3X income for for C D class rentals is it out of date?

Question

with this incredible inflation and gas price hikes..

Anyone worried that 3X rent for your C and D class tenants that are basically pay check to pay check are going to be able to pay rent

and still buy gas and groceries ??

Mike Dymski · Answer

Financial obligations (bank payments + rent) as a percentage of disposable income is at a 40-year low.

The average household wealth of the bottom 50% of households is at a historic high...there is no comparable period whatsoever.

If you back out real estate gains, net worth is over 100% higher than pre-pandemic levels for the bottom 50% of households.

Bank deposit balances of the the bottom 50% are $10,000+ and $3,000 above pre-pandemic levels, and kept increasing in 4Q21 after 3 quarters of increasing inflation and lower fiscal support payments.

Nominal wage growth for the lowest income quartile is growing at the same pace as inflation (most important stat on the page).

2020 had large gains in real wage growth; so, even though real wage growth is severely negative for the past year, the 2-year trend is break even.

If real wage growth is -1%, it would take ~6 years to burn off the excess savings of the average bottom 50% of households. Even at -5%, it would take over a year.

Job openings are at all time highs; so, wage growth should continue, particularly for the bottom 50% of households.

The statistics for the lower income consumer look strong.  Time will tell how long that holds up.

Jay Hinrichs · Answer

ya seems to me when your talking a  1k a month rental and 3k to move in.. U have gas utls and food go up say 250 to 500 a month and I dont think that is a stretch .  that has to pinch these folks hard.  So I am thinking landlords PMs will have to move to 3.5 X or 4 X to qualify OR  rents we may see in the bottom earners will actaully have to come down.  I know most folks think that is impossible but i have seen it over the years  rents are not always a linear line straight up.. just like every one is talking about RE prices are not linear and will come down .  Seems to me same thing holds for rents ??? I just think back to the 350 C D class doors I had and boy the renters many times were just a flat tire away from being broke.  Mike mentioned 10k average bank balances while I cant dispute that number .. I never saw an application for one of our rents that had more than basically enough for first and last and maybe a tiny cushion on top of it.   what do you see in your applications do you see your renters with average balances at 10k or more ?

Bjorn Ahlblad · Answer

@Jay Hinrichs  I don't have any C and D-just B- but have upped mine to 3.5 minimum and shoot for more. We also collect first and last plus security deposit in certified funds before handing over the keys or signing a lease.

Quincy Lockett · Answer

@Jay Hinrichs

No. I’m still raising rents but not to the degree that the market is stating. I’m taking into account average incomes and debt to get the most increase that’s feasible for the average tenant in the area. I figure I’ll have lower turnover and still get higher cashflow. Also, by being on average $75 under the competition, I’ll get more applicants which should improve my chance of getting the best tenant available.

Jim K. · Answer

Not really. The basic demographic of "the tenants we want" in C'class is still pretty solid.  The criteria that make them good tenants for us are not really income-based. Especially couples, in a $1000/month Pittsburgh-area apartment or SFR, are often making significantly more than $36K/yr. What you're looking for in your vetting is the key that KEEPS them in rental housing. It may be bad debt (often medical), it may be necessary proximity to a job, it may even be time, that they see themselves as dedicated workers and don't want to worry about maintaining an old Pittsburgh house. This often happens in health care jobs.

Kim Meredith Hampton · Answer

@Jay Hinrichs we have been discussing this in our offices for about 6 months now and have not made a decision. Our C areas are being stretched and now some don’t qualify with our rents going up over 20% this past year.

We are really also looking at deposit options as our rents still creep up. I have no problems with our A & B areas, just C. It’s a problem, just don’t know if I’m comfortable with 2 or 2.5 ??

Jay Hinrichs · Answer

@Jim K.

Jay Hinrichs · Answer

Do you mean the your keeping your rents lower so you can still maintain this old standard of 3X rents . Regardless completely agree on the reality check in rental rates in certain income demographics.

Quincy Lockett · Answer

@Jay Hinrichs

Absolutely. The math is not “mathing.”  Market Rents have risen to a point where landlords in the C\D asset class HAVE to be approving tenants with incomes consistent with 2X rent. You only have to look at census demographics. So you know what follows…late payments, Evictions and ultimately rent adjustments (in C/D). Most of my properties are in this area so I’m not setting myself up for failure. There is a big difference between what you can ASK for and what you can consistently get over the full term of the lease. I’ll take the latter.

3X income for for C D class rentals is it out of date?

Most Popular Reply