Change in SFR market rental prices

[Brandon Pearsons]

Hello Im new to investing in SFR's. Only been doing it for a couple years. I was wondering if any longtimers have dealt with any significant decrease in market rents or increased vacancy rates? If so.... What was the reason? And how did you deal with it?

[Shane Pearlman]

Hey Brandon,

It has happened twice to us.  I can only speak about Santa Cruz, CA for this topic as our we haven't owned our Seattle properties long enough to experience a full cycle.

In 2001, the tech bubble burst. Santa Cruz is a 40 minute commute from silicon valley and we were hit HARD. I personally was laid off five times in 2 years. Property prices softened a bit and rents did as well. We had a 3br/2ba SFR go from $2,100 a month to $1,900 a month. Granted it is only a 10% drop, but imagine loosing $200/m on your new rental. Rents did catch up and the property now rents for just over 3k today. We calculated the risk of vacancy VS offsetting the loss and chose the known over unknown (basically we took it in the teeth).

Rents climbed from 2003 - 2007. Then they stagnated something fierce. You can imagine why. Nothing like a great recession to affect earning power. A couple of our properties needed to drop rent a touch during unfortunate turnovers (you know times are bad when the priest renting one of our our 3br homes had to confess that donations to his church had dropped so much that he needed to move his family into a 1br). I had been planning for a typical rent increase at some point to cover what was a narrow margin on a new duplex. In reality, rents did not begin to go back up until early 2012. Nearly five years of stagnant rents and harrowingly tight cashflow. How did I deal with it? I learned to make sure all my leases ended between may - sept to avoid non-optimal turnovers, paid for professional photography to attract higher demand, and invested in stainless kitchen appliances to increase appeal to get a higher rent.

In the last 3 years, rents have done some serious climbing. Going up over 25% across all our properties. 

I personally don't think the face value of your rents will drop rapidly any time soon, but this is my 2c. We are due for a significant wave of inflation. Even if buying power goes down, the upwards pressure in general prices pushed by inflation will prop rents up. If people can afford it, it will drive them quite a bit higher. The actual true (inflation adjusted) value of your cashflow may not increase, but the dollar numbers will be higher.As long as your mortgage is fixed, and you have some safety built in, its a hell of a time to lock down the right property.