Rental rates vs property appreciation

[Bryan Cork]

I had a question for you smart and wonderful people. Speaking generally, in appreciating markets like Denver, or in my hometown of Colorado Springs, does property tend to appreciate faster than rental rates? And is that the reason that finding deals that cash flow at double digit returns get harder and harder to find? I’m new to the game and in the stage of learning, so let me know what you all think. Thanks!

[Phillip Bicker]

I do find that rents tend to lag behind appreciation. If you consider that tenants are often in 1 year leases, it is often the case that rents cannot be increased as quickly as the appreciation. I also find that many landlords are happy to rent to strong long term renters at a set rate and are reluctant to raise rents as fast as appreciation (often requiring new renters as the old ones cannot afford the new rent rates). 

While prices of investment properties should be based off of the actual rents received, or arguably the market rents expected, you will notice that properties with fewer units will be based more on comps than cap rates or rent multipliers. This is especially true for single family homes up to 4plexes that can be acquired with low down payment programs such as FHA if one of the units is owner occupied. Once you hit 5+ units, a property's value is very closely tied to rent multipliers and cap rates.

All this to say that I often find that properties with fewer units tend to appreciate faster than rents, but as you get more units, it is tied more closely to the appreciation rates for multi-unit properties.