Is rental property investing forever doomed?

[Mike Schorah]

Rent growth has not kept the pace of home appreciation.

- In the largest 588 cities in the U.S., the average (unweighted) cash-on-cash return is -6.5%. 

- Since the Great Recession 10 years ago, you got a growth rate of 7.4% for home prices, compared to a growth rate of just 4.54% for rents. 

- It was easy to profit $200/mo in cash flow 10 years ago whereas now it’s a struggle to make $50/mo in cash flow.

- The average cash remaining after just two expenses – P&I and taxes—was about three times greater 10 years ago compared to now.

Unfortunately, this dynamic is accelerating of late as well. Since the beginning of 2020 and the COVID-19-induced craziness in the housing market, home prices have gone up on average 12.8% in the U.S., while rent growth rates are less than half at 6.1%.

Stagnating wages in the U.S. limit rent growth. Wage growth has not recovered from the financial crisis. Experts recommend that renters spend no more than 30% of their income on rent. If their income does not rise, the total dollars renters can/should spend on rent does not rise.

The 2% rule became the 1% rule which became the .8% rule. From what I’ve seen in most cases, you need to manage the property yourself to have positive cash flow at .8%. So since the trend is that it’s going to dip further and further, are you ready to start taking on negative cash flowing properties?