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?

[Nathan Gesner]

Quote from @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?

Rent rates can't keep up with home appreciation, but that doesn't mean they won't catch up or that investing is doomed. I bought my first investment in 2004 and properties were appreciating faster than rent was increasing. I sold it eight years later, just two years after our local market tanked, and still managed to sell it for an incredible profit/return. All my current investments worked when I bought them and they will continue to work, even if rent rates stop rising for the next ten years.

If you think housing is forever doomed, you should find another investment vehicle that's more stable and proven. When you do, be sure to come back and let us know! ;)