Are you betting over/under on rental rates in 2012???

Question

Just finishing a couple articles in current mags. Money and Smart Money. Economists are predicting a 4% ANNUAL increase in rents-which will be the highest annual increase since bubble burst.
   I'm betting over for my areas I work in and have already seen this happening. 
   San Jose, Calif was 5% for last year.

Which way are you betting? Over 4% or under? If you're betting over, why aren't you buying/building more???? Rich

Steve Babiak · Answer

I would imagine that many BP landlords are getting Section 8 rent, where the voucher amount and the allowances for utilties by the housing authority end up setting the rent received by the landlord.

For your existing tenants, you could probably get away with the bigger increases - if their income was keeping up and other rental units in the area also went up similarly.  In the SFR arena, if you have a vacancy, it might pay to not make that rent jump up so as to attract better / more tenants.

Scott Hubbard · Answer

In my market, it depends on the type and location of rental. I believe luxury rentals will see an increase as there is low vacancy rates somewhere around 3%.  I can only see demand increasing as I see more and more strategic defaults occurring.  Therefore, I believe the rental rates in this sub-market will be much higher.  This analysis includes SFR's and MFR's.

On the other hand, for the lower socioeconomic blue collar rentals (B class), I see rental rates will remain the same or a slight increase as we are still in the absorption period where vacant units are being converted to rentals.  There is still much supply and competition with cheap money, so I expect a lower cost basis to negatively impact rental rates.

The middle-class is also in a transition, but has been in higher demand recently probably due to post-foreclosure tenants looking to rent.  Supply remains moderate with vacancies being around 7%.  I expect a slight rate increase mainly in properties with a good central local.

My assumptions are supported by new construction project starts.  We have two Class A "luxury apartment homes" projects underway which are expected to do well.

We are also seeing some infill SFR and small MFR projects going up as well.  The common thread to all of these projects are that there in locations well-suited for commuting and are aimed at the higher-end or luxury demographic.

In my opinion, with interest rates low, I think it can be a good time to build if you have a good location and demographic.

I am personally looking into new construction opportunities and in the process of putting a JV together.  I expect this particular sub-market to outperform over the next 4 or 5 years.

Mark Updegraff · Answer

Rich, I think you're asking a macro question, when rents are more micro in nature.  The 4% is an average, if you're an observant investor it should be no problem to beat that average.

Will that average go higher?  The RE investor in me wants to say yes.  But let's be realistic.  Can that happen with high unemployment and stagnant wages?  How are people going to pay for the increase?  Or will this force more people back home or into shared arrangements?  Reducing the number of renters surely won't increase the price.  I think rental rates are more correlated with wages than with inflation.

Lets look at a couple of scenarios to illustrate the averaging affect and the discrepancy between micro and macro views on rental rates.

Williamsport PA.  It has been rated one of the fastest growing cities in the nation in 2011.  Because of the city's location and proximity to the Marcellus boom the rental rates continue to rocket up.  Not only rental rates, but property values.  And they keep rising.

I predict that Pennsylvania on average will prove to have been a very good place to be investing in hind sight, much better than a national average.

In my experience it seems that an RE investor must have a very micro view on the location of RE investment.  And any predicted rise in rental rates should be viewed as speculative incentive wether they be micro or macro in origin.

I think the national average will stay close to the same.

BTW you never clarify "rents"
Are we talking residential only, commercial, or some mix there of?

Finally, if you could cite your references it would be helpful for those of us commenting.

Hope all is well!  Glad to stumble upon this thread :D
Humbly,
Mark

Cheryl C. · Answer

I'll take the "over".  Our rental market is very tight and we've seen some good jumps over the past couple of years.  Little inventory in the pipeline spells a few more good years vis a vis increases.  I have a list with lease-end dates of all my property.  I just raised another 2 last month.  I also just got my 5 yr commercial loans on 8 properties dropped 1.5% in interest rate.  All it took was a couple of e-mails.  These are note mod's with no application/appraisal/recording/etc., etc.  I have to pay 1/2 pt.  Payback is 4 or 5 months.  In this type of market, like the 90's, I try to get the rents up and the mortgages down and ride it out as best I can.

Will Barnard · Answer

I will not pick one way or the other as it does not affect my business model, however, I would agree with Mark in that wages and unemplyment ratios will have a larger affect on rental prices than anything else.

That said, regardless of your view, IF you are a landlord, then you should ALWAYS be adding to your portfolio and as such, making adjustments to the market by adjusting how much you pay. So regardless if the rental rates stay the same or increase, I don't see a "potential" increase as a reason to be buyinjg more, I see it as extra gravy for those who make smart purchases no matter what the rental market rates are doing.

As the old saying goes, you make your money at the purchase.

Rich Weese · Answer

Looks like ALL repliers picked the over. Mark kinda hedged a bit. I meant residential only and I agree sfrs will increase faster than multis.

Mark-In Vegas playing for the week. The source was current issue of Smart Money Mag real estate article. Can't recall what they cited as their source, but maybe some researcher techie on here can find it and post. 4% nationally was the anticipated increase.

If everyone thinks this is a realistic increase, maybe we should all be buying more! Rich

Cheryl C. · Answer

Clearly location counts.  In Northern Virginia we have high incomes, low unemployment and low vacancy rates.  My rentals are residential b/t $1,100 and $2,000.  I have one Sec. 8 (disabled) and the County is paying $1,300 for a modest one bedroom apt.  The Washington Post did an article this weekend on rising rents and raising the question of whether it's time to buy.

David Wedemire · Answer

Over.

Rental market is good and I can get a good price for mine although I have both in lease right now.

Rich Weese · Answer

Steve B- good point on the section *. I don't deal with those, so it never occurred to me. Rich

Steve L. · Answer

I have definitely been seeing activity in my properties (even with higher prices) rise from 2009 and 2010 rents.

I would bet on the over too.

Are you betting over/under on rental rates in 2012???

Most Popular Reply