The Rental Market is Changing: What Does This Mean for The Investors?
Source: Photo by Valeriy Khan on Unsplash
The headlines back in September 2022 said it all. With the title "Rents Fall for First Time Since Late 2020", shivers went down spines as investors and landlords grew increasingly concerned for their returns. We’re sorry to inflict pain once more, but this is the news that spread like wildfire:
Average rent prices are falling nationwide, and it's likely to continue. For those in the City of Detroit, the market was experiencing increasing rent averages before dropping along with the rest of the nation. "We're not seeing rents go up as quickly; the rental market is softening a little bit," Christopher Mayer, a professor of real estate from Columbia Business School, said.
And, while the news may be a few months old, the market is still changing and will continue to change for years to come—requiring you to be prepared to handle drastic rent drops. After all, the decrease may be excellent news for renters, but it’s horrible news for investors like you.
What can you do?
It’s difficult to say since the data on Detroit rent prices is somewhat limited and conflicting. Still, we’ve done our best to understand the available data. Read on for our key insights.
The Concerning Nationwide Rent Decline in Major Cities
Redfin reports that the national average rent price was up 11% year-over-year to $2,039. If you put it up against years before, this figure is the smallest annual increase in a year, down from a 19% gain back in March. Moreover, even on a month-on-month growth, the median rent inched by 0.4%—the slowest growth since December 2021 and a significant drop from the 1.6% increase a year before.
Source: Redfin
Taylor Marr, Redfin’s Deputy Chief Economist, chimed in, “Rent growth will likely slow further as the Federal Reserve continues to raise interest rates. Higher interest rates impact the rental market because they put a damper on spending power in the economy as a whole, including renters’ budgets.”
“Growth in rents is also likely to be slowed by a boost in rental supply. There are nearly a million rental units under construction that will hit the market in the coming months and years,” he concluded.
In short, the higher the interest rates, the more difficult it is for people to pay rent. We’re seeing this happen in several of the nation’s biggest cities already—will the City of Detroit be spared?
The Rent Trends in the City of Detroit Housing Market
Zooming closer to the City of Detroit, Michigan's Motor City went through several market shifts before all this went down. Before the pandemic, the Detroit market experienced a shortage of housing inventory that led to buying competition and a spike in property prices. Then COVID entered the world, and the market came to a standstill—although it was temporary.
The market started roaring, with interest rates dropping and remote working becoming the norm. As a result, prices soared, and the competition intensified among homebuyers. However, it didn't last long, as the market is now cooling off due to rising interest rates and concerns about the economy's stability.
Plus, there's still a shortage of affordable housing, especially with new construction slowing down. Anika Goss, the executive director of Detroit Future City, says, "During the pandemic... people living in the bottom quadrant of the income scale were not being supported. If rent softens and people are back to work in 2022, we might see an evening out… in a year or two years."
However, renters aren't the only ones struggling, as Detroit inventors are also experiencing some loss. Data shows that "Detroit" is one of the many major US markets that saw a decline in rent averages the past month—as much as 0.5%—which equates to less income and cash flow.
Although we're not entirely sure if this only covers the City of Detroit or the greater Metro Detroit, we see that the area was included in the top rent price drops nationwide in late 2022:
Source: Apartments.com
Should Detroit investors opt for lowering their rents in the name of attracting tenants? Even with the notable drop in rent averages, Detroiters still can't afford to rent. Few people are buying homes, and yet, everyone needs a roof over their heads. Their only choices are to move back into their parents' house or rent a property they can afford.
Then again, the data that shows a rent decline in “Detroit” might only cover the city itself, excluding the rest of Metro Detroit that includes more affluent areas like Oakland County—places where locals aren’t as affected by the economic downturn as lower income zones.
Why do we think this? Because if we look at Zillow’s data, the City of Detroit actually saw an increase in average rent recently, where investors are charging Detroiters $20 more than last year:
Source: Zillow
Plus these impressive statistics calmed our hearts down:
- * The City of Detroit continues to have an exceptionally affordable housing market, where the median sales price is $100,000—all while seeing a growth of 38% from late 2021 to 2022. Regarding rent prices, the city is also the fastest-growing area in the metro, where rents are said to have skyrocketed by 32% from 2021 to 2022.
- * The average rent for a one-bedroom unit in the City of Detroit is $1,000—4% growth compared to a year before (February 2022). However, for a three-bedroom property (which is honestly the more popular type in the market), the median rent is $1,200 with a 9% year-over-year change.
- * Plus, the president of Bowers Realty in Southfield, Darralyn Bowers, said that rent amounts in the City of Detroit increased by a third since the beginning of COVID-19, where she said that the average rent is $1,200 in the city and $2,000 in its surrounding areas in November 2022.
Still, perhaps Detroit landlords charging higher rent is why Detroiters can't afford rent. And what’s the point of charging higher rent if the tenants can’t afford to keep up with payments?
So take the time to consider the rent you're charging now—are your tenants struggling to keep up? Are they paying on time and in full? If you screen them thoroughly, they might not have financial constraints. But if the economy's downturn caused them to lose their jobs, you might need to help them.
“Gas prices are coming back down, but rents are going up 10, 12, 15%. And rent can end up taking 40% of these households’ income,” Bank of America CEO Brian Moynihan said. In other words, the City of Detroit is still a landlord’s market—not one that sides with the renters.
Remember: your cash flow depends on your tenant's ability to pay rent. So as much as we want to generate as much cash flow as possible from our rental properties, you won't get any investment returns if the renters can't afford the price tag in the first place.
The Rent Price Dance Between Investors and Tenants
It's a landlord's market in the City of Detroit (and certain spots in the greater area of Metro Detroit), with rents increasing even as the economy falters. This situation could present an opportunity for careful investors willing to lower their rents to attract quality tenants.
With careful screening and keeping an eye on the economy, you can ensure that your rental properties remain profitable while helping Detroiters stay housed during these uncertain times. Remember, your goal is to have tenants that can afford the rent while still providing you with a healthy return on investment.
Do you need more help in Metro Detroit? Get in touch with my team and me.
We've been operating in the area as a property management company for over two decades. We have all the insider knowledge and expert tips you need to navigate today's dynamic market. My inbox is open; shoot me a message!
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