3 Real Estate Investment Dangers When Rent Skyrockets

Posted by Chris Clothier on Wed, Nov 26, 2014

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In cities across the United States, particularly in large real estate markets, rent prices have been skyrocketing.  We have seen rent increases in many areas of Memphis as well as Dallas and Houston, although rents have not been rising like they have in some large cities across the country.  Many rents are also rising in multi-unit complexes which are seeking to add more and more attractive amenities, but are not shy about raising the rent at the same time.

While many markets are recovering from the recession (some slower than others), the demand for rental units — whether single-family properties or apartments — is still very, very high and shows no signs of slowing down. Whether its residual fear of foreclosure or shifts in our goals and needs in residence, renting is popular.

That’s good news for real estate investors!  However, all rental increases are not created the same and often an increase in rent can lead to a decrease in revenue!  Read on to figure out how...

The issue we’re seeing, however, is that rent has been rising high in many markets — and it’s becoming harder for tenants to deal with them. When the cost of rent far outweighs income, combined with other costs of living, it can have detrimental effects not only for your tenants, but for the economy and potentially, if left unchecked, the real estate market. While those of us in real estate investment can be tempted to enjoy the higher rent prices (which is in thanks to high demand and a lack of inventory to meet it), it’s not necessarily a good thing.

3 Things that Happen When Rent Grows Too High

  1. It burdens your tenants.

Most financial advisers would tell you not to pay more than 30% of your income towards housing costs, whether that’s mortgage or rent. In all three of our markets, we keep a very close eye on this number as a major indication of an applicants ability to afford the rent they are applying for.  If this number tips out of balance, it is our responsibility to point that tenant to a lesser expensive property.

In many cities, however, that number definitely exceeds 30%. In the current economy where income growth hasn’t kept pace with the growth in rental and home prices, that can be a heavy burden on your tenants. While your prices aren’t always about making people happy (no one likes to pay rent, after all) and the market does make a difference in what your prices are, it doesn’t make it any easier for them to deal with.  Even small rent increases can be a determining factor in whether or not a property rents or whether a tenant chooses to renew an existing lease.  Important factor to keep in mind!

RELATED ARTICLE:  4 Ultimate Strategies For On-Time Rent Payments

  1. It hurts the economy in the long term.

We’ve seen it before. Higher rents and mortgages means less money for people to put towards other things — whether that’s dining, shopping, entertainment, or something else that doesn’t factor into necessities. Less money to spend means less money in our local economies. That hurts businesses! 

It can also hurt your property.  Time and time again we see two occurrences when rents get out of balance.  A lack of general upkeep in a property and an unwillingness to stay put.  Tenants will often be willing to uproot their families and move to a different property if they have the chance to reduce and sometimes maintain a current rental rate.  And if they have not been keeping a property properly maintained, then it is MUCH easier to move and leave an owner with a bill. 
  1. It makes the ‘buying VS renting’ debate a toss up.

One big ask in face of rising rent is “why don’t they just buy a house instead?”

That question should be a red flag for real estate investors. In large part, our job is built on the attractiveness of renting. It’s more flexible, maintenance free and, at one point, more affordable. Truth be told, people aren’t choosing to buy because growth in housing costs has also outpaced income growth, making home ownership continually out-of-reach for many. It puts people between a rock and a hard place, where renting should be a more attractive alternative.

Though rent prices are expected to calm back down in 2015, it’s important for those of us in real estate investment not to merely consider our potential profits, but how the real estate market affects prices, the economy and the lives of our tenants.  Rental rates can have a dramatic effect on the over-all holding cost of an investment property and ultimately on the profitability!

Do you think rent prices will drop back down next year?
Share your opinion in the comments.  Would you like to learn other 
real estate investing mistakes to learn and avoid?  Just Click Below for our
quick, educational video...Grab a pen and paper!

11 Mistakes to Avoid in Real Estate

image credit: Michael Theis

 

Topics: real estate market, affordable rent