Rent prices not keeping up with home prices

[PMJL34]

Hi community,

I have this fear that rents won't keep up with house prices going forward. Low interest rates, housing shortage, inflation, labor shortage you name is has significant increased home values around the country, but in my opinion, rent prices have not kept up.

Perhaps this is more of a problem in HCOL areas, especially where rent control exists?

Sort of like how stock P/E ratio is out of whack, purchase price/rent ratio is out of whack and I don't see it getting better.

Any thoughts?

[Jon Bon]

When I see things like this I always like to remind myself of the saying I heard before: "Capitalism is undefeated" Sure you can monkey around with it in monetary policy, governments think they have perfected it etc. But it always eventually wins.

My second thought is housing prices are tied to interest rates, rent is tied to wages. So wages have been just keeping up with inflation but it sounds like they might be catching back up.

Thirdly, how is this a problem that causes you fear?

[maizefolk]

Low interest rates cause divergence between home prices and rent for two reasons: low interest rates mean people can pay more for houses and low investment return environments mean real estate investors (in aggregate) are willing to accept lower rates of return in investment properties because their next-best investment options are worse.*

*Or to say the same thing in a different way: the net present value of the future discounted cash flow from rental payments is higher when interest rates are lower.

[clarkfan1979]

Hi community,

I have this fear that rents won't keep up with house prices going forward. Low interest rates, housing shortage, inflation, labor shortage you name is has significant increased home values around the country, but in my opinion, rent prices have not kept up.

Perhaps this is more of a problem in HCOL areas, especially where rent control exists?

Sort of like how stock P/E ratio is out of whack, purchase price/rent ratio is out of whack and I don't see it getting better.

Any thoughts?

For some real estate investors, cash flow makes them feel safe. It's their security blanket. The real estate market has already shifted from cash flow to appreciation about 5-6 years ago, mostly due to low interest rates. Lower cash flow is making some real estate investors experience fear because their security blanket is gone. Some real estate investors stopped buying in 2015 and some even sold their portfolio because according to them, "real estate investing no longer makes any sense" My security blanket is mostly cash reserves and to a lesser extent equity. Lower cash flow doesn't bother me.

Bigger pockets is full of younger real estate investors that started buying real estate 10 years ago at the age of 25. Now at age 35 their net worth has exploded. They have 50% equity on many "doors", with each door having low cash flow. A real estate portfolio that used to take 25 years, can now be accomplished in 10 years. This angers some people because they feel like the younger generation got lucky and hasn't earned it.

My philosophy is, "don't hate the player, hate the game." 

[waltworks]

Thoughts: it's a pretty crappy time to buy rental RE in the US. But I say that as someone who already won the game and quit playing. You might still do great, who knows. Maybe the Fed cuts to negative and house prices double again.

Demographics make buying for appreciation in the longer (10+ years) term pretty unattractive IMO, but like I said, I quit the game already. You almost certainly aren't going to replicate the results of the folks who bought over the last decade or so, that was a one-time thing.

-W

[PMJL34]

Thanks for the input folks.

My fear is that my investments become less attractive year over year if the rent prices cannot keep up with home values. As a buy and hold investor, I may need to rethink selling at a certain point. Rents being tied to wages is a concern as well because it clearly has not kept up.

I also think that real estate is so saturated and people with too much money + institutional investors (there are tons of these folks/groups) keep driving cap rate down to the point where mom and pop investors like myself cannot justify the carrying costs. 

For example, I have a rental that I purchased for 600k that had rents of 5k in 2014. Now in 2021, the value is 1.3mil with rents of 7k. I fear in say 5-7 more years, it will be something like 2mil with rents of 9k. As in, the longer I hold, the less attractive my rental becomes.

I hope this makes sense. Yes, it's rich people problems, but this means that fundamentally, real estate will not make sense for me in the future and I have to be prepared to sell and become a 100% index fund investor.

[pnw_guy]

Thanks for the input folks.

My fear is that my investments become less attractive year over year if the rent prices cannot keep up with home values. As a buy and hold investor, I may need to rethink selling at a certain point. Rents being tied to wages is a concern as well because it clearly has not kept up.

I also think that real estate is so saturated and people with too much money + institutional investors (there are tons of these folks/groups) keep driving cap rate down to the point where mom and pop investors like myself cannot justify the carrying costs. 

For example, I have a rental that I purchased for 600k that had rents of 5k in 2014. Now in 2021, the value is 1.3mil with rents of 7k. I fear in say 5-7 more years, it will be something like 2mil with rents of 9k. As in, the longer I hold, the less attractive my rental becomes.

I hope this makes sense. Yes, it's rich people problems, but this means that fundamentally, real estate will not make sense for me in the future and I have to be prepared to sell and become a 100% index fund investor.

I hear your concerns, but what sticks out is talking about rental investing as if market conditions are the same around the U.S.. Aren't there areas of the country that offer better cap rates? Are you invested in those areas? If not, maybe sell your million dollar + unit and buy some rentals in the South or Midwest where cap rates are more competitive? Just a guess at what could help.

[maizefolk]

For example, I have a rental that I purchased for 600k that had rents of 5k in 2014. Now in 2021, the value is 1.3mil with rents of 7k. I fear in say 5-7 more years, it will be something like 2mil with rents of 9k. As in, the longer I hold, the less attractive my rental becomes.

I hope this makes sense. Yes, it's rich people problems, but this means that fundamentally, real estate will not make sense for me in the future and I have to be prepared to sell and become a 100% index fund investor.

Would that be so bad? You talk about being afraid that a house you already own may appreciate an extra $700,000 at which point you'd be able to sell it, invest in the market and get the same or better returns without all of the extra work, stress, and potential liability of being a landlord.

I understand most landlords get into the field for cash flow rather than appreciation, but appreciation ends up happening you don't have any less cash flow on existing units but you potentially also have the option to sell and get more money with less work from the stock market.

Why is that potential future something to fear?

[PMJL34]

I've been watching Rotten on Netflix and it's basically a documentary on how a profitable commodity gets swallowed up by institutions (poultry, dairy, avocado, garlic, fishing, etc.) by cutting down profit to the point that only mass production can be profitable. Real estate appears to be on a similar track.

[PMJL34]

I'm a sweat and equity value add investor so I couldn't invest outside of my immediate area. I do all my own work so if I had to hire it out, I wouldn't be anywhere as profitable.

I agree Maize it's not the end of the world, and possibly a good thing. But I do value real estate and my retirement is/was dependent on cashflow + index funds. Switching to 100% index funds is just something I will need to adjust to.

[Villanelle]

For example, I have a rental that I purchased for 600k that had rents of 5k in 2014. Now in 2021, the value is 1.3mil with rents of 7k. I fear in say 5-7 more years, it will be something like 2mil with rents of 9k. As in, the longer I hold, the less attractive my rental becomes.

I hope this makes sense. Yes, it's rich people problems, but this means that fundamentally, real estate will not make sense for me in the future and I have to be prepared to sell and become a 100% index fund investor.

Would that be so bad? You talk about being afraid that a house you already own may appreciate an extra $700,000 at which point you'd be able to sell it, invest in the market and get the same or better returns without all of the extra work, stress, and potential liability of being a landlord.

I understand most landlords get into the field for cash flow rather than appreciation, but appreciation ends up happening you don't have any less cash flow on existing units but you potentially also have the option to sell and get more money with less work from the stock market.

Why is that potential future something to fear?

Yeah, this.

If your numbers come to fruition, then you sell and make a boatload.  Sure, it may not have been the original plan, but it's still a plan that leaves you very rich, just in a different way.  So if that's truly the direction you think things might be heading, I don't see it as a reason not to buy RE, if you are otherwise inclined to do so.  Now, if you think that in 5-7 years the property will still be worth about $1.3 and rents will still be about $7k, that might be reason to look elsewhere.

[clarkfan1979]

For example, I have a rental that I purchased for 600k that had rents of 5k in 2014. Now in 2021, the value is 1.3mil with rents of 7k. I fear in say 5-7 more years, it will be something like 2mil with rents of 9k. As in, the longer I hold, the less attractive my rental becomes.

I hope this makes sense. Yes, it's rich people problems, but this means that fundamentally, real estate will not make sense for me in the future and I have to be prepared to sell and become a 100% index fund investor.

Would that be so bad? You talk about being afraid that a house you already own may appreciate an extra $700,000 at which point you'd be able to sell it, invest in the market and get the same or better returns without all of the extra work, stress, and potential liability of being a landlord.

I understand most landlords get into the field for cash flow rather than appreciation, but appreciation ends up happening you don't have any less cash flow on existing units but you potentially also have the option to sell and get more money with less work from the stock market.

Why is that potential future something to fear?

Yeah, this.

If your numbers come to fruition, then you sell and make a boatload.  Sure, it may not have been the original plan, but it's still a plan that leaves you very rich, just in a different way.  So if that's truly the direction you think things might be heading, I don't see it as a reason not to buy RE, if you are otherwise inclined to do so.  Now, if you think that in 5-7 years the property will still be worth about $1.3 and rents will still be about $7k, that might be reason to look elsewhere.

100% agreed. Why would a landlord be fearful of their real estate appreciating too much in value? We need to have more discussion on this matter.

I have bought in what I consider to be "good locations". I have experienced higher than average appreciation. My rents are increasing, but not keeping pace with sales prices. I also re-financed. My payments went down and principle pay-down went up. I really don't care if the rent and sales price are out of whack at the moment. 2021 has been amazing.

The stock market is at an all time high. How is that the unquestionable answer?   

[PMJL34]

I really do appreciate everyone's input. I agree I sound delusional and like a rich whiny person. But I do feel that we as mom and pop real estate investors should be concerned about the lack of cashflow currently available and what will occur in the future.

Buying for appreciation is not a game I want to play and not typically what this forum recommends. I got into real estate because of cashflow and while I will be fine in terms of appreciation, it does hurt to see the cashflow not improve in relation.

[Villanelle]

I really do appreciate everyone's input. I agree I sound delusional and like a rich whiny person. But I do feel that we as mom and pop real estate investors should be concerned about the lack of cashflow currently available and what will occur in the future.

Buying for appreciation is not a game I want to play and not typically what this forum recommends. I got into real estate because of cashflow and while I will be fine in terms of appreciation, it does hurt to see the cashflow not improve in relation.

But why? If your house appreciates so much that the rent no longer makes sense, you sell it and pocket hundreds of thousands of dollars.  How is that problematic?  If it is no longer an attractive rental *because you have made gobs and gobs of money in appreciation*, why does that matter?  At that point, you may stop using it as a rental and instead use it is a giant savings account with the best interest rate--retroactively--ever, and you empty the account and go swim in your millions of dollars ala Scrooge McDuck.  Unless I'm missing something, I'm not seeing how there is anything problematic about this.  You planned to have great cash flow for life with rentals, and instead you end up with millions fo dollars in the bank, from which you can create a cash flower. 

It's not 'buying for appreciation'.  You are buying for cash flow.  But is instead you end up with massive appreciation, how is that bad?  That's different than buying a place that doesn't cash flow *because* you are counting on appreciation.  Instead, it is just another way you can win if your primary plan--cash flow rentals for long term--doesn't pan out. 

Again, go back and look at the numbers in your example.  You purchased a house for $600k and in ~7 years it is worth ~$2m.  So you sell and walk away with ~$1.5m, plus whatever you cash flowed during those 7 years.  Why is that in any way a bad outcome?

[clifp]

I really do appreciate everyone's input. I agree I sound delusional and like a rich whiny person. But I do feel that we as mom and pop real estate investors should be concerned about the lack of cashflow currently available and what will occur in the future.

Buying for appreciation is not a game I want to play and not typically what this forum recommends. I got into real estate because of cashflow and while I will be fine in terms of appreciation, it does hurt to see the cashflow not improve in relation.

I'm somewhat sympathetic, I bought my Vegas properties beginning 2010 after the great real estate crash, because they cashflowed great, well over the 1%/month rental rule of thumb.
As they appreciate the cashflow looked worse, but obviously the appreciation is great.

Pretty much every year since 2017, I have thought maybe I should sell and take my profits.  But then the question is where do I put the money?  Bonds pay nothing are even more overpriced than real estate. Stocks have had double digit returns pretty much every year for the last decade and are also over.  Maybe bitcoin is real, or maybe it is a scheme, I'm not sure, but it is definitely appreciated way faster than real estate.  I've also considered selling in buying real estate in LCOL places.  In the end, I've decided that doing nothing is a perfectly fine strategy.

I collect my rent checks, I'm able to raise rents a bit faster than inflation, and house prices keep going up.  Someday one or more of these conditions will stop being true, and I'll deal with it. Until then enjoy the ride.

[clarkfan1979]

I really do appreciate everyone's input. I agree I sound delusional and like a rich whiny person. But I do feel that we as mom and pop real estate investors should be concerned about the lack of cashflow currently available and what will occur in the future.

Buying for appreciation is not a game I want to play and not typically what this forum recommends. I got into real estate because of cashflow and while I will be fine in terms of appreciation, it does hurt to see the cashflow not improve in relation.

I'm somewhat sympathetic, I bought my Vegas properties beginning 2010 after the great real estate crash, because they cashflowed great, well over the 1%/month rental rule of thumb.
As they appreciate the cashflow looked worse, but obviously the appreciation is great.

Pretty much every year since 2017, I have thought maybe I should sell and take my profits.  But then the question is where do I put the money?  Bonds pay nothing are even more overpriced than real estate. Stocks have had double digit returns pretty much every year for the last decade and are also over.  Maybe bitcoin is real, or maybe it is a scheme, I'm not sure, but it is definitely appreciated way faster than real estate.  I've also considered selling in buying real estate in LCOL places.  In the end, I've decided that doing nothing is a perfectly fine strategy.

I collect my rent checks, I'm able to raise rents a bit faster than inflation, and house prices keep going up.  Someday one or more of these conditions will stop being true, and I'll deal with it. Until then enjoy the ride.

100%. I'm doing the same. Add in a few re-fi's and lowering my mortgage payments.

[pnw_guy]

Sometimes I get the urge to go any try and buy up as much real estate as I can before it becomes out of reach for mom and pop investors (due to corporations and banks buying up real estate). This thread is a good reminder that it probably isn't a wise choice as an investment if rents aren't going up along with home prices. Something about the scarcity of real estate just hits a nerve and makes me feel like I need to act ASAP. I know it's not rational but can anyone relate?

[srad]

Rents always lag appreciation.  The nationwide median rent is up like 11% this year.  I know I can't raise my rents fast enough.

In 2016 ago I purchased a few properties out of an estate in a lower cost of living town than I'm in.  I based the numbers on 1k a month per door.  It was 3 duplexes in a row so all 6 units are basically identical.  Last 2 years, I"ve been able to get $1200, $1260, and just a few months ago, I got,  wait for it....  $1350.  $1350 is insane and I received multiple applications.  So in 5 years my rents can be up by 30%? 

The value on these has gone from 250k each to around 350-400k.  I also refinance them last year to 3.25 on a 30. I left the equity in and just did a rate term for the increased cashflow.   As my existing tenants move out and I get the next batch of tenants in at the new market rate of 1300'ish, I'm going to sit back and collect these checks, I don't care what the value goes to.

I also sent out rent increase for my Portland properties that were just under 9% (9.9 is the rent cap here).  As of now, I don't see any reason why I won't be able to raise them by that percentage next year too.   My Portland properties have become terrible rentals based on their "rent to value",   But wow, their value now...  I am not complaining.

[Jesstache]

We have 3 rentals in a place where property values have increase 50% since the pandemic began.  We've owned them all for at least 6 years, one we've owned for 18.  Two of them just turned over due to the tenants buying their own homes.  One: 1 bed/1bath went from $1180/mo to $1900/mo (market rate was probably closer to $1400/month when lease was signed a year ago but good renters and all that...), other: 2 bed/1 bath went from $1675/mo to $2100/mo.  Both leases signed in Nov, a notoriously bad time to rent here.  If it were Summer, probably would have been closer to $2100 and $2500, maybe more, and beating applicants off with a stick. 

One interesting anecdote I can relay is that almost every single person/couple touring the rentals told me they were looking for a new place to live because their current landlord was preparing their house to sell in the spring. 

Has selling crossed our minds?  You bet!  We decide against it pretty much every time though since landlording is relatively easy here and we have other long term plans that include keeping them.   We can change our minds at any time though.  It's nice to have options.

[MayDay]

St Paul MN just passed rent control legislation that caps rent at 3%. That's 3% period, no inflation adjustment. It'll be interesting to see what the effects of that are. I wouldn't want to invest in real estate in St Paul with a 3% cap. A bunch of big projects have called a halt while they sort it out, including some low income apartment projects.

[PMJL34]

My St. Paul friend, it can always be worse....

Max allowable rent increase for city of Berkeley in 2021 was 1%
2022 jus got published at 2.1%.

[Dicey]

My St. Paul friend, it can always be worse....

Max allowable rent increase for city of Berkeley in 2021 was 1%
2022 jus got published at 2.1%.

LOL, my husband's patents owned an 8-unit building in Berkeley, made up of 1BR apartments and studios. In addition to the caps you cite, there are fees levied on landlords when tenants turn over. They hated rent control, and those fees, so much that as tenants left, they let the units sit empty. This went on for years, until they finally got down to a single tenant. They liked him and by then had owned the building for a long time, so they let it ride. When the tenant died, they discovered he had left them his entire estate. He had no remaining family and they had been good to him. He was a frugal dude, retired from the Post Office, and his estate was worth about 30% of the (then) current value of the property. They settled his estate, emptied the apartment, sold the building and exited the landlording business.

This is just one of the many ways that rent control can backfire. In the end, they did just fine, but what a crazy story! I was a renter during those years. It kills me that so much housing was kept out of circulation. Though Berkeley being Berkeley, now there are probably penalties for keeping units vacant.

[PMJL34]

I love the story. Thanks for sharing Dicey!