Author Topic: Is rental income inflation adjusted?  (Read 6701 times)

cloudsail

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Is rental income inflation adjusted?
« on: August 25, 2015, 05:02:09 PM »
So I was trying to use FIREcalc and factoring in rental income, but I'm not sure if it should be considered inflation adjusted.  I know rents tend to go the way of the local RE market as a whole, which in most places is never guaranteed to go up.  So does this mean that potentially the rent on a place will always stay flat?  There's also the case of long term tenants, who usually pay lower rent on a place they've been in for many years even if the rent in the area has gone up significantly.  If I make $3000/month in rental income today, can I count on that amount to increase to keep up with inflation or no?

fishnfool

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Re: Is rental income inflation adjusted?
« Reply #1 on: August 25, 2015, 05:10:56 PM »
I know rents tend to go the way of the local RE market as a whole, which in most places is never guaranteed to go up.

 can I count on that amount to increase to keep up with inflation or no?

local means everything along with demand in that local. I saw a 3 bd 2 ba rental sign my town today $3400 mo, a few years ago this would have been 1K cheaper. But that is whats going on in the Bay area of Cali. .........Crazy!

sol

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Re: Is rental income inflation adjusted?
« Reply #2 on: August 25, 2015, 05:15:53 PM »
Your rental income goes up when you raise the rent.

nereo

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Re: Is rental income inflation adjusted?
« Reply #3 on: August 25, 2015, 05:28:53 PM »
... If I make $3000/month in rental income today, can I count on that amount to increase to keep up with inflation or no?
you hope that rental income will increase with inflation.  Broadly speaking across all markets over long time periods this is exactly what happens.  However, there are times when local rental prices will outpace inflation, and instances where rentals will go way down (for example: when the population of a city shrinks).

There are no guarantees, and there are things you can do to make your rental fetch a higher price (keeping it clean and updated).

cloudsail

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Re: Is rental income inflation adjusted?
« Reply #4 on: August 25, 2015, 05:42:38 PM »
Your rental income goes up when you raise the rent.

But are you able to raise the rent if the RE market in that area stays flat?

For instance, our house in the outskirts of Seattle is rented out to tenants who have been there for a few years.  The first couple of years we never raised the rent.  The housing market was pretty bad and lots of brand new homes in the area were unable to sell.  Last year when their lease was up for renewal our property manager recommended raising the rent, which we did.  But I'm not sure that we could have done so if the housing market wasn't recovering.  And I'm guessing most places don't experience RE booms like Seattle or the Bay Area.  So it seems like there's a significant risk that rent will stagnate over long periods of time.  But I haven't been a landlord long enough to know, so would be really great to hear from people who have rental properties in different cities.

sol

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Re: Is rental income inflation adjusted?
« Reply #5 on: August 25, 2015, 05:52:21 PM »
We're talking about individual properties here, so it's hyper local.  Your personal rental rates can go up as fast as you like, assuming you can find renters at that price, regardless of what the rest of the market is doing.

One of my places is rented for like $300 above "market" rent for similar places, to a couple that makes way more money than we do.  We haven't raised their rent at all.  Another in the same area is rented about fairly, and we raise it a tiny bit each year, usually 1-3% depending on market conditions, because we don't really want to lose the tenant.  But if he moved out, we'd relist it about 10% higher.  You never know what you can get until you ask.

beltim

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Re: Is rental income inflation adjusted?
« Reply #6 on: August 25, 2015, 05:55:33 PM »
Your rental income goes up when you raise the rent.

But are you able to raise the rent if the RE market in that area stays flat?

For instance, our house in the outskirts of Seattle is rented out to tenants who have been there for a few years.  The first couple of years we never raised the rent.  The housing market was pretty bad and lots of brand new homes in the area were unable to sell.  Last year when their lease was up for renewal our property manager recommended raising the rent, which we did.  But I'm not sure that we could have done so if the housing market wasn't recovering.  And I'm guessing most places don't experience RE booms like Seattle or the Bay Area.  So it seems like there's a significant risk that rent will stagnate over long periods of time.  But I haven't been a landlord long enough to know, so would be really great to hear from people who have rental properties in different cities.

It's unclear from this quote if you already know this, but I wanted to point out that the market for houses and for rents are often uncorrelated - that is, houses might not be selling, but rents could be going up. 

Long term, rents should go up in proportion with inflation, but it's not smooth, and very dependent on local conditions - rents in Detroit have gone up ~2.7% annually over the last 30 years, while in San Francisco that number is about 4.4% annually.

http://www.bls.gov/regions/midwest/news-release/ConsumerPriceIndex_Detroit.htm

brooklynguy

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Re: Is rental income inflation adjusted?
« Reply #7 on: August 27, 2015, 11:23:47 AM »
This thread shines a spotlight on an aspect of inflation that is rarely discussed:  it is not uniform.  There is no single rate of inflation that applies equally to every good and service in every market.  Food prices do not move in perfect lockstep with housing prices.  Orange prices do not move in perfect lockstep with banana prices.  Orange prices at your corner grocery store do not move in perfect lockstep with orange prices at your other corner grocery store.

Common measures of inflation, like year-over-year changes in the consumer price index, tell us only the average rate of inflation across the components that make up the index.  That's useful as a benchmark, and as simplified shorthand for the dollar's overall loss of purchasing power in general, but it doesn't really tell you the precise loss of purchasing power of your own dollars (which depends on how you choose to spend them).

nereo

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Re: Is rental income inflation adjusted?
« Reply #8 on: August 27, 2015, 11:39:19 AM »
(blah blah blah)
What I really want to know Brooklynguy is; why do you have a piece of cake next to your age?  Is today your birthday?

brooklynguy

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Re: Is rental income inflation adjusted?
« Reply #9 on: August 27, 2015, 11:56:27 AM »
What I really want to know Brooklynguy is; why do you have a piece of cake next to your age?  Is today your birthday?

Hey, look at that, there is a piece of cake next to my age.  Yes, today is my birthday.  Thanks for noticing, forum software!

Mississippi Mudstache

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Re: Is rental income inflation adjusted?
« Reply #10 on: August 27, 2015, 12:03:16 PM »
What I really want to know Brooklynguy is; why do you have a piece of cake next to your age?  Is today your birthday?

Hey, look at that, there is a piece of cake next to my age.  Yes, today is my birthday.  Thanks for noticing, forum software!

Happy birthday indeed!

We're talking about individual properties here, so it's hyper local.

This is pretty much all you need to know. Yes, in the long run, over large areas, fair-market rents tend to increase with inflation. However, in the area in which your rental is located, over the time frame that you own it...Well, anything can happen. You're subject to the whims of your local housing market.

cloudsail

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Re: Is rental income inflation adjusted?
« Reply #11 on: August 27, 2015, 04:40:26 PM »

It's unclear from this quote if you already know this, but I wanted to point out that the market for houses and for rents are often uncorrelated - that is, houses might not be selling, but rents could be going up. 

Long term, rents should go up in proportion with inflation, but it's not smooth, and very dependent on local conditions - rents in Detroit have gone up ~2.7% annually over the last 30 years, while in San Francisco that number is about 4.4% annually.

http://www.bls.gov/regions/midwest/news-release/ConsumerPriceIndex_Detroit.htm

I didn't actually know this, so thanks for the info.  This is somewhat comforting to know.

My knowledge of rent prices is limited to two places: Seattle and the Bay Area, both of which have gone up with the housing market.  (A year after we moved to Silicon Valley and our lease was up for renewal, the apartment complex changed owners and our rent went up by $600! We bought a home shortly thereafter.)

cloudsail

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Re: Is rental income inflation adjusted?
« Reply #12 on: August 27, 2015, 04:40:59 PM »
What I really want to know Brooklynguy is; why do you have a piece of cake next to your age?  Is today your birthday?

Hey, look at that, there is a piece of cake next to my age.  Yes, today is my birthday.  Thanks for noticing, forum software!

Happy Birthday!

cloudsail

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Re: Is rental income inflation adjusted?
« Reply #13 on: August 27, 2015, 04:42:50 PM »
So..... is the consensus that I should tick the "inflation adjusted" box next to my rental income in FIREcalc?  It actually makes a significant difference. (Not between success and total failure, but I guess between total success and high chance of success.)

beltim

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Re: Is rental income inflation adjusted?
« Reply #14 on: August 27, 2015, 04:50:53 PM »
I didn't actually know this, so thanks for the info.  This is somewhat comforting to know.

No problem!

So..... is the consensus that I should tick the "inflation adjusted" box next to my rental income in FIREcalc?  It actually makes a significant difference. (Not between success and total failure, but I guess between total success and high chance of success.)

Yes.  It won't be a perfect prediction, but since you're interested in long-term success rates, it makes far more sense to include inflation adjustments in long term calculators like FIREcalc.

CCCA

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Re: Is rental income inflation adjusted?
« Reply #15 on: August 28, 2015, 09:27:29 AM »
I would say it also depends on what you mean by rental income.

I normally include net rent (i.e. rent - expenses) in firecalc.
If you specify gross rents instead then you also need to include rental expenses as well.
In either case, we typically assume that rents (net or gross) will grow at some rate (2-3%), but expenses do not grow as fast since the mortgage is a fixed cost and makes up a large portion of total expenses. Thus your net rent should grow faster than your gross rent (assuming you are doing things right).


example: Year 1, rent is $1000, total expenses are $600 so net rent is $400/month
Year 2, rent is $1025 (2.5% increase), total expenses are $606 (1% increase), so net rent is now $419 (4.75% increase in net rent).
« Last Edit: August 28, 2015, 11:12:42 AM by CCCA »

Bearded Man

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Re: Is rental income inflation adjusted?
« Reply #16 on: August 28, 2015, 11:02:03 AM »
You can still increase the rent if you are putting money into your house to keep it from becoming a slum. Paint, flooring, roofing, appliances, cabinets. It all costs money and you can raise the rent since they have a much nice place to live in. Either way they are paying for it, and you get depreciation benefits too!

clarkfan1979

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Re: Is rental income inflation adjusted?
« Reply #17 on: August 31, 2015, 11:43:57 PM »
Your rental income goes up when you raise the rent.

But are you able to raise the rent if the RE market in that area stays flat?

For instance, our house in the outskirts of Seattle is rented out to tenants who have been there for a few years.  The first couple of years we never raised the rent.  The housing market was pretty bad and lots of brand new homes in the area were unable to sell.  Last year when their lease was up for renewal our property manager recommended raising the rent, which we did.  But I'm not sure that we could have done so if the housing market wasn't recovering.  And I'm guessing most places don't experience RE booms like Seattle or the Bay Area.  So it seems like there's a significant risk that rent will stagnate over long periods of time.  But I haven't been a landlord long enough to know, so would be really great to hear from people who have rental properties in different cities.

If brand new homes were unable to sell, then it's a landlord's market. You raise the rent. If homes are selling, it's going to be difficult to keep tenants and you do not raise the rent.

zephyr911

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Re: Is rental income inflation adjusted?
« Reply #18 on: September 01, 2015, 07:42:14 AM »
The strongest predictors of rent in your area are wage growth and relative housing demand. If you're in a LCOL area (one with housing costs not inflated by demand) you can probably count on slow and steady growth, unless something happens to depress wages (a major employer vacates, etc). If you're in a place that's seen a major run-up, the odds of reversion to the mean may be greater. Or maybe it'll push even higher if high-end jobs proliferate.

I live in a cheap area (duplexes $60-100K, rents as low as $400). People at minimum wage can afford my rentals, and that wage will theoretically track inflation over time*, so my odds of rent rising with inflation are pretty good.

*it's lagged for decades, so there are no guarantees, but there's nationwide momentum for a correction, which could be great for us.

jinga nation

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Re: Is rental income inflation adjusted?
« Reply #19 on: September 01, 2015, 11:09:20 AM »
I look at inflation numbers, real and imaginary, along with comps, and increases in property taxes, insurance, and association dues to determine the rent price and be within my range of ROI.

cloudsail

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Re: Is rental income inflation adjusted?
« Reply #20 on: September 02, 2015, 10:25:40 AM »
The strongest predictors of rent in your area are wage growth and relative housing demand. If you're in a LCOL area (one with housing costs not inflated by demand) you can probably count on slow and steady growth, unless something happens to depress wages (a major employer vacates, etc). If you're in a place that's seen a major run-up, the odds of reversion to the mean may be greater. Or maybe it'll push even higher if high-end jobs proliferate.

I live in a cheap area (duplexes $60-100K, rents as low as $400). People at minimum wage can afford my rentals, and that wage will theoretically track inflation over time*, so my odds of rent rising with inflation are pretty good.

*it's lagged for decades, so there are no guarantees, but there's nationwide momentum for a correction, which could be great for us.

I just realized that I have never in my life lived in a LCOL area.  Although I guess the city I grew up in didn't really become super HCOL until about 10 years ago.  Makes me wonder what it would be like.

Pooperman

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Re: Is rental income inflation adjusted?
« Reply #21 on: September 04, 2015, 04:40:02 AM »
I can give you a very local example to my town in NJ, though it does, to some degree, apply to the entire NYC suburb region in Nj and Ny. We rent our 1 br 650 sqft apartment for $961/month. Rents are only allowed to rise with inflation (November inflation specifically). This building has been around for 40 years or so. The newer buildings in the area don't have to follow inflation and the rent for the same room costs $1400+. This is likely the case in many HCOL areas as well.

sokoloff

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Re: Is rental income inflation adjusted?
« Reply #22 on: September 04, 2015, 03:35:25 PM »
Yes, tick the box.

Turn the question around. What makes up inflation, and what would cause you to need more money in retirement? Food, energy, transportation, and housing. Housing costs are a big component of spending, and therefore the changes in them make up inflation.

The way you get in trouble is if your personal housing costs and related inflation experience is uncorrelated to where your rental properties are. If you have rentals in a stagnant or declining area (Detroit, Florida in a bust cycle) and are living in Silicon Valley in a boom there, your expenses will be going up way faster than your rental income.

But, for cFIREsim's purposes, yes, tick the box.
« Last Edit: September 05, 2015, 10:12:53 AM by sokoloff »

clarkfan1979

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Re: Is rental income inflation adjusted?
« Reply #23 on: September 05, 2015, 12:49:46 PM »
House #1: Rental income in 2007 was 1400/month and today is 1900/month

House #2: Purchased in 2012 as primary residence. If I rented it out in 2012 rent would probably be around 1200/month. Rental income in 2015 is 1600/month.

My experience has been higher than inflation. If housing prices decline, rents don't really decline. I think the biggest threat to a rental market is an increasing unemployment rate.

I would recommend trying to show the houses yourself to get an idea for rent. If you are below market value, the applicants will let you know in a variety of ways by how they act.

I have been told by a few property owners that it is legal to accept overbids on rents and is not considered discrimination.