How Elevated Rental Housing Prices Are Crushing Hard Working Americans

WHEN PROPERTY OWNERS TRY TO GET ALL THEY CAN, THEY’RE TAKING FROM FUTURE TENANTS AND FUTURE RETURNS

The housing market is a bit of a mess right now. We’ve gotten used to this mixed-up reality where both mortgage rates and housing prices are sky-high. Theoretically, mortgage rates as high as 8% should dig into the value of homes (as purchasing power decreases) and prices should come down. But they haven’t. Those homeowners sitting on 3 or 4% interest rates from yesteryear aren’t selling, so the supply remains miniscule, which means demand, and subsequent housing prices, are still at nose-bleed heights. Meanwhile, young professionals sit on the sidelines as they can’t afford to get in the game at these prices, so they’re left to rely on the rental market…more on that rental market later.

LEARN MORE: ARE RENTS TRULY UNAFFORDABLE OR IS SOMETHING ELSE TO BLAME?

SHORT TERM V. LONG TERM

Before diving back into the reality of the moment, we want to remind readers of the #1 Nexus Guiding Principle: ALWAYS FOCUS ON THE LONG TERM. As a company that guides and advises our investing clients, we take seriously the importance of playing the long game. Our real estate investors play it safe and avoid the hottest trends. We’re not flipping. We’re not buying up GameStop stock on Robinhood. We’re not in it to get rich quick. That approach is not sustainable over the long term. But that approach IS at the heart of the problem renters face from coast-to-coast.

ENTER: THE CASE IN POINT

A rental property in one of our territories that sold for $127,000 five years ago was recently listed at $1,000,000. Yes, you read that correctly. An increase of about 750% in half a decade! There is one two-bedroom unit and seven one-bedroom units. So eight units is pretty solid, but $1 million? Could they even get a mortgage from a lender? What will the rents have to be? And the insurance? And the taxes? And the construction costs? The short of it is this…maybe a buyer can afford to buy this property, but to make it profitable whoever rents it will likely have to pay through the nose.

LEARN MORE: A POTENTIAL HOUSING MARKET TURNAROUND IN 2024???

THE UNDERLYING DEAL (THAT NO LONGER HOLDS)

The key to successful investing is finding comfortable margins. If you find an investment property where the sales price is reasonable, construction needs seem minimal, and rents are low compared to the market, there are likely some margins there that you can rely on. Raising those rents to market levels allows for greater income and gives the owner the ability to reinvest in the comfort of their tenants. Comfortable tenants lead to reliable on-time rent payment, and the cycle plays out nicely. However, this falls apart if landlords don’t reinvest. Rent prices are way up and it is a strong rental market. But that doesn’t mean property owners have more income to pocket. If your rents went up $200/month you should do what you can to add value back into your properties: to validate that market price…because you’re playing the long game, not trying to max out on today’s market conditions.

LEARN MORE: DOES IT MAKE SENSE TO KEEP RENTS BELOW MARKET???

WHY THAT DEAL NO LONGER HOLDS

And that’s where we get stuck…whether individual property owners are aggressively trying to max out on today’s market or not, the margins just aren’t there if you’re buying right now. What used to go toward common area maintenance is now going toward that 7.75 mortgage interest rate. If someone buys this 8-family unit for $1,000,000 their mortgage and carrying costs are going to be through the roof. They’re going to have to increase rent prices substantially, but how in the world do they substantiate those prices through adequate maintenance and in-unit improvements? They likely will not be able to…and the deal is dead. Lower quality places to live for higher prices. The pool of potential renters has never been stronger, but the water they’re swimming in is getting murkier and murkier.

LEARN MORE: THE TRUE COST AND VALUE OF REAL ESTATE INVESTMENT

THIS ISN’T ISOLATED

If this was about one home in Pawtucket, RI then I’d be wasting my energy, but it’s not. This is becoming the new normal and normal everyday working class Americans are losing out. In Nexus’ Worcester territory, years of deferred maintenance of 200 year old multi-family units are making investment nearly impossible for the cops, teachers, and hard-working folks we’ve had the pleasure of working with over the last decade. Instead, large investors from Boston are jumping in, tearing down these low-margin properties, building Boston-esque complexes, and outpricing the population. Instead of pricing a dud at $1 million and hoping for the best, in Worcester, they’re building fresh with the same expected returns. In both cases, ownership is stretching their potential margins as razor-thin as possible. We wish them luck, but it’s not the game we want to play.

LEARN MORE: WHY WORCESTER AREA PROPERTY OWNERS NEED A PROFESSIONAL PROPERTY MANAGER MORE THAN OWNERS IN OTHER PARTS OF THE COUNTRY

WHERE’S IT END? WHAT ARE THE SOLUTIONS?

Regardless of where prices and mortgage rates are, the goal of finding margins is the same. And the best way to maximize any of your efforts is to hire a professional. Looking for better organization and financial literacy because money is tight, hire a bookkeeper that will pay for him or herself in the savings they help create. Looking to lose those pounds or add that muscle after the Holiday season, hire a personal trainer to keep you on track. Looking to navigate a difficult rental housing market, hire a reputable property manager that will both keep you focused on your goals and help find revenue that covers their services. The best way to make the most of a challenging situation is to invest in a partnership that works for you.

It’s also important to take a step out to remind investors that this conversation is really only central to those buying, selling, or trying to refinance (for some reason) in the face of these current conditions. Those investors who bought prior to the prices skyrocketing are in very good shape. You are able to increase your rents, which is typically a good thing, but make sure you’re doing your part to add grease to your property’s financial cycle. Re-invest in your property and the comfort of your tenants and you’ll be looking at positive long term returns that will outlast these wild market waves.

LEARN MORE: THE 3 PROS AND CONS OF HIRING A PROPERTY MANAGEMENT COMPANY

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Mick Lefort is the General Manager of Nexus' New Haven County Franchise Office and the Vice President of Operations for Nexus Property Management®, a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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