Jim Valentine: The rent’s going up
August 8, 2018
Rentals in the area are scarce and the rates are going up for new or renewal situations as anybody looking for, or living in, a rental can attest. While some are a modest increase of $50 a month, others are substantially more than that. Why the sudden increases?
Some situations are a direct result of the recent recession. Investors at that time had properties that were either vacant, or tenants were considering leaving to another property that offered a lower rent. Just as the home sales situation at that time became a race to the bottom, owners were trying to entice tenants with attractive rents to keep, or get, a cash flow to help sustain or keep the asset. That competition actually drove rents down.
Several dynamics have occurred with the recovery of the real estate market. The demand for rentals has increased dramatically from people that are selling and waiting to buy, moving in from outside the area and renting while they find a home to buy, or moving in for work due to the flourishing economy. Add to that the natural demand of young adults coming of age and needing a place to live and the demand exceeds the supply. It's basic economics for supply and demand ratios to have an impact on value, or in this case, rent.
The combination of circumstantially lowered rental rates being corrected and heavy demand is causing rents to go up at what may seem like an alarming rate unless it's considered in the larger perspective. The home values have gone up so the corresponding rents also increase. If they don't, then more tenants would be buying instead of renting. They don't because increased rents are still relative to the overall value of the property. What can occur, however, is the tenant may reach a point where they do become buyers because of what they can buy with the monthly cost they're now paying for rent. Remember, rent is after-tax dollars, home payments are before-tax dollars.
It's important for owners to keep their rents at market in order to preserve the value of their property. Income property value is primarily established by the cash flow it provides. The less cash flow the lower the value. Owners often work with long term tenants by not increasing their rent to a market rate, but that can change on the transfer of the property, or in preparation for the sale of the property. It isn't personal at that point, they're simply adjusting the property's cash flow to better position themselves when it's time to dispose of the property from their portfolio.
If you have a lease in place then your rental rate is locked in for the term of that lease. If your lease expires soon you might get an idea of what the owner intends to do with the rental rate. If it's going up, how much? Depending on the range of rent you're paying you may wish to consider buying instead of renting. You might be surprised at what you can qualify for and find yourself enjoying the benefits and certainty of owning rather than renting. Contact an agent and/or lender to discuss your options.
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Our Advice: Just as homeowners stay up with the value of their home, tenants should stay current with rental rates for properties similar to that which they're in. If they're trending upward and you want to stay, consider asking for an extension to your lease. If your rent is artificially low, consider what's fair and see where you fit in. You might end up paying more than you have been, but still have a good deal. Until the housing shortage is alleviated by added supply, or reduced demand, you'll have competition for rental units. Plan accordingly.
If renting is best for you and your family work the rental market as you would the home market as a buyer. Study the availability and rates in your neighborhood and in the region to know how you fit in. A good relationship with your landlord is good for both of you. When it comes to choosing professionals to assist you with your real estate needs… Experience is Priceless!