Hi everyone, I’m Adam. I’m really interested in investing and becoming a landlord.
I’m still doing all my homework, but I’d really appreciate it if someone could give an in-depth answer as to what drives rental prices up an down.
This is not meant to be a glib answer but…supply and demand.
jmd_forest
Hi Adam. Rents are a lot like properties. They’re only worth what people are willing to pay for them. Also, if someone can buy a house for what they’re paying in rent (or close to it), they’ll likely buy a house. You’ll need to scout out the rentals in your area and see what people are ACTUALLY paying and for what. Then you’ll be able to properly price and equip your rentals competitavely. Good luck.
So is it correct to assume that as house prices go up (meaning they are more expensive to buy), rent prices should go up as well? This is the part that confuses me, as higher mortgages obviously means less people can afford to own a home, but at the same time does that automatically create a higher demand for rental units, bringing up the price of rent?
Basically: do rent prices and home prices have a parallel relationship? When one goes up so does the other, and vice versa?
adam,
Rent and hosing prices have a parallel relationship only in the loosest of ways. In very general terms, rentals will follow housing prices. However there is not a 1 for 1 relationship. Supply and demand are much bigger forces working on rental pricing in my opinion. For example, during the housing price runup from say …2000 - 2005, rents in this area were basically stagnant because people were able to qualify for one of the many different mortgage programs, including subprimes, that were available at the time. At the same time, the high prices and high demand for houses somewhat reduced the number of rentals available resulting in somewhat of an equilibrium in tenants and rental units and the stagnant rental prices.
Recently, more and more people are unable to qualify for mortgages and the pool of tenants is increasing resulting in rental prices creeping up. However, more people who cannot afford their mortgages or who cannot sell their houses are trying to rent their homes, sometimes at inflated rental prices (to try and cover their costs). This both helps drive up the rental costs due to the inflated comparisons, but also helps keep prices down, due to the increasing number of units on the market.
Rental prices are not cut and dry like there is some mathematical formula you can apply and out pops the right answer. Rental prices are a lot like purchase prices, its really a free for all of what the market will bear. MIxed in with these influences is the fact that there is a core group of stupid people who will try and charge too much (or too little) and who will pay too much (or too little). This core tends to generate the real world, but outlying examples/comparisons used by the real estate agents and management companies to sell you their services.
I generally follow, over a several month period, similar rentals in similar locations in several local papers and craigslist. I note which rentals are advertised longest and shortest and price my units accordingly. Just one month without a tenant costs me $1500 so its kind of stupid to be advertising for $1650 for three months.
The above reflects my experiences and a common sense type approach and understanding of my local market. I’m sure an economist could provide a more rigorous analysis.
jmd_forest
Thanks jmd_forest! That was exactly the kind of answer I was looking for.
Supply and demand has a lot to do with it, but so does the income level of your local tenants.
The tenants can’t increase their salaries every time the rent goes up, so if they get priced out of the market, they no longer rent. Instead, they move back with family or share a multiple family home.
Supply and demand affect both purchase price and rent, but it is different sets of supply and demand that are not really related. It is a different group of people with different income levels who purchse, so their supply and demand level is very often different from the demand for rentals.
- Too many, or too few, jobs nearby
- Many people moving into or out of your metro area – like here we have lots of illegal immigrants
- Too many, or too few, rental units in your market area
- Property condition
- Property location
E.G. In one area of Dallas, off Forest Lane/Audelia/Skillman and I-635, there are tens of thousands of apartments within probably a square mile or two. This area used to be very nice, but now has gone down hill due to cheap rents which attracted a lower grade of tenant over the last 10-20 years. There is no doubt, though, that the area is still nicer than where I bought my recent 2/2 home. However a 2/2 home or apartment in that are would still rent for less than what my 2/2 home would, even though it’s a better area, purely because there is so much competition nearby.