Could low end rents explode upward in 2-3 years???
We like to think of ourselves as compassionate capitalists, which we understand is an oxymoron so let us explain. We like to provide safe and secure housing while we produce a profit every month. Our goal is to purchase, rehab and lease properties that the average family in our market could rent if they chose to. This strategy has been a lot easier to execute the last 18 months than the preceding 5 years.
We watch our market every day and we see a potentially surprising outcome in the next 2-3 years. We currently rent an average 3 Bed/1 bath house for about $900 and we rent our average 2/1 apartments for about $625-$650. In 3 years we could see the 3/1 house going for 1,100 and the 2/1 apartment going for $795.
If you own any rentals today your immediate reaction is going to be you’re crazy because rents are currently soft across the board. We see this as a short term fact that is about to turn and turn suddenly down the line. Why? The simple answer is that the SFH housing market is getting a lot of play and attention from the media and the government.
This means, that eventually we will turn this market around and push prices back closer to replacement cost. As this market turns houses that have been bought by investors will be sold to first time buyers which will remove much of the excess supply of rental homes.
The next area to contribute to what we foresee as the potential rapid rise in rents is the fact that the small and medium apartment market is about to explode from all the stress of bad financing. The Duplex – Four-Plex market leveraged the same set of toxic products that blew up in the SFH market. We know of dozens of Four-Plex’s that were purchased for north of $400k in our market that would be hard press to get $180K today.
So let me ask you a question, if you were an owner of a Four-Plex that lost over 50% of the value, is producing negative cash flow of $500-$800 a month and your payment suddenly doubles what are you going to do? The options are not pretty and we suspect most people will just walk away. We suspect this is going to happen with greater frequency starting this year. We already see some but we think the wave is still rising behind a dam that will burst eventually.
Also do you know that most banks chose to vacate Duplex-Four-Plex’s before they sell them? This reduces their risk and lets them sell it quicker. We don’t blame the banks they need to watch out for their investors and stock holders but it does put strain on families who have to move.
The real issue as far as we see it is if you take 5%-10% of the lower end rental apartments out off the market what happens? We only see a couple of options with Rents going up being the most likely. People could also chose to double or triple up or maybe even move out of our market to the Mid-West perhaps.
The final straw is the fact that a new apartment cannot be profitably built and leased for less than $950-$1,100 depending on which article you read. So you have to lean on older properties to satisfy 100% of the lower end rentals which offers only a finite supply that can become very constrained if a large chunk of supply is removed.
In the end if you see rents rising in the future and prices will follow as rents rise. If you think the basic logic is sound then I propose you buy now and reap the rewards of the future appreciation.
Please not ONLY buy property today that cash flows today and let future appreciation be the icing on the cake. Review our acquisitions as we never over pay for future benefits!!!
Thanks for reading
Michael
