One of my biggest fears for renters has come true. Rents are surging due to rising home prices, increasing household formation, and declining inventory. The main question now is: How long will rent increases last?
We shouldn’t feel bad for those who’ve been against homeownership for years. You can find plenty of them commenting in my posts:
All those against real estate have rationally saved and invested the difference in the stock market and other classes. And given most asset classes have done phenomenally well over the years, renters who invested have also done very well.
However, for those of you who wanted to buy real estate but couldn’t or want to buy real estate but can’t, this post is written mostly for you. This post should help you better figure out your future living situation.
How Much Are Rents Up Year Over Year?
According to data from Zillow, August 2021 rent is up 11.5% from a year earlier, or almost $200. In other words, the median rent price in America in August 2020 was around $1,530. Today it is around $1,739.
Below is another median rent price chart by ApartmentList, which shows the median rent price in June 2021 was up about 9% from a year earlier. Therefore, perhaps rents are accelerating since the economy in August 2020 was better than the economy in June 2020.
Here’s another chart from CoreLogic. It shows a national single-family rent index for various price points is also up dramatically year over year in 2021 as well. It shows the High Tier segment (black line) increase the most.
In other words, no matter how much you don’t want to believe rents are up in 2021, they are up big time. It would be one thing if median rent prices went negative in 2020. If so, it would make today’s rent surge more digestible. But median rent prices never went negative in 2020. They just stopped increasing as much.
It is my belief that the intrinsic value of a home has permanently increased. We are all spending more time at home, and therefore, we all appreciate our homes more.
There is no going back to the way things were. The most likely scenario is a hybrid model where workers work from home part-time and work in the office part-time.
How Long Will Rent Increases Last?
Rents cannot increase faster than wage growth indefinitely. At some point, rent increases will have to slow.
Therefore, it is my belief that rent increases will begin to moderate in 1H2022 as home price growth slows, enough people finally move out of their parents’ homes or shed roommates, and housing construction bottlenecks decrease.
However, make sure to differentiate between moderating rent price growth and negative rent price growth. Instead of driving 85 mph on the highway, a car might slow down to 65 mph. The car is still moving forward, but just not at as rapid of a pace.
If median rent price growth is really about 11.5% YoY in 2H2021, I suspect median rent price growth will slow to about 6% by the end of 2022. That’s still a 18.2% increase in rents in two years.
After 2022, I expect national median rent price growth to revert to the mean of around 3.5% until some other unpredictable exogenous event occurs.
Even though 3% annual rent increases don’t sound like a lot, everything is relative in finance. If your property is also increasing in the single digits, the combined return is quite healthy. This is especially true if returns for equities and bonds dramatically decline over the next 10 years as well.
Advice For Renters Looking To Control Living Expenses
As a landlord since 2005, generating positive returns was important so I could escape work earlier. Today, generating positive returns is important so I can better take care of my family. Real estate income accounts for about 50% of our current passive income portfolio.
At the same time, as a personal finance writer since 2009, I also have a goal of helping as many people achieve financial freedom as possible. This goal is why I’ve encouraged readers to buy real estate as young as they possibly can for so long. Inflation is too powerful of a force to combat.
Whether you believe me or not is neither here nor there. If you are a renter, what matters is what you do and how you think about the current situation going forward. Therefore, here is some advice for renters as a landlord and as an ex-renter myself.
1) Eliminate misinformation, understand the latest market conditions
Although seeing rents and home prices increase can be frustrating, there’s a positive for renters. Most landlords are incapable of increasing rents as fast as the market. The reasons are due to kindness, ineptitude, and laws.
Therefore, even if the national median rent or local market rent increased by 11.5% from a year earlier, your rent has most likely not increased by the same magnitude.
In a rising market, the difference between current market rent and the rent you are paying is your “profit” and a landlord’s “loss.” Your profit is what you save by not having to pay market rent. A landlord’s loss is the opportunity cost of not earning market rents. The longer you rent a place, usually the larger your profit grows and vice versa for the landlord.
If a renter does not understand the latest rental market conditions, s/he might get erroneously upset at not getting their way.
For example, one tenant recently asked for a rent decrease when neighborhood rents are up between 10% – 15% ($400 – $615). Since 2H2020, there’s been a huge flood of people migrating to the western side of San Francisco due to better value, more space, better air, more parks, and less density. I knew demand was up because I rented out a house in September 2020 and experienced more demand than ever before.
When I declined my tenant’s request and just kept the rent unchanged, he was unhappy. But if he understood the latest market conditions, he would have felt more at peace.
Asking for a rent decrease when the rental market is up 15% is like asking for a raise during a bear market. It could happen if you’ve developed an amazing relationship with your landlord. But what’s more likely to happen is your manager adding you to the RIF list for being so disconnected from reality.
2) Know that your landlord has rising expenses too
For those who have never owned property before, it’s understandable to not know all the costs associated with owning real estate. Landlords often have the following costs: insurance, maintenance, mortgage, property taxes, special assessments, property management.
In other words, the increased rent never 100% goes to the landlord’s bottom line. For example, even if I have no mortgage, I still pay about $23,000 a year in property taxes for one rental property. This property tax goes up 2% a year, usually forever.
The more a renter understands a landlord’s costs, the more a renter won’t feel as bad about paying higher rents. The same goes for voting on legislation to raise more money for some cause. If the money raised is coming from paying more property taxes, then rents will inevitability increase. Therefore, voters of such legislation should be fine with paying higher rents.
If you’re lucky to not have any rent increase in a rising-rent environment, your landlord’s cashflow is declining. Therefore, as a renter, you might gain comfort knowing your landlord is making less.
3) Keep things harmonious and don’t get personal
If you have a good landlord who is attentive, takes care of issues, and communicates with you in a professional manner, cherish the relationship. A landlord who finds good tenants will certainly do the same.
At the end of the day, a harmonious relationship is better than a contentious one, especially if you know your landlord and see him/her every so often. If your landlord is a faceless corporation, then it’s easier to be more aggressive or combative. But even still, it’s usually worth keeping things cool with the property manager.
If you get too personal, you run the risk of offending either party. If you offend the landlord by bringing up some personal issue, he might decide to raise the rent to the legal maximum. Worse, he might give you notice, which would be bad if you don’t want to move out.
At the same time, if a landlord offends a renter, the renter might damage the place, delay paying rent, or not pay at all. Therefore, when it comes to the lease agreement and negotiating future terms, keep things strictly business. Please don’t bring personal issues and judgement calls into a negotiation.
4) Practice Stealth Wealth
Before I had kids, one of the reasons why I enjoyed driving a Honda Fit was because my tenants wouldn’t judge me when I came over to address an issue. Driving a cheaper car than my tenants not only felt good, it helped diminish envy.
Strategically, to minimize the chances of a rent increase, it’s also best for renters to practice Stealth Wealth. If the landlord sees you rolling in a new car, fancy watch, $10,000 home theater system, or whatever luxury item, he may logically think you can afford to pay more rent.
When in doubt, it’s better to be more low key with everything you do.
5) A renter really does have to save and invest the difference
Anti-homeownership advocates always argue that renting is better because it’s cheaper, less hassle, and you can invest the difference in better performing assets. Yes, these are great reasons for renting in the short term or medium term.
However, just like how you wouldn’t short the S&P 500 over the long term, you wouldn’t short the real estate market by renting long term either. Instead, it’s better to invest in the S&P 500 and at least own your primary residence to get neutral real estate.
If you rent, you must actually save and invest the difference. If you don’t, you will likely fall financially behind your peers who do own. The main reason is homeowners have a forced savings account every time they pay their amortizing mortgage. The other reason is that real estate tends to inflate with inflation over time.
If a homeowner owns a $500,000 house that appreciates by 8% one year, a renter with a $80,000 income needs a 50% pay raise just to stay even. Or, a renter with a $100,000 stock portfolio needs to see a 40% return to stay even. Both are unlikely.
The average net worth for a homeowner is 40X or so greater than the average net worth of a renter. There are all sorts of reasons for this massive discrepancy. But one reason is the lack of discipline in saving and investing the difference over the long term.
6) Always be looking for buying opportunities
One of the great benefits of renting is trying out a neighborhood in a lower-cost way before buying. After about a year, you should have a great idea if you want to live in the neighborhood long-term. And if you don’t, you should spend time at least once a month exploring new neighborhoods.
Thankfully, it’s easier than ever to explore new homes online. You can even track rent increases in addition to property prices. I recommend setting up e-mail alerts with homes that meet your filters. It’s just like signing up for my e-mail list that automatically e-mails you whenever I publish a new post. This way, you’ll never miss a thing.
If you can afford to buy a home using my 30/30/3 rule, I would buy. Just make sure to leave in your home for at least five years to ride out the cycles.
There are great buying opportunities that pop up all the time. You might find a stale-fish listing that was priced too high. You might stumble across a great listing during the middle of a snow storm when nobody is looking. A couple might be getting a divorce and just wants a quick sale.
Gems are waiting to be snagged every day. You just have to spend time looking.
Rising Rents Are Also A Positive Economic Signal
Finally, another good way to look at rising rents is to view them as a positive signal for a healthy local economy. Rising rents usually mean positive demographic changes, rising wages, and more job opportunities. Therefore, look to rising rents as a way to boost your employment or business income.
If your rent is rising by 5% – 10%, but you can get an equal or greater raise, you’re winning! If rents are flat or declining, it will likely be harder to get that raise and promotion. Which situation would you rather be in? If I was working, I’d much rather be in the former.
Further, if rents are rising quickly, it might be a positive signal to invest in local companies. After interviewing many prospective tenants who worked at Google and finding out their mind-boggling salaries, I decided to invest in Google stock 10 years ago.
There’s always a silver lining to every suboptimal situation. Even sitting in horrendous traffic everyday could be a positive signal for you to invest more.
Renting is absolutely fine during the short or medium term. Even in a rising-rent environment, renters can prosper handsomely. However, over the long run, I encourage everyone to own their primary residence, invest in real estate, and invest in stocks and other risk assets.
Your net worth and your descendants will thank you.
Real Estate Suggestion
To invest in rising rents, take a look at Fundrise, one of the largest real estate crowdfunding platforms today. Fundrise primary invests in residential rental properties across the country. You can invest in a Fundrise eREIT for as little as $10.
There’s no need to wait until you have a down payment to invest in property. Nor is there a need to be a landlord anymore to take advantage of the residential real estate boom.
Readers, how long do you think rent increases will last? If you are a landlord are you raising rents and by how much? As a renter, have you experienced rising rents? If so, by what percentage increase? Why do you think anti-real estate people still stick to their beliefs despite being so wrong?