RENT IS ‘UNAFFORDABLE’...WHO’S TO BLAME? 

Rent prices have never been higher and it’s caused a lot of buzz across the media this summer. There is no doubt that landlords across the country have elevated their rent prices, but are they the ones to blame? Possibly because it’s coupled with states’ eviction moritoria coming to an end in recent months, or government subsidized rent relief drying up, but whatever the reason, it’s crystal clear that landlords have become easy scapegoats for the inequities that exist in housing. 

LEARN MORE: RENTS ARE SOARING IN SOUTHERN NEW ENGLAND   

LOOK NO FURTHER THAN THE BLOATED SALES MARKET 

Nexus Property Management’s VP, Greg Rice, wanted to break down this current issue with a simple comparison of a typical rental property that the company manages. Although it’s become trendy to paint the property owner as the big bad wolf, the reality is that he or she is the last one in line and they themselves are just trying to stay afloat. The true culprit is the exorbitant sales market. As property owners look for ways to keep up with the inflated prices they’re paying to buy property, they are inevitably left with few options other than raising rent. 

LEARN MORE: YOUR TAX ASSESSMENT IS ABOUT TO SKYROCKET…WHY??? 

34 FRANKLIN STREET, WOONSOCKET, RHODE ISLAND 

This 4 unit property in one of Southern New England’s once mighty industrial cities has been owned by Rice and managed by Nexus Property Management since 2016. For comparison’s sake, we’re going to look at price for the building, down payment needed, rent rolls and total income, and contrast that to expenses that come from operating costs. The table below shows those numbers for the property for 2016:   

Let’s begin with the obvious: a 36.33% return on your investment (after one year) is incredible and it’s why real estate investment is so attractive. However, these figures are based on a best case scenario with full tenancy and no major issues arising (which is not the reality we live in). This table exists for the sake of comparison, so we had to leave those variables. But there’s no doubt that these rent prices were affordable and fair and in the end it was a win-win for tenants and the owner alike. With four unit apartments, we typically advise clients that 3 units will cover your regular expenses and the fourth will likely provide passive monthly income for you or help you weather the storm should an expensive issue arise. As you can see, this holds true for this property. It’s a solid investment. 

But a lot has changed since 2016. The table below shows how expenses have changed. You can see that total expenses have doubled in the past 6 years!!! (from $1,775 to $3,455 a month). Over that same time period, rent would need to be added to keep up. The average out there is about 10% a year. The rent here increased $1,830 total over those 6 years, which is an increase of 60.5%...in line with those averages. 

With 60 percent more income coming in that 6 years ago, the overall profit is just about the same ($150/month). At a time when more and more people are working from home and there is more wear and tear on rental properties than ever, that amount is negligible at best. The main point should be clear…landlords are not getting rich by hiking up rents…they’re simply trying to keep up themselves.   

LEARN MORE: WHY NEXUS FRANCHISES SUCCEED IN SOUTHERN NEW ENGLAND CITIES   

THE COST THAT DOESN’T COME UP IN THE NUMBERS: STRESS 

Any investor would jump at the chance to take home 36% on $40,000. It’s a no-brainer. Six years later, that opportunity no longer exists. 16.8% is still a great return, but you need $100,000 to play right now and your margin for error has become razor thin. Where a vacancy in 2016 that took you 2 months to plug meant $1700 lost, today you’re looking at possibly $3000 out the window. Until the housing market corrects itself, there’s just too much stress on the system for the typical investor. 

Those investors are being asked to take much more risk. They’re being asked to take on far more debt. They’re having to deal with a 100% increase in operating costs. And at the same time, they’re being painted as the bad guys. The volatility of the market has created this scenario and both tenants and property owners are bearing the brunt of the hardships but its the landlord alone who has been vilified.   

LEARN MORE: IS THE RHODE ISLAND HOUSING MARKET SHOWING SIGNS OF IMPROVEMENT? 

SOLUTIONS 

When margins are thin and risk is high you’ve got two main options: 

1. SIT OUT AND WAIT FOR THINGS TO CHANGE:  2016 was clearly more attractive than the current investment environment, so why not just wait for those conditions to return.  You could…but the reality of prices coming back to where they were is slim and markets rarely work that way. Normalcy should return but the days of paying $41,250 per unit are long gone. If you opt to take some time away be sure to keep an eye on listings and watch closely to see what happens with that price per unit ratio. It’s at $100,000 currently, which is unaffordable for most.  As it creeps back down toward $65-70K, you should start stretching and preparing to jump back in. 

2. HIRE OR CONSULT A REAL ESTATE INVESTMENT PROFESSIONAL:  The huge advantage that companies have over individuals is their ability to take advantage of scale. In this case, you might be sitting back and checking listings passively, but they’re actively scouring and looking for the best deals for their clients (see Nexus’ Nvest buyers’ agency program). A reputable professional will have their finger on the pulse and will see that wave of change far sooner than individual investors swimming alone. 

LEARN MORE: A TYPICAL INVESTING EXPERIENCE FOR A TYPICAL NEXUS CLIENT   

Want to learn more, or interested in becoming a client? We encourage you to reach out to our team for any and all of your real estate investment needs.    

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Mick Lefort is 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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