Rental prices have seen aggressive growth over the past five years, but the gas tank may finally be getting low with prices over the past year growing half as much as recent years.
Raising Rents as an Investment Strategy May Get Difficult
A lot of this is market dependent and growth could certainly kick up again, but the rates have been steadily strong prior to this year so it’s worth keeping an eye on this data going forward and adjusting strategy if needed.
As a whole rental prices increased 1.4% year over year, according to apartmentlist.com data, while the month over month change for October was 0.1%.
Picking Growing Markets Is Important
Many real estate investors in recent years, especially those doing large multifamily deals have used a strategy of acquiring under performing properties, sprucing them up and raising rents as units are turned over.
Then, with the cap rate higher due to the increased rents they can refinance out of an original loan and pull a good chunk of equity or just sell outright for a profit.
It is a solid strategy, but we can’t just blindly assume higher rents will be supported indefinitely. Capital improvements will help attract higher rents, but in the end the market dictates the ultimate cap regardless of how nice a place is.
This is why it is imperative to pick strong growing markets. That doesn’t just mean in rental prices, it means a growing population with increasing job opportunities.
That will help provide the market growth needed, but will also hold up the best if we hit a period of stagnation in the future.
Growing vs. Shrinking
Here is a glimpse at some states with the best and worst year over year growth.
- Arizona: 3.5% growth
- North Dakota: 2.9% growth
- North Carolina: 2.7% growth
- Nevada: 2.6% growth
- Delaware: 2.4% growth
Rental prices falling:
- West Virginia: -0.8% growth
- Louisiana: -0.6% growth
- Alaska: -0.3% growth
No Red Flags, but Pay Mind
As you can see there are some leaders and some laggards of the 1.4% national average.
The good news is we still have growth in rental prices, the bad news is growth has slowed a considerable amount over the past year.
Again, it is data worth watching, especially for those with the business model of aggressively raising rents on new projects as growth projections may not keep pace compared to recent years.