Whether you’re an independent landlord or a property manager, it’s essential to stay on top of the current housing market trends. Whether you’re planning to acquire a new property, wish to sell a property, or are doing competitive research on similar units in the area, having a handle on the market will allow you to make more informed decisions.
As you’re probably aware, housing costs are rising throughout the country – for renters and homeowners. Renters, however, are seeing higher cost increases. According to a report from CoreLogic, single-family rents increased 2.9% year over year in February 2019; rents on lower-priced rentals increased 3.7% while rents for higher-priced homes increased by 2.4%. How do these rising costs affect the rental market, and what do they mean for your bottom line?
Why are Rent Costs Rising?
The costs of housing prices have significantly increased over the last decade or so, leading many people who may have been homeowners in the past to rent instead. This has contributed to crowding in the rental market, with more affluent renters competing with lower income tenants. As the demand for additional rental housing increases, the costs of rentals rise. Even in areas where there is active, ongoing construction of apartment housing, it may not be enough to prevent further rental hikes, especially because many developers tend to build luxury units to appeal to a high-income tenant.
Increased Rent Burden on Tenants
According to TransUnion SmartMove self-reported data from independent landlords, rental prices are growing faster than renter’s income. It’s estimated that between 2014 to 2017, rent growth surpassed income growth by over 200%. A 2017 report from the National Low Income Housing Coalition stated that renters would need to earn an average of $21.21 per hour to be able to afford a two-bedroom rental home – significantly higher than the Federal minimum wage of $7.25 per hour. Millennials tend to spend the greatest amount on rent, with an average of 45% of their income going to rent costs, however, they still view renting as a more affordable option than owning.
What Does Rising Housing Costs Mean for Landlords?
The combination of rising rent costs and stagnant wages means more renters will have a difficult time saving the money needed to put a down payment on a home. The costs of home prices also continue to rise due to high demand by first-time home buyers and limited availability of affordable homes. This means that there is a large number of people who are seeking rental housing, and landlords can be more choosey about the tenants they select.
As rents continue to rise, renters will become increasingly burdened, needing more roommates to be able to afford it. Landlords may have to adjust their thinking about rent to income ratio; the old 3:1 ratio may no longer apply. It may become necessary to evaluate on a market to market basis to figure out a realistic rent to income ratio. Additionally, with so many renters paying over 30% of their income on rent, it’s even more essential to run a credit screening on prospective tenants to ensure they’re financially stable and able to handle their finances.
In conclusion, as renter burden increases, it’s more essential than ever for landlords to ensure their prospective tenants can afford the rent. The high demand for rental housing also means that landlords will increasingly see larger numbers of applicants apply for their rentals. Thoroughly screening applicants through a reputable tenant screening service is essential to mitigate the risk of not being paid in an economic environment where the rental burden is growing.
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