From The Real Estate Guys Radio Show…

Rising rents to crush spending power…
That’s the spooky headline from a recent Fiscal Times article which says…

“America’s rental affordability crisis is as bad as it’s ever been.  Unfortunately, it’s about to get a whole lot worse.”

The article cites data from a Census Bureau report which…

found that the number of renters paying 30 percent or more of their income on housing – the standard benchmark for what’s considered affordable – reached a record high

Any time you hear of anything at a “record high”…you should start to pay attention. Sometimes it means there’s a bubble forming.

In a previous article titled More Americans Struggling to Pay Rent, the Fiscal Times referred to a report issued by the Harvard Joint Center for Housing Studies and said…

Rising rents aren’t just impacting low-income consumers.  One in five renters earning $45,000 to $75,000 is paying at least a third of their income in rent.

It goes on to say…

“That puts the 2010s on pace to be the strongest decade for rental growth in history…”

Well…now we know where all the missing inflation squished to.

(Note: Squish is our term for what happens when an economy has too much currency forced into it.  Sometimes it squishes out somewhere unexpected the way a balloon does when you squeeze it.)

Now at first blush, a real estate investor might look at a decade of record rents and say, “Great!”

After all, who doesn’t want their rental income going up?

Of course, that’s the same excitement everyone had about record real estate price appreciation in the early 2000s.  Everyone likes rising prices and growing equity.

But how’d that work out?

Not so great for everyone who thought the party would never end and didn’t adjust their strategy.

So as inflation is squishing into bubbles of various shapes and sizes, be sure to think about what happens when one gets too big too fast…

The balloon gets spread a little thin.  And if the pressure goes past the breaking point…it could pop.

So you have to ask…

Are tenants at the breaking point?

Right now, according to these reports, rents are hitting the upper edge of affordability.   In other words, tenants’ incomes are starting to get spread thin.

So here are some things to consider as you manage and add to your residential income property portfolio in this economic environment…

Pay closer attention to YOUR tenant’s income to rent ratio.  If prospective tenants’ ratios are starting to inch higher, it’s a safe bet it’s also happening to your current tenants.

This could be a signal that the upward trend in rental rates is about to meet some resistance.

If so, don’t count on being able to push through rental increases unless you’re able to attract a higher earning demographic.

Also, be very careful about extrapolating a rising rents trend line to justify buying a property with thin cash flows.

You might already be near the upper edge of what the market can take.  The rental increase trend could flatten out.  Worse, it could over-correct and rents could actually fall.

Another question to ask in your specific markets is whether higher rents are attracting an increase in supply.

When a rental market gets hot, developers and investors notice.  So they jump into the market to get in on the action.

Are more rental units being aggressively added to your market?  This might put additional downward pressure on rents.

Consider also that when renters start to complain, politicians like to pander.

To a politician, a tenant’s vote is as good as a landlord’s.  But there are more of them than you.  Watch for any talk about implementing or strengthening rent controls.

And look for other inflation factors in your area.

If gasoline, electricity, water, food, healthcare, cable TV, sales tax, credit card interest rates and other items your tenants pay for are going up, it can put pressure on your tenants.

And when tenants start feeling squeezed, they might move to someplace cheaper.

But when you consider the cost of vacancy, turnover and new tenant acquisition, you might be better off simply lowering the rent for your current tenants…or offering to extend their leases with no increase.

This could improve retention, build good will and result in referrals.

On the expense side, this could be a good time to restructure your financing if you haven’t already.  If you wait and rates rise or incomes decline, it could be too late.

It’s easy to get lazy when times are good.

But it’s best to tighten things up when you can.  You’re no worse off for doing so…even if rents don’t flatten out.

And if these wonderful rising rents are approaching bubble status, you’ll be prepared.

Until next time, good investing!

Robert Helms and Russell Gray
The Real Estate Guys Radio Show