What a great time to own rental property. Rents have risen to the point where they slowly make up for the lost income during the pandemic. And the shortage of rental properties promises to keep rents where they continue to make a profit for rental owners. The high interest rates and limited supply of houses and have kept prices high and renters out of the home-buying market, making it cheaper to rent than buy. As the pendulum swings in rental owners’ favor, take full advantage. Some ideas about how in a minute.
Renting today makes far more financial sense than buying. The median sale price of a single-family home is $407,200 according to the National Association of Realtors. Housing prices will remain high because there simply aren’t enough properties to satisfy the needs of people who want to buy. Meanwhile high interest rates keep current owners from selling their homes because they wouldn’t be able to find anywhere else to live they could afford. They may have an interest rate of four percent where their rates are now. They would have to pay seven percent for any house they’d buy now, if they could even find an available suitable one to make their next home.
“I want to be a homeowner so bad,” CNN reports TikTok creator Jordan Swanson having said. “In this economy it’s literally impossible.”
The difference in the cost of rent and the cost of a mortgage is significant. That $407,200 median single-family home with loan cost of $325,760 with the 20 percent down, is $2167 a month. It would require an income of $8668 a month or more than $104,000 a year to afford that mortgage, far out of the reach of most renters. And that’s not even factoring in taxes and insurance that would also be included in the income-requirement calculation by a mortgage broker.
CB Richard Ellis (CBRE) in a March 21, 2024 report predicts that new mortgage payments can be expected to outpace rents for the next five years, making renting the only option for many. Single-family and small multifamily properties will continue to be in short supply, keeping the inventory of homes low and prices higher . Right now, they estimate, we have a 3.8 million housing unit shortage, and will remain so a few bumps in sales notwithstanding.
With average rents from November 2024 at $1595, it is $572 a month, 36 percent, more affordable to rent than a mortgage.
Rental owners are starting to make up for their losses during the pandemic. That average current rent of $1595 is 39 percent higher than the average rent of $1149 in 2019 when the pandemic and its rental killing consequences began. Rents do appear to be dropping with average rents down 17 percent from October. Look for rents to moderate more, how much more we can’t predict, as a million multifamily units come online in 2025. It still won’t fix the nationwide housing shortage which CBRE says will continue for several years to come. More multifamily properties will become available while the fewer available single-family and small multifamily properties will maintain the current 3.8 million unit shortage.
Yes, it’s a great time to own rental property. It can be an even better time if we take advantage of it. The extra, added benefit begins with tenant retention. Jeff Tucker, Senior Economist with Zillow said, “As renters are pressured financially by everything from rent to price
increases of essentials like food, healthcare, and transportation, they may
be seeking more value from that rent. The right location and amenities, especially if they can save renters money, can add greatly to quality of life.” And make them reluctant to move.
Zillow also reported on what encouraged renters to stay where they were. First, 72 percent said rental costs if they were “a good deal.” Quiet neighbors retained 69 percent of them followed by 68 percent who said they could not “afford to move somewhere else.” Other reasons were the quality of property maintenance, liking their landlord or property manager, allowing pets, and a private outdoor space.
It costs a lot of money to move and it costs rental owners a lot of money to find new tenants. Marketing gurus point out that it costs seven times more to find a new customer than to keep the existing one. Thus, if you already have a tenant, at least one that you want to keep, it pays to give that person not only no reason to move but the desire to stay right where they are because they know it’s better than any other place they might go.
I consider patronizing companies that make it hard to do business a waste of my time and money. Rental ownership is a business and our customer (tenants) appreciate our making renting from us easy. As the Zillow report confirms, liking their landlord or property manager was a major factor in whether they stay in their current residence.
Rental owners have a system.
Good tenants appreciate this part. In conversations with a prospective tenant or the actual renter, the rental owner writes down the gist of a conversation and then tells the tenant what to expect and when. Then does it—as promised, no excuses.
A tenant who always seems to have rented from slipshod or incompetent landlords or managers finds it a breath of fresh air. In fact every time the tenant has any dealings with the landlord, he feels as if the landlord is complete control of the situation.
They give great customer service.
In his book, Selling the Invisible, Harry Beckwith writes, “Create the possible service; don’t just create what the market needs or wants. Create what it would love.” We can make our customer service so good that our tenants might not even think about buying a house because they are so happy where they are.
Yes, it is a great time to own rental property. Rents have risen to the point where they are making up for the lost income of the pandemic. And the shortage of rental properties promises to keep rents high enough to where they actually make a profit for rental owners. Now keep the tenants we want to keep despite a waiting list for applicants.
