The Economic Impact on Your Rental Portfolio

I read an article this morning in the Wall Street Journal which sheds some light on a trend I’ve seen in the rental housing market. For the last year, the media has touted reports of rising rental rates caused by increased demand. In one segment of my rental portfolio and property management business it has become increasingly difficult to find qualified applicants.

Over the past year, I have had an underlying frustration from some of my property management clients. They read the news. Many are very well educated in the Real Estate market. I’ve received numerous inquiring emails and phone calls with the same common theme, “Rental rates and demand are up. Why is it taking so long to rent my property?”

It is true that rental rates, overall, have increased. In fact, according to Karen Oho or MSN Real Estate, prices have been increasing 5-7% per year since 2010. I have seen these increases first hand. In the apartment units that rent between $1500 and $2500, I’ve actually seen increases as high as 12% per year.

These gains also appear in more modest rental rate ranges as well. But the increases seem less sustainable at the lower end of the income spectrum.

Areas that are predominately tenant occupied and cater to lower income households have become much less stable. The down economy has hit lower income families the hardest. Governmental budget cuts and the weak jobs market have resulted in more people looking for lower cost housing and fewer qualified applicant.

Consider the following statistics from Harvard University’s Joint Center of Housing Studies cited in The Wall Street Journal Article, Low-Income Rental Markets Contract. During the period from 2007 to 2011:

• The number of extremely-low income renters rose by 2.5 million to 12.1 million.
• The number of low-income rental units decreased from 6.9 million to 6.8 million.
• The number of households spending more than half of their income on housing rose 14.6% since 2007.

These numbers are disheartening on a human level. They are also a bit un-nerving from the standpoint of an investor.

Cash flow rental investments are part of the foundation of my Real Estate investing strategy. They provide a few dollars each month in profits and contribute to the growth of my long term wealth. Even though quality residents may be more difficult to find, good tenants are still looking for good housing. Make sure that when you evaluate your next rental investment, take into consideration the difficulty of finding the right person to rent your house.