It's the glass half empty/full thing with rents these days. Investors are enjoying some of the best market conditions in many years. Finding a rental property that will return a positive cash flow is more difficult than a few years ago, but still very possible. Rental demand is still rising, and rents are going up with it.
The image is probably an overstatement, but some tenants would argue that it is accurate. A couple of articles over at Money.CNN.com are pointing out a tough market for renters these days.
Many Can't Afford Their Rent
Most experts consider affordable rent to be 30% or less of a tenant's income. A recent study shows that more than 21 million renters are spending more than that 30% for their rental housing.
Harvard's Joint Center for Housing Studies reported that number, and the same study reports that 26% of those renters are considered "severely cost burdened." The report blames rents versus wages as the reason for this growing problem. From 2001 through 2014:
•Rents increased by 7%
•Household incomes dropped by 9%
With vacancy rates hitting 30-year lows, rents are in an upward spiral that doesn't seem to have any resistance to going higher. A lot of activity in multi-family construction should help, but it has to get built, and developers are going to be careful not to ramp up too much and over-build.
The median rent for an apartment rose to $1,372, a 26% increase from 2012. Low income households are hardest hit, but it's moving up the income ladder. Middle income households with income between $45,000 and $75,000 are experiencing a rent burden at a 21% rate. That's a jump from 12% in 2001. In 2014 a record 37% of households were renting, the highest level in more than 45 years.
More Bad News in 2016
In 2016, rent increases are again expected to outpace inflation, rising by 3% to 5% on average. Rents in the hottest urban areas are expected to plateau in 2016, but they have been driving renters into surrounding areas farther out, so the rents there are on a steep rise.
Rising mortgage rates are almost a certainty, and this normally causes rents to rise as well. Rental investors pay more in debt service, but fewer buyers mean more renters, so the demand and rents will rise. A troubling side effect of higher rents is that renters will have more trouble in accumulating a down payment to buy a home, so the cycle seems to perpetuate itself.
Rental property investors are riding a nice wave, but caution should be the rule. Just because positive cash flow can be had due to these high rents, don't cut it too close. With multi-family construction ramping up to absorb some of the demand, at some point the low cash flow properties could go negative on you due to competition and falling rents. Do your due diligence and shoot for cash flow that can withstand free rent deals or reduced rents if the market turns on you.