When underwriting a multifamily property, rent growth is one of the most difficult assumptions to predict. This is because rent growth can be rather volatile. For example, when COVID first hit in 2020 rent growth was temporarily stifled for about a year However, coming out of COVID, we have seen strong markets with some of the highest rent growth in history. So what factors affect rent growth and can provide us confidence that our rent growth projections are reasonable when analyzing a property? Today's article looks at four of these considerations.
All four of the factors discussed really stem back to one simply concept which is supply and demand. As developments lags drastically behind the markets ability to absorb new units and many strong markets like Texas experience dramatic population growth, the basic laws of economics dictate that rents must continue to increase. While not all markets in the US are experiencing population growth, the sunbelt states in particular have seen a large migration of the US population seeking job opportunities and more reasonable costs of living. This has had a profound impact on the rise in rents in these markets.
People are not the only ones who have been moving towards the south in recent years. Employers have also been relocating and starting new businesses in states such as Texas, Florida and Arizona. This has obviously also been a contributor to the population growth in this areas. Employers are seeking economically strong environments that are business friendly as they make long term decisions about the location of their business. In addition to being a driver in population growth, job growth also produces a more competitive environment for employers which results in wage increases that provide renters the ability to afford the increased rents that we have seen.
Rising Home Prices
Rents are not the only housing cost that has been increasing in recent years. Home prices have also been rapidly increasing and as if this wasn't enough the taxes and insurance associated with home ownership has also been increasing at historical rates. These increases have removed many buyers from the market and in particular first time home buyers. Now that interest rates are rising this will only exacerbate the problem as more young families find it taking longer to save for a down payment and reach an income level to afford a mortgage.
Desire to Rent
Of all the factors presented this might be the most difficult to quantify. However, it's no secret that younger generations have shown a preference to rent instead of own. Many believe that home ownership and the upkeep that comes with it is a hassle that makes renting more desirable. Additionally, many younger Americans prefer to be more geographically flexible which also makes renting the preferred option. Regardless of the exact reason, the desire to rent in younger generations has played a solid role in the demand for rentals.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.