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Where will rents go?
Old 01-25-2008, 06:37 AM   #1
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Where will rents go?

IMO. One of the major drivers towards home ownership is rental price. For example, why rent if you can buy for the same price...

Recently in the NOVA market costs of owning have greatly increased in relation to cost to rent.

NOVA market "done got whacked with an axe", as they say...

Is there some sense in the board as to where rents will go over the next few years. For some of the more eperienced board members, what happens to rents when inflation increases? Are they directly linked or is the elasticity?

The purpose of my comments is this. i currently own 3 rental properties. I cash flow close to even (When rented) on all 3. They are all brand new construction homes. i bought recently following the bloodshed of 2006/2007. My time line is a few years out. Does the board expect rents to rise? If they do ill be looking good, if not... i wont. I can afford to carry the houses now as I am still full time employee. I am planning to see cash flow 3-5 years out. My costs are fixed. I have all 30 yr fixed mortgages.

If I am even now, should I expect positive cash flow in 3-5 years?
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Old 01-25-2008, 07:25 AM   #2
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Originally Posted by Buku View Post
IMO. One of the major drivers towards home ownership is rental price. For example, why rent if you can buy for the same price...

Recently in the NOVA market costs of owning have greatly increased in relation to cost to rent.

NOVA market "done got whacked with an axe", as they say...

Is there some sense in the board as to where rents will go over the next few years. For some of the more eperienced board members, what happens to rents when inflation increases? Are they directly linked or is the elasticity?

The purpose of my comments is this. i currently own 3 rental properties. I cash flow close to even (When rented) on all 3. They are all brand new construction homes. i bought recently following the bloodshed of 2006/2007. My time line is a few years out. Does the board expect rents to rise? If they do ill be looking good, if not... i wont. I can afford to carry the houses now as I am still full time employee. I am planning to see cash flow 3-5 years out. My costs are fixed. I have all 30 yr fixed mortgages.

If I am even now, should I expect positive cash flow in 3-5 years?
Wow, you seem to be a recipient of some 'blind good luck', since it looks like you entered into these purchases without a plan. IMO, the answer is closer to home than you think. 'THEY' do not set the price of rents, YOU DO. The price IS determined by market rates (so you do need some local data). Your ability to raise the rates is local also (what the market will bear). Check the local newspapers for rentals of your type of house/apt/condo and that will give you an idea. Then put a little 'english' on it. Are you in the most desirable area, or in a slum. Is it near the 'hot' areas, either good nightspots for the young crowd, or best schools for the 'got kids crowd'? If you are risk adverse, then set the price in the middle of the pack. If you are wanting to get the most out of the units, then see if you can push the price a bit (but only if you can take an empty unit for a while, both economically and emotionally).

It does sound like you have a break even proposition. So a slight inflation rate adjustment might be adequate.

I can't figure out what your 1st statement means. However, rental prices, IMO are very locally determined. No one can tell you what the 3 year outlook really will be. However since you are close to break even now, it should only get better (sooner or later). If I were in your position, I would hang in there and in 15 - 20 years you will be on easy street. Sitting back collecting the inflation protected (hopefully) rents or selling them off for a huge nest egg to invest for your retirement. In other word, I would include your property in your FIRE planning.

Good luck.
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Old 01-25-2008, 08:05 AM   #3
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I did actually have a plan. i bought in a new location that was convenient to Quantico. After driving around several neighborhoods I chose the one with the best look and feel to it. Most of the poeple in this area are either Marines or FBI agents going through their academy. In my estimate this area has limited exposure to an economic down turn. neither of those Govt agencies is going anywhere. In addition Dept of Homeland defense is moving a significant part of their workforce from DC to MCB Quantico as part of BRAC.

To be more clear, Im looking for an experienced landlord familiar with the NOVA I-95 cooridor to share thier thoughts on where the believe rents will go..
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Old 01-25-2008, 08:16 AM   #4
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I did actually have a plan. i bought in a new location that was convenient to Quantico. After driving around several neighborhoods I chose the one with the best look and feel to it. Most of the poeple in this area are either Marines or FBI agents going through their academy. In my estimate this area has limited exposure to an economic down turn. neither of those Govt agencies is going anywhere. In addition Dept of Homeland defense is moving a significant part of their workforce from DC to MCB Quantico as part of BRAC.

To be more clear, Im looking for an experienced landlord familiar with the NOVA I-95 cooridor to share thier thoughts on where the believe rents will go..
Even better Buku .. it looks like you have a built in clientel that is recession protected. My rec still holds. You are well on your way to FI with 3 rental units that are close to break even (before taxes I hope, which makes you profitable after taxes) under your belt.
Good luck.
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Old 01-25-2008, 08:50 AM   #5
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Ok one more further clarification then i will shut up.

My rents are 1695 each. My total PITI payment is 1807 each. With HOA this puts me upside down about 150 a month each in cash.

That said, The Equity going against the loan principle is over 200 a month. So I consider myself just barely in the black. I guess an accountant might look at it differently.

The depreciation check at the end of the year is in my mind applied to offset months without renters. (1/28th of 290k)

Like i said, if rents rise im looking good, but how likely is that to occur?
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Old 01-25-2008, 09:00 AM   #6
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I would assume that you could raise rents by the rate of inflation (3-5% a year). However, if you have good tenants, it may not be worth the possible vacancy if you are currently treading water with your payments. Anytime you get a new tenant, look into raising the rents if the local market will bear it.

I would conservatively project 2-3% annual rate increases on average, not knowing anything about your local market. You may choose to keep them steady if you have a great renter who is cash strapped. You seem to be in a fine position if you don't have vacancies.
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Old 01-25-2008, 09:07 AM   #7
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I would assume that you could raise rents by the rate of inflation (3-5% a year). However, if you have good tenants, it may not be worth the possible vacancy if you are currently treading water with your payments. Anytime you get a new tenant, look into raising the rents if the local market will bear it.

I would conservatively project 2-3% annual rate increases on average, not knowing anything about your local market. You may choose to keep them steady if you have a great renter who is cash strapped. You seem to be in a fine position if you don't have vacancies.
In my slumlord days, that is what I did also.
Good tenet, no hassles, rent next year went up by inflation rate.
Bad tenet, calls in the night, had to pay for their service. I would add a few percentage points, as I did not care if they moved.
Bad rental market (never saw one) my plan was to adjust a bit lower
Good rental markets I would adjust a bit upward.
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Old 01-25-2008, 04:28 PM   #8
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I would assume that you could raise rents by the rate of inflation (3-5% a year). However, if you have good tenants, it may not be worth the possible vacancy if you are currently treading water with your payments. Anytime you get a new tenant, look into raising the rents if the local market will bear it.

I would conservatively project 2-3% annual rate increases on average, not knowing anything about your local market. You may choose to keep them steady if you have a great renter who is cash strapped. You seem to be in a fine position if you don't have vacancies.
Ive discussed this alot with my three family members that all have rental units in the DC area and the above analysis is spot on, based on thier experience. Upside is semi-stable desiriable tenants. Semi-stable is good because it enhances ability to raise rents and still have low vacancy. Wild cards are HOA fees and taxes......Builders and Gov't often lowball these costs in the first several yrs. I did look at the community you bought into (based on your other post) and with BRAC, I think you hit the sweet spot if you are comfortable with a conservative 2-3%/yr.
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Old 01-27-2008, 08:40 PM   #9
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One of the major drivers towards home ownership is rental price. For example, why rent if you can buy for the same price...

Is there some sense in the board as to where rents will go over the next few years.
I know I'm in the minority here... Renting (instead of buying) and investing the savings (HOA, property taxes, down payment, repairs, maintenance, remodeling, etc) has made FIRE attainable much faster for me. Yes, even if I pay the same in rent payments as I would in mortgage payments (but I don't). We've rented for almost 5 years now and it has contributed significantly to increasing our net worth.

Anyway, I know we're talking about two different things here (homeownership versus investment properties). I can tell you this, though - I'm starting to hear about rent incentives. With the slow down in the RE market, home-sellers needing to move are turning to renting their vacant homes. Builders are sitting on vacant new construction projects. So what do they do? Lower rents and/or add incentives for lease contracts.

Of course it all depends on your local market...
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Old 01-28-2008, 09:36 AM   #10
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Millionaire Mommy:

Want to rent a brand new townhome?

Kidding, my thoughts are my mortagage is 30 year fixed...but infaltion will drive rents upwards. At some point, rental income will cash flow positive while at the same time paying down the mortgage.

I just have to wait it out.

I was hoping someone on the board had done some research into local rents and made a estimate on that analysis as to where they will go.
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Old 01-28-2008, 09:55 AM   #11
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This one is easy.

Rents follow renters incomes and wage adjustments. You can stretch it a little bit but if the market rents dont move with you, your tenants will move.

Home prices, inflation, and most other factors really dont apply. I think the common expectation is that when house prices exceed rents on similar properties, that the home prices will come down or the rents will continue to rise with wage adjustments while the home prices go sideways. Which will suck for any financial 'seers' who sold their homes and are renting while waiting for home prices to drop.

I havent looked in the last year or so, but last time I checked, wages generally werent keeping up with inflation very well, and if we slip into a recession, they arent going to be catching up anytime soon.
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Old 01-28-2008, 10:15 AM   #12
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normally i'd be able to rent the inherited house at over $3k but in this market i'll be lucky to get $2k. no one is going to rent this house if they can buy it though because i'm not gonna let the renter tear it down to build his minimansion.
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Old 01-28-2008, 05:42 PM   #13
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I was hoping someone on the board had done some research into local rents and made a estimate on that analysis as to where they will go.
See my earlier post?
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Old 01-28-2008, 07:55 PM   #14
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Buku - Studies I've seen basically state that as long as you can afford to keep your properties (to cover neg cash flow), you will be fine in the long run. Over time, rents will go up - if not by market demands, just inflation alone and over time, your payments will get better (premium / interest mix). The key is to keep your job so you can afford to keep the properties.

Specific to the market...(no studies, just my opinion...): Home prices have dropped quite a bit in the suburbs in NOVA as you know. I95 - Woodbridge area in particular, has been affected quite a bit given the increase in new development over the past years and subsequent foreclosures. This means that the property values will drop come assessment time which equals lower taxes for you, hopefully.

DC metro continues to be one of the top places to find a job. Despite the economy, there will always be a shortage of employees - professionals - in the DC area. We have had challenges recruiting people to move to the area but as the housing costs decrease, DC will be a more realistic place to move to. In other words, people in the area still need a place to live and renting is easier than qualifying for a home they can't afford so the rental market should still hold pretty well.

With King George County being one of the fastest growing areas in the Nation (20 miles east of you, correct?), Fredericksburg and Ft Belvoir to your north, I think you're located in a pretty good area.

Of course, definitely try to keep it rented with good tenants. There are things that are always unknown with rentals (repairs, vacancy, etc) but in your case, plan for the possibilities of longer vacancy rates (competing with other investors who have the same plans as you do, retirees moving out of the area), the impact of the elections and the possibility of increasing expenses (like your association dues) and of course, given the proximity to the DC area -- terrorism.

Sorry for the long opinion -- we have 3 rentals in the area and 12 in Atlanta. The DC Metro properties are doing very well, allowing us to keep the Atlanta properties despite a negative cash flow. Hang in there!
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Old 01-29-2008, 02:23 PM   #15
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I cash flow close to even (When rented) on all 3. They are all brand new construction homes. i bought recently following the bloodshed of 2006/2007.
Wecome to the rental business! Interesting to see people begining to take advantage of the chaos. Still believe we have a ways to go - down - thou, so I am not biting (yet).

As for rents ... CFB nailed it. Need to look at wages for rental increases. If the federal goverment is your rental market, expect to pin rent increases to the federal wage increases. Good news is you're recession proof (due to the gov stability). The rest of us will be riding the economic cycle.

Check the local paper for comparable rents ... missing just one month (being too high) will chew-up years for increases.
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Old 01-29-2008, 06:01 PM   #16
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To be more clear, Im looking for an experienced landlord familiar with the NOVA I-95 cooridor to share thier thoughts on where the believe rents will go..
i guess i'm kind of experienced so i'll stab an answer. after upgrading homes over a period of time, but not really selling the old ones, i ended up a landlord of 2 , now 1 property.
not off of I-95 but inside the beltway, just north of the Potomac.
full-disclosure: in the process of selling the property since we live too far away to manage well and i'm too cheap to hire a property manager.

also grew up in the area and used to spend my weekends looking at classifieds with my mom and driving around looking for investments. so anywhoo, as long as you feel comfortable managing the properties, and as long as you are running positive, then you should be good.
part of people's problem (who live in the area) is that LBYM is really anathema to the whole Beltway mindset.
So many people can't *afford* to buy, yet make very good income. This results in a steady, very steady upward rise in rents, from my observation. In my experience, rents have risen at least commiserate with the rate inflation since the late 80's.
myself, with a good renter, i would have just nominally raised rent annually and would do a bulk jump when tenants changed. Easier to just find a very good tenant and then not worry about anything.
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