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Rent Inflation

As many of you will recall, a rental property that I own is coming up for renewal. Right now, I am renting that two bedroom, 1900 square foot house for $1700 a month. That price includes a washer/dryer, pest control, and lawn maintenance. Two years ago, when we began renting to this couple, that rent level put us near the upper end of the area rental market. We didn’t raise the rent last year when they renewed.

A month and a half ago, we looked and decided that rent was probably going to be increased by $100 to $1800 a month when the time came. That was a month and a half ago. The time has come, and things are a bit more complicated than they were in October.

Zillow has a useful tool that landlords can use to compare their rental property to other rental properties in the area. Looking at the recent rental listings, there are only a handful of rentals available in the area. Houses are renting as quickly as they are being listed, and that is driving up prices. The ones that have recently been listed indicate that our home should be renting for somewhere between $2,200 and $2,700 a month. This means that, in the last 5 months or so, rents have increased by about 25% in my area!

If this keeps up, by the time of lease renewal on Feb 1, my house will have a rental value of $2400 to $2900 a month. In a year, who knows?

My wife says that she doesn’t want “to screw them” by renting the place for market, and wants to stick with no more than $1850 a month. She also says that too large of a rent increase will cause them to move out, and then the home will require cleaning, painting, etc. on top of being empty for a month or two. I must admit that it would make be feel guilty to raise rent by $400 or more dollars month. On the other hand, if rents keep increasing like this, every dollar that we don’t increase the rent now is two dollars of an increase that we will have to make next year.

Not matter what, inflation is hitting the rental markets in a big way. Rents are increasing at an astonishing 40 percent per year, at least in this area. Real estate is skyrocketing. We bought this rental two years ago, with the idea that we wanted a passive income stream. We put $150,000 down on the purchase price of $250,000. Every dime that we have collected in rent over and above expenses has gone to paying down the mortgage. We now owe $45,000 on that house. We were just contacted by a real estate agent and were offered $350,000 on that house. A $155,000 profit in 24 months corresponds to more than a 50% annual ROI. That house is increasing in value by $4400 a month. We are increasing equity at double the amount we are collecting in rent. That is going to be reflected in our property tax bill next year, and needs to be factored into the rent.

The only reason we don’t boot the tenants out and sell is that we don’t want to covert income producing real estate into dollars that are decreasing in value every day, thanks to President Biden and his insane economic policies.

Setting rent is tricky. If you rent at too low of a price point, not only are you leaving money on the table, but you are running the risk of getting tenants who will trash the place. (Sorry, but people without money don’t value your rental as much. They are more likely to destroy the place.) Too high, and the place sits empty for an extra month or two, and that costs you more than simply renting for a bit less.

The kitchen countertops need to be replaced in that unit, and that will cost around $3000. The renewal letter goes out this week, so we need to make the call. I think that we are going to offer the renewal at $1850, unless they want the countertops replaced. If that happens, I will have to raise rent to $2000. If they don’t want to renew and instead move out, then I will relist the place for rent at $2300. I am sure that I will get it.

10 replies on “Rent Inflation”

Currently, the housing market here in my A.O. has been ‘yo-yoing’.
Bought my place in 2005 for an insane overpriced $240K. Owe about $100K (thanks to the X and her financial shenanigans). When the deee-vorce first fired up, I looked at dumping it with offerpad. Got a $260K for walkaway cash… since then it’s goin gupupupupupup…

Last offer was $410K… but, as you stated DM, Where could I go and what can I afford? That $410K ain’t worth jack, and the Zillow sez $365K right now…

I’m just going to keep riding it out.

My little 756 sf 2 bedroom condo in CO is going for a ridiculous $500k. I to looked at selling, but there is nothing in the area to buy that isn’t also way overpriced.

Split the middle?? Go up to $1850 monthly for 6 months, then to $2K (also gives 6 months to get new countertops in??)

Because of the way Florida laws are, that would then require me to collect sales tax.

We’re in a Real Estate bubble in addition to stagflation. They only kicked the can down the road in 2008 with their too big to fail. Neither party was willing to let the market correct and let their campaign financiers go broke. We’d be in better shape now had they done it.

My small rental house, 2bed, 1 bath, 900 ft2, had the tax assessment go up $5000 in one year. Not the value to be taxed on, but the actual tax owed. When the time came to renew the lease, we went to the tenants and explained what had happened, and why we were raising the rent $500/ month to cover the difference.

They weren’t happy about it, but we offered to open our books for them. We don’t make much cash flow on the house. Taxes and maintenance eat most of the profit, but it is appreciating daily which meets our long term goals.

They re-signed and have been good tenants.

I try to do at least one upgrade every couple of years, usually between tenants. We did the kitchen one year, the bathroom after a couple of years, and new appliances for the current occupants.

We get calls pretty much every day looking to buy the house, but no one wants to pay up.

When the current couple in the house inevitably gets pregnant, they’ll move out, and we’ll raise the rent some more before the next tenants. It’s a long term investment, and as long as there aren’t rent controls imposed, it’s fairly adjustable for inflation .

n

Just a heads up about that Zillow “current market rent” tool. Its complete garbage. Its something they added to make the site look more “authoritative”. Like the “ZEstimate” property price. Both grossly overstate the actual current market price. By a fair margin. At least anywhere I know really well. All very tight markets.

In San Francisco, a very tough rental market which I have rented in for a large chunk of the last four decades, the Zillow “market rent” numbers have always been about 30% to 40% higher than the actual market rent at the time. Because most of the rental market is private party so most of the rental numbers dont show up in property management industry statistics. Which is what people like Zillow use. In Seattle, which has a higher corporate managed rental property percentage the Zillow numbers from the start were always way too high. At least 20% plus. Often 30%. Even though its their home town and should know better. So the inflation in the numbers they publish is deliberate.

I had a big run in with a previous landlord because he looked at those Zillow numbers and tried to raise my rent almost 40%. I actually had no problem paying the actual market rate at the time, about 10% higher, but the landlord was having none of it. He even went as far as hiring a “slumlord” lawyer to try and intimidate me. That did not go well for the landlord. Or the lawyer. For the next three years I had a hassle free tenancy as they held their breath in case I took them to the cleaners. Which I easily could have.

Oddly enough right before all this happened I had just written a 12 page statement of fact to help end a horrible lawsuit brought against previous landlords (wonderful couple). Soon after, end of lawsuit which had been going on for years. The buyers were trying to walk away from an underwater mortgage and were claiming a very obvious defect had been hidden. A total nightmare for my former landlords. I was glad I could help end it for them. I’m still friends with most of my previous good landlords. Lots of them out there.

If you want to get an idea of current fair market prices check out the main local listings site (its been craigslist in the Bay Area and Seattle area since the late 1990’s) and look at the equivalent properties and see how fast they rent. Ones that rent quickly are at the fair market price, those that dont are asking too much. Which at least in SF, the rentals that dont shift quickly are usually people using the Zillow or equivalent market rent calculator. Even in SF properties will stay unrented for many months if they use the Zillow numbers to set asking rent.

The “Zillow price” landlord story had the usual ending. After I moved out he jacked the price way up to almost the Zillow number so it was only rentable to big house share group who according to the neighbors were a nightmare. Very high maintenance and in the end the landlord had to kick them out and bring in a local property management company. Who rented the property out at close to marker rent. So the landlord is now making less net than he was when he rented to me. Almost a decade ago.

Still not my worst landlord story. The worst guy went to jail. In a very high profile unrelated case. But on the whole most of my landlord stories have been good. But I only rent from private parties which makes it much easier to filter out the bad people before you sign. Just like with buying a used car.

I don’t understand how you can “take a landlord to the cleaners” because they ask for too much rent, nor do I understand how they can threaten you with a lawyer. Is there more to that story?
As far as Zillow, the “rent value” on there is high. You have to look at the landlord tool, which allows you to select your property and the rent you want to charge, then it shows you what other property has recently rented in your area at that price point. I have compared that to Craigslist, and it seems pretty close. Most rental property in this area is running around $1.20 to $1.50 a square foot or so, even on CL. There is a house less than a mile away from my rental, same square footage, same # of beds, renting for $2200. There are no other comps within 5 miles that are for rent.

The only places that are renting for less than that are located in crime ridden neighborhoods.

Well this is in a typical big city with rent control and a whole bunch of tenant protection laws. The landlord was someone who was unfamiliar with both how the city and state laws worked (and unwilling to accept) and the lawyer was a typical sleazy lawyer who tried the bully tactics that usually work against most people unfamiliar with the law. And lawyers. I have got three plus decades of experience dealing with lawyers and litigation, mainly as an expert witness, so that tactic by the landlord and his lawyer did not work as expected.

I went out of my way to be accommodating at first, as previous landlords will confirm, and tried at first to be diplomatic but the landlord made both illegal rental increase claims and then untrue claims as to what he was going to do with the property. If he had acted on those claims when I left, or even while a tenant, no problem. But as they were very deliberate lies to try to force me out when I refused to pay an illegal rent increase, that is a very straight forward multi $K’s damages lawsuit prosecuted by the city. Which his lawyer knew.

The lawyer tried some initial tactics that I could have made a complainant to the state bar about. Successfully. And to the city DA’s office too. He was not the first idiot lawyer I have chewed up and spat out. A single letter from me was enough to make that clear. After that both parties were a model of politeness. And I was a dutiful tenant for the next few years and left the place in perfect order when I left.

Well it sounds like your local market has a very different dynamic from the ones I am familiar with. Going back to the 1980’s If the craigslist clearing price (not asking prices) and the Zillow estimate is close then fine. But in the markets I know best you have to watch the listings for a month or two to see what places rent quickly and which ones stay unrented. Lots of property listed on craislist at an asking price way over market. All stay listed for many weeks to months. The rest move very quickly. In a week or two max.

As for the zillow information you see. Its little different from the information I have access to. Basically only corporate managed property or rentals listed through online property sites gets aggregated. If this accounts for the majority of rental in your area it will be closer to market rent. But if the rental market is majority private party landlords it will overstate the numbers. Which it does in the markets I know best.

My parents had rental properties for years so familiar with the other side of the equation. They had a (very) few bad tenants but the good tenants stayed for many years, most until the properties were sold. My parents doing the usual tradeoff of private party landlords of less income for no hassle responsible tenants. And when my parents sold it all worked out. All the great tenants were very quickly found other places through the family / friends grapevine, who were glad to have such great new tenants. Its always nice when this happens. Good feelings all around.

Anyway, best of luck. Hope it all works out with as little stress and hassle as possible.

I also like setting rents slightly below the market. A great way to attract responsible renters is to set a high security deposit. A round number between 1.5 and 2 months rent seems to work well in my area.

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