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Frequent and regular readers know that managing residential real estate in these inflationary times has been a continuing topic in our newsletters this year. Now, we’re solidly in Q4 and I believe it’s critical that we begin planning for the upcoming year.
In my judgment, the “pacing items” and drivers of actions by residential rental landlords in the upcoming year will be Inflation, Interest, a new Evolving Tenant Pool and Rent. In this issue, we’ll look at each separately and draw inferences as to how each may impact one or more of the four. I won’t burden you with a ton of documentation … just a summary of my expectations and intended actions based on my research and experience.
Note: As background and a frame of reference, you may want to review articles listed in the Top Recent Articles section of this issue.
Inflation & Interest Rates
The most recent CPI story declares inflation rose 8.2 percent in September … year-over-year … higher than what experts predicted. That announcement by the Labor Department dashed hopes that inflation would begin to decline.
To me that’s a clear signal that the Fed will continue to keep its foot on the interest rate accelerator. We just saw a 75-basis point bump … best guess is another 75-point jump by year-end, followed by further increases in the upcoming year.
The latest 75-basis point hike escalates 30-year fixed-rate mortgages to 7 percent. That’s double the rate from a year ago … and my expectation is that Fed rate increases later this year and in 2023 will push the market into the 7+ range.
That means three things for us as residential real estate investors.
Inflation increases the cost to buy a home which increases the demand for rental housing.
Purchases of new rental units will tighten up.
The cost to refinance existing properties and free-up cash will be restricted.
Evolving Tenant Pool
In slight contrast to September’s inflation report, the U.S. unemployment rate fell to 3.5 percent … below market expectations of 3.7 percent. Economic models anticipate unemployment to rise to 3.8 percent at the end of next year and 4 percent at end of year 2024.
Of course, the wild card is recession which would likely cause greater pain in the labor market. In anticipation of at least a mild recession, I’m of the opinion that 2 unprecedented elements in the labor market will affect us all as residential real estate investors … white collar unemployment and accelerated employment in the so-called trades.
White Collar Unemployment: More economists now fear people employed in the tech and financial sectors will be among those hardest hit in a recession … along with those displaced by automation and software. White collar, high-income office workers face an escalated risk of job loss, while those in blue-collar sectors are likely to fare much better.
For us as residential real estate investors, that development can mean a shrinking pool of white-collar tenants … offset by a pool of blue-collar renters enjoying increasing wages as competition heats up for essential services … services important to residential landlords such as maintenance, repairs and renovations.
Careers in the Trades Accelerate: Increasingly, post-pandemic, four-year college programs steadily lose its appeal with emphasis on shorter, more affordable paths to a well-paying career … the skilled trades. More people are choosing this alternative. Skilled trades workers, such as electrical, welding, HVAC, and CDL truck drivers now enjoy starting salaries as high as $66,000 … often with signing bonuses and prospects for rapid advancement.
Rent with an ROI
Generally, inflation positively impacts rent increases for residential landlords to keep pace with rising costs.
Of course, inflation isn’t totally positive for landlords … as your rental income goes up, so do your expenses to manage and maintain your rental properties.
So, your objective as a landlord is to retain quality tenants and attract equally valuable replacements. The added challenge is raising rents to keep pace with inflation and ideally maintaining an attractive return on your property investment.
The balancing act is to approach raising the rent with consideration and empathy for your tenants. That includes communicating the reasons for the increase, with an emphasis on those items that ensure continued quality of life and tenant safety … such as property maintenance. Pointing out increased costs like property taxes that are out of your control is appropriate as well.
Attracting quality tenants is as much art as science. Whenever a tenant leaves a property, making the property rent-ready and finding another qualified tenant costs money. A good rule of thumb is the average cost of a turnover is equal to two month’s rent not including the lost rent during the vacancy.
So, I urge you to consider the football mantra, “the best defense is a strong offense”, when screening applicants. Our tenant candidate qualifications include a minimum credit score of 600 and a background check with no tenant/landlord disputes of any kind.
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