Why Rents Will Skyrocket For Low Income Tenants Over The Next 5 Years

I’ve recently heard multiple renters talk about the housing market in a manner that does not show the objective reality.  They state that rents currently are far too high (While paying $600 to $750 per month) and that they are glad they aren’t trying to buy a house because interest rates are so high.  They are missing the big picture that renters are in for major price hikes over the next 5 years.  I am a landlord in a small economically depressed area, and I can tell you for a fact that low income households will be squeezed to an unprecedented rate over the next decade.


Property Prices Are Rising:

5 years ago I bought my first intentional rental property.  I paid $19,000 for the property and with $3,000 of repairs it was ready to go.  At the time interest rates for investment properties were around 4%.  Today a similar home for size, location, condition, is selling for $75,000.  Prices have more or less tripled. Increased prices should of course mean increased rents.

Why are prices increasing?  Prices are increasing for all properties, but on the low end of housing they are increasing to a much higher rate.  These are starter homes in previously identified “challenged” neighborhoods.  This is due to several factors.

  1. We have a decreased supply of houses:  In Benton Harbor specifically over the last 20 years we have had 2 mobile home parks shut down, we had hundreds of properties demolished for the airport expansion post September 11th, and we had several hundred houses demolished under the blight elimination program in conjunction with the county tax auctions.  Fewer properties with the same population = an increase in costs.
  2. Increased demand for houses:  We have an increased demand for housing due to people from nearby communities moving here because those communities are completely unaffordable. People who would have historically lived in Coloma 10 miles away are priced out and can save 50% by buying in Benton Harbor, even with the higher prices. A stable housing supply, or worse a tightening supply with more people = higher prices.
  3.  We have a decreased supply of rentals:  Look at my situation.  I can currently rent this 2 bedroom house out at 750 per month and maybe cash flow $3,000 a year, OR I can sell the house for $80,000 and pocket $55,000.  That’s 18 years worth of rental cash flow.  It is more advantageous for me to sell this property than to continue to rent it.  And who is going to buy it?  Most likely a home owner, not a landlord. More housing will transition to owner occupied from tenant occupied.  Fewer rentals available = higher prices for rentals.
  4. We have a decreased supply of long term rentals in favor of short term rentals: I have 1 Airbnb property that makes far more money than my long term rentals.  It is also easier. If I end p with a problem tenant I am stuck. On top of that they can destroy the place and I have little recourse.  With short term rentals problem tenants are much easier to get rid of and AirBnB covers damages.

What else contributes to higher rental costs?

Now that we have covered the pricing of the properties increasing, now we need to look at the carrying costs.

  1. High Interest rates.  Well of course right?  Apples to apples a $30,000 mortgage at 4% in 2018 is now a $30,000 mortgage at 8%.  This is an increase on a 15 year mortgage from $222 to $287.  That’s $65 a month.  That will be paid by the tenant.  We also have to include the increased costs of the property.  That same $30,000 properties purchased in 2018 would be $80,000 for the same house purchased today. Now the monthly payment is $765 instead of $222.  This is a $543 difference every single month for the same house. 
  2. Higher property taxes.  When a house is sold the property taxes re-adjust to be based on the new sales price, or at least they are supposed to.  I recently had a property that I purchased and rather than the sales price being the new assessed value, they more than doubled it.  When I bought the house for $19,000 in 2018 it was assessed properly at the sale level, so I was taxed on it being worth $19,000, which is $596 per year.  The same house selling today for $80,000 would be taxed at $2,510 per year (That’s a $160 per month increase!).  However, if the city does the same thing they just did to me and doubled the sale price and refused to adjust it back after challenging it, then the taxes would be $5,020 per year, an increase of $368 per month.  This increase in property taxes will be borne by the tenant.
  3. Higher maintenance costs:  With inflation and low unemployment maintenance costs have increased substantially.  Labor and materials have essentially doubled in the last 5 years.
  4. Higher Insurance costs: Properties need to be insured for their rebuild value, and the rebuild value has been going up quickly, thanks to the increase in supply cost and the increase in labor cost.  We are also seeing property insurance doubling in many markets over the last few years.   Insurance in states like California has gone through the roof as more insurance companies exit the market.

What This Looks Like For Tenants:

The median 2 bedroom home rent will skyrocket.  look at this chart:

Same Home
Landlord goal to cash flow $300 per property
2018 2024
Purchase Price $30,000 $80,000
15 Yr mortgage $222 $765
Property taxes monthly $78 $418
Insurance $42 $84
Maintenance $50 $100
Positive cash flow $300 $300
Rent Total $692 $1,667

The rents increase by almost $1,000 a month in this model.  This also doesn’t include the landlords trying to earn an equal amount back on their investment.  Earning $3,600 per year on a $30,000 investment is a 12% return.  Earning $3,600 on an $80,000 investment is only a 4.5% return.  So the landlord proportionally makes far less money, while the tenant gets a massive increase in rate.  No one wins… Okay, well the banks win and the local governments win.

A more extreme example:

A local landlord who has been in the game for almost 50 years has been selling off all of their properties.  These homes were typically bought for $10,000 to $20,000 and have very low property assessments.  They have also been paid off for decades.

Same Home
Landlord goal to cash flow $300 per property
1980 2018 2024
Purchase Price $12,000 $30,000 $80,000
15 Yr mortgage $0 $222 $765
Property taxes monthly $32 $78 $418
Insurance $42 $42 $84
Maintenance $50 $50 $100
Positive cash flow $300 $300 $300
Rent Total $424.00 $692 $1,667

This landlord has been renting the property for $425, despite it being well below market rent because they are able to maintain the profit margin they want per property and don’t want to deal with tenant turnover.  This tenant is going to find that very shortly they will be paying 3 to 4 times this amount.

The reason I am saying this will happen over the next 5 years is because it will take some time for the old landlords to sell their properties and for new landlords with new mortgages to take their place.  The old landlords are heavily incentivized to sell right now.

The tightening of the rental market is very easy to see.  Currently there is only 1 house listed for rent on the Facebook marketplace. Last month there were ZERO.  The pricing of the market is determined only by new rentals, and if there are dozens to hundreds of people looking and only 1 property available rates will increase.  That one property? A 2 bedroom 1 bath for $1,100 a month.

So What Can Tenants Do?

  1. Understand the reality of the situation.  Rents are NOT going to be $500 a month, $750 a month, or even $1,000 a month for much longer.  Rents will be increasing.
  2. Make a plan to NOT be a tenant.  Even with this increase in pricing it is still more affordable to buy.  Michigan has the MI Home Loan program that provides up to $10,000 of down payment assistance and the buyer is only required to contribute 1% of the purchase price, including closing costs.  For the $80,000 2 bedroom home this is only $800.
  3. Make a plan for your children to not be tenants:  In conjunction with seeking home ownership, allow your children to live with you after they graduate.  Have them save 50% of their income, and have them work while in high school as well.  When they move out they will have 2+ years of work history and a sizable down payment.
  4. Move.  Move to an area that doesn’t have as tight of a squeeze on the housing supply.

What Can We Do As A Nation:

  1. We must build more housing, and the correct housing.
  2. 1200 square foot 2 story homes with simple roof lines as well as mobile home parks.  Most new construction housing has been 2,400 square foot mcmansions with 2 car attached garages and complex roof lines.
  3. We need to eliminate zoning ordinances
  4. Change our local tax incentives to benefit housing construction.  We don’t bat an eye when time and time again local governments give decade plus property tax abatements to corporate new construction.  What if we did the same for housing construction?  New housing construction receives 10 years property tax free for the new buyer (giving incentive for people to choose the new homes over existing stock).
  5.  Change our federal tax incentives to benefit housing construction.  Adjust short term capital gains for new construction housing to be its own bracket of a flat 10% across the board. New home construction benefits society so much and creates so much economic value that housing producers should not be tax burdened.
  6. Pass new state level regulation to limit the taxable value of a property to its most recent sale price, adjusted for inflation. Municipalities should not be able to make a cash grab at every new home sale.

Now For The Big Question:

What happens to the lower class that can no longer afford housing?

For starters, some who are able will work more hours.  I have a tenant who works around 20 hours per week, there is time in the week for her to increase her economic output and earn more money.

Next we will see households get larger.  When Mrs. C. and I got together neither of us could afford a place on our own, but together we were able to make it work.  More people will be in room mate situations or move in together as part of a couple.

Staying with family:  Staying with family for longer periods of time will become the norm.  For most of history it was normal for young adults to live at home for many years into adulthood.

Lastly, there will be more homeless people.  There will be more people sleeping in their cars or tents on public land or anywhere they can be left alone.

Incomes, especially on the low end have not, and will not keep up with the increased costs of housing over the next 5, 10, 20 years and will be a major issue for our country to tackle.

What did I miss?  Do you think rents will skyrocket in the next 5 years?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John is the author of the book For My Children's Children: A Practical Guide For Building Generational Wealth.

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