What is going on with rental prices?

z31maniac said:

ProDarwin said:

As a homeowner and potential landlord, those prices do not seem high at all.  And I live where the cost of living is cheap cheap cheap.

Landlords buy houses to rent them because they want a good investment.  Its silly to drop rent so low that their money can earn more elsewhere.

$2000 month rent for a house in the middle of nowhere seems INSANE. Assuming he's living in the city in his profile. 

I bought a completely, COMPLETELY renovated home (including a new roof, etc) with 0% down and mortgage/insurance/taxes is $1150/month in a 1.5 million person metro area. 

Didn't someone here just post a house for sale for like $150k that's not too far from downtown Chicago just a week or so ago? 

https://grassrootsmotorsports.com/forum/off-topic-discussion/anyone-need-a-house/141490/page1/

Looks like Robbie already has an offer. 

I can see rentals being high where he is--still close enough to Chicago that you'll have folks commuting, and there probably just aren't many rentals that aren't actually trailers. I'd be looking hard at buying. Can probably get something for around $75k.

z31maniac said:

ProDarwin said:

As a homeowner and potential landlord, those prices do not seem high at all.  And I live where the cost of living is cheap cheap cheap.

Landlords buy houses to rent them because they want a good investment.  Its silly to drop rent so low that their money can earn more elsewhere.

$2000 month rent for a house in the middle of nowhere seems INSANE. Assuming he's living in the city in his profile. 

I bought a completely, COMPLETELY renovated home (including a new roof, etc) with 0% down and mortgage/insurance/taxes is $1150/month in a 1.5 million person metro area. 

Didn't someone here just post a house for sale for like $150k that's not too far from downtown Chicago just a week or so ago? 

Me, yep, and we had an accepted offer for basically asking price in a few days after listing (if I could only sell my cars that well). I guess that could still fall through but there are plentiful houses in that neighborhood for sale currently that would be under $1000 monthly payment. Heck one that needs work across the street recently sold for $70k and people were living there before the sale. I am sure you can rent in that neighborhood for $1500/month.

Another significant contributor is the excellent returns the stock market has made over the last two years.

Investors ask themselves “should I buy an income property or should I buy stock”. The average rate of return for the S&P going back ~100 years has been 9.8% but in the last two years, it has averaged ~15.5%. Since 20% equity is typically required to qualify for a loan and to avoid PMI, investors now need to get a ROI of at least 3.1% of the home’s value per year (0.155 X 0.2) for them to not just hit the easy button and buy stocks.

Of course, there are a myriad of other moving parts that go into the decision making process but ultimately, renters need to cover the opportunity cost of not just buying stock in addition to paying for all of the unique expenses associated with property ownership such as acquisition costs, mortgage interest, taxes, down time, repairs, etc. minus the properties rate of appreciation.

Spoiler alert…

Over the long haul, the net ROI on investment properties closely approximates those of the stock market when everything is taken into consideration.

That’s no coincidence, when one investment class becomes more attractive than the other, money will flood into it driving up prices until equilibrium is reestablished; AKA capitalism doing it’s thing.

I’m glad you pointed out that it’s not just where do you get a better rate of return. 

With the stock market your return is controlled by your investment.  If you have $400,000 to invest that is your return rate.   

If you buy a house with 20% down  that is the total of your investment.  So in theory your $400,000 could control a $ 2 million dollar home.  Then you get the tax deduction of the interest cost.  Plus either the benefit of living there or the rental income. 

Yes you do have to make payments and do maintenance etc.  so calculating rate of return gets extremely personal.  

High demand areas such as beach front or lakeshore increase rate of return beyond what normal real estate does. Just as selecting the next big company will do the same. 

RX Reven' said:

Investors ask themselves “should I buy an income property or should I buy stock”. The average rate of return for the S&P going back ~100 years has been 9.8% but in the last two years, it has averaged ~15.5%. Since 20% equity is typically required to qualify for a loan and to avoid PMI, investors need to get a ROI of at least 3.1% of the home’s value per year (0.155 X 0.2) for them to not just hit the easy button and buy stocks.

Yup.  To illustrate my earlier point...  If you are renting a house that has a market value of say $200k, the landlord is expecting to make ~$516/month in profit.  So that leaves just under $1500 to cover mortgage, taxes, insurance, and maintenance.  

Also, that 3.1% steadily climbs over the life of the investment because as the landlord ties up more equity in the home (vs. leveraged with mortgage), they need a higher return to remain competitive with the market.

z31maniac said:

$2000 month rent for a house in the middle of nowhere seems INSANE. Assuming he's living in the city in his profile. 

I bought a completely, COMPLETELY renovated home (including a new roof, etc) with 0% down and mortgage/insurance/taxes is $1150/month in a 1.5 million person metro area. 

And you would likely be a fool to rent that out for $2k.

ProDarwin said:

Also, that 3.1% steadily climbs over the life of the investment because as the landlord ties up more equity in the home (vs. leveraged with mortgage), they need a higher return to remain competitive with the market.

Shouldn't the increase in equity count as part of the return? You're trading debt for larger and larger pieces of a tangible item. That tangible item will have a value right? I can understand raising rent as property values increase, but if you have to raise rents independently from property values to keep pace with the stock market, it seems like something is wrong.

Robbie said:

ProDarwin said:

Robbie said:

The house right next door to me is for sale, should be less than 1800 for monthly mortgage + insurance.

Just saying!

Exactly.  You get to pay $1800 for mortgage + insurance.  Add in the fact that you tie up some cash (20% down) and maintenance (which is a huge number), and you can see why the actual cost to own something like that is significantly more.

If you are renting, you are paying the above numbers plus some return on investment for the landlord.  Suddenly $2000/month for rent doesn't seem so crazy.

To be clear, by mortgage + insurance I meant mortgage + taxes, but I guess insurance is part of it too. I was just saying that a fellow GRMer could come move in next to me for sub $2000/mo. and WHO wouldn't want that???? haha.

Well I didn’t want to go to the rent vs owning argument, because that’s not what it’s about, my wife and I cannot get a mortgage right now. We are stuck renting. 

frenchyd said:

I’m glad you pointed out that it’s not just where do you get a better rate of return. 

With the stock market your return is controlled by your investment.  If you have $400,000 to invest that is your return rate.   

If you buy a house with 20% down  that is the total of your investment.  So in theory your $400,000 could control a $ 2 million dollar home.  Then you get the tax deduction of the interest cost.  Plus either the benefit of living there or the rental income. 

Yes you do have to make payments and do maintenance etc.  so calculating rate of return gets extremely personal.  

High demand areas such as beach front or lakeshore increase rate of return beyond what normal real estate does. Just as selecting the next big company will do the same. 

 

Hi frenchyd,

I’ve always been a worker / saver and by 20 I had squirreled away just enough to purchase a modest rental property.

Before committing, I read a few books on the subject and learned how to do the calculations as accurately as possible. This was before computers were commonplace so it took a lot of time to crunch the numbers but the result was shocking…the best estimate for a rental property’s net ROI was in striking agreement with the best estimate for the stock market’s net ROI.

It was at that moment that I had an epiphany…countless other investors had come before me and crunching the same numbers. The instant one investment class is a better deal than the others, money rushes into it and is drawn away from the others driving prices up and down respectively until equilibrium is restored.

I know this is fairly obvious stuff but it’s one thing to sit in an economics lecture and entirely another to make the journey yourself and discover on your own how it works.

None of this will make renters that are getting squeezed feel any better, I’m just pointing out the mechanics of why it’s happening.

STM317 said:

 

Shouldn't the increase in equity count as part of the return?

Hi STM317,

Not to anywhere near its full extent as it isn't realized unless you liquidate the property (expensive and labor intensive) or re-balance your equity stake which comes with its own cost and hassle of refinancing plus about 50% of the time, new loans will have a higher interest rate than the one you currently have.

Having more than the minimum amount of equity is slightly helpful in that it reduces your carried interest and may improve your borrowing power but it’s mostly like stuffing money under your mattress…it’s not working for you, it’s just sitting there sidelined.

Ultimately, the increased equity is real money that you’ve made but a big portion of it will be forfeited to transaction fees and taxes if you access it.

Perhaps the 1980’s rock band Epic said it best with “It’s in your face but you can’t grab it”

2000 gets you a 1 bed apartment in my hood.  If you're lucky.   Whats going on.. is right.

Around here, rental prices in regards to our needs vs what we can afford have led us to stay with the folks for a few more months until we can afford to buy.

MazdaFace said:

Around here, rental prices in regards to our needs vs what we can afford have led us to stay with the folks for a few more months until we can afford to buy.

“Your house is the box you put your thirty-year guarantee that your rent won’t go up in” – RX Reven’

Congratulations

I can afford a payment on a new camper. My grandma has a 10 acre property, this is becoming more of a possibility day by day. 

It does seem to be going mildly pear-shaped lately (aka 2007-ish).  I am relocating for work in the next year, and selling my current home next spring.  I pay ~$1300/month for PITI (principle, interest, taxes, insurance).  I cannot find anything to replace it with, and am slightly concerned...I only bought the house 4 years ago.  Homes (and rents) seem overvalued to me.  I will likely rent for a year or two and see what the market does.  I might pay a short-term penalty in lost equity/rent, but the mobility and ease of changing my living situation and location have their own non-monetary value and are worth it for the short-term.   

While there is the concern it will keep going up, the people that try to use that as a reason to jump in rashly seem to forget something: the market always corrects eventually.  Home prices and rents can only go up so far, unless there is an increase in salary to go along with it.  The median US household income is just under $60,000/year https://www.deptofnumbers.com/income/us/.  Multiply that by .75 (taxes) and divide by 12, and most people have ~$3750/month to play with, not including important stuff like saving to their 401k, or you know...feeding themselves.  And that has to cover everything: food, shelter, transportation, medical, entertainment, etc.  Real estate can't go much over 50% of take-home pay for very long, or there is literally nothing left over.  And even 50% of take home is usually considered unsustainable...stay at that level too long, and the torches and pitchforks come out (or government regulation, or massive shifts in behavior etc.).  So something has to shift, it could take many forms:

• Home prices could drop, ala 2007-2009, to more affordable levels
• Incomes could increase, and home values are returned to an affordable level via inflation
• Corporations and REITs end up owning everything and squeezing us for every nickel, until the population revolts

Hopefully not the last one, but my point is, an imbalance in affordability for most of the population CAN'T continue long term.  The pendulum might swing one way or the other for a few years, but it always goes back the other way. 

pres589 said:

wheelsmithy:  Unless something has changed, you're on the hook for the rent for the months that you didn't live there until the lease is up.  You shouldn't be sued if you keep paying OR until they rent out the unit.  Once it's rented you're done as it can't be rented out to two separate parties at the same time.   The landlord is also obligated to get it rented again ASAP.

The deposit is also gone but that's always been the case as well.   

That is sort of what happened to me when I had to break my lease in NH when the project I was working on ended.  Fortunately, the management saw this sort of thing all the time and had a pretty reasonable policy about it.  $200 break-lease fee, deducted from your deposit and you're on the hook for the rent until they can rent the apartment. However since they had a waiting list to get in, the pro-rated rent was only for two weeks. So end I got a fair bit of my deposit back despite breaking the lease. I considered that one advantage of getting one of the cheaper places.  My coworker was in a much nicer apt, but the lease was considerably less flexible when he inquired about breaking it. Pretty much what wheelsmithy described. 

When you own, your "rent" does still go up a bit - my mortgage payment usually went up a bit each year for tax increases. It's also the advantage of paying off your mortgage. The "rent" for me now is basically making sure I have saved enough for the tax bills.

With everyone knowing that the interest rates are rising and the days of cheap money are coming to an end, the smart people are rushing to get to the market and driving up costs. we are just a couple of fed increases away from a slow down. Because of that the rents are increasing as well with the rise of sale prices. 

We all know the opportunity costs of renting vs. buying. I personally think its a great time to stay clear of the market. Im moving for work here in a few months and I fully plan on renting when I get there to let the market cool and to build up more of a war chest to put 50+% down on the new place. 

STM317 said:

Note to self: become a landlord

Note to you from me: don’t rent to your well meaning but fiscally cursed cousin if you want steady rental income 

When I got divorced, I rented a 2 bedroom, 1ba house with an eat-in kitchen, garage, laundry room, driveway, fenced-in yard, deck and pool for $650, and that included garbage pickup.  

Flynlow said:

It does seem to be going mildly pear-shaped lately (aka 2007-ish).  I am relocating for work in the next year, and selling my current home next spring.  I pay ~$1300/month for PITI (principle, interest, taxes, insurance).  I cannot find anything to replace it with, and am slightly concerned...I only bought the house 4 years ago.  Homes (and rents) seem overvalued to me.  I will likely rent for a year or two and see what the market does.  I might pay a short-term penalty in lost equity/rent, but the mobility and ease of changing my living situation and location have their own non-monetary value and are worth it for the short-term.   

While there is the concern it will keep going up, the people that try to use that as a reason to jump in rashly seem to forget something: the market always corrects eventually.  Home prices and rents can only go up so far, unless there is an increase in salary to go along with it.  The median US household income is just under $60,000/year https://www.deptofnumbers.com/income/us/.  Multiply that by .75 (taxes) and divide by 12, and most people have ~$3750/month to play with, not including important stuff like saving to their 401k, or you know...feeding themselves.  And that has to cover everything: food, shelter, transportation, medical, entertainment, etc.  Real estate can't go much over 50% of take-home pay for very long, or there is literally nothing left over.  And even 50% of take home is usually considered unsustainable...stay at that level too long, and the torches and pitchforks come out (or government regulation, or massive shifts in behavior etc.).  So something has to shift, it could take many forms:

• Home prices could drop, ala 2007-2009, to more affordable levels
• Incomes could increase, and home values are returned to an affordable level via inflation
• Corporations and REITs end up owning everything and squeezing us for every nickel, until the population revolts

Hopefully not the last one, but my point is, an imbalance in affordability for most of the population CAN'T continue long term.  The pendulum might swing one way or the other for a few years, but it always goes back the other way. 

You have most of it right.

Except 1  it’s not really a pendulum because there is only so much land( and less then you’d think when you factor in  job access And desirability. But an ever increasing population willing, neh,  eager to get on the inflation defeating elevator. 

Except 2. 50% can be sustainable if your goal is to use real estate as your investment medium.  I realize doing so violates two investment rules.  1 diversify.  & 2. Have a escape plan.  

The second isn’t relevant if you are committed to a particular location.   If for family reasons, business reasons or just plain preference you decide to remain in one location you don’t have to be like most Americans who move every 5 years on average.  There are solid fiscal reasons to remain committed to one location 

As for diversify,  while it is solid advice for most, it also imply’s  that your alternate plans may not be as good.  That if you make a selection mistake if you select enough alternatives  maybe something will “luck-out”.  

Sort of like by buying more lottery tickets you have a better chance of winning.  

Oh, and as for waiting. Remember after two years any profit you made on selling is exposed to capital gains taxes.  ( unless you want to take your one time exemption now instead of at retirement) 

Ian F said:

pres589 said:

wheelsmithy:  Unless something has changed, you're on the hook for the rent for the months that you didn't live there until the lease is up.  You shouldn't be sued if you keep paying OR until they rent out the unit.  Once it's rented you're done as it can't be rented out to two separate parties at the same time.   The landlord is also obligated to get it rented again ASAP.

The deposit is also gone but that's always been the case as well.   

That is sort of what happened to me when I had to break my lease in NH when the project I was working on ended.  Fortunately, the management saw this sort of thing all the time and had a pretty reasonable policy about it.  $200 break-lease fee, deducted from your deposit and you're on the hook for the rent until they can rent the apartment. However since they had a waiting list to get in, the pro-rated rent was only for two weeks. So end I got a fair bit of my deposit back despite breaking the lease. I considered that one advantage of getting one of the cheaper places.  My coworker was in a much nicer apt, but the lease was considerably less flexible when he inquired about breaking it. Pretty much what wheelsmithy described. 

When you own, your "rent" does still go up a bit - my mortgage payment usually went up a bit each year for tax increases. It's also the advantage of paying off your mortgage. The "rent" for me now is basically making sure I have saved enough for the tax bills.

You make a good comment regarding the slight increase in taxes due to appreciation.  Savy home owners I know will make the case that while the land does appreciate over time. The building will depreciate. The average home in America is something like 48 years old when it’s either demolished  for new or so extensively remodeled  it may as well have been demolished.  

So whatever it cost to build the house ( minus land) divided by 48 is what the yearly depreciation on the building is.  Using that formula they contest a tax increase.  

frenchyd said:

You have most of it right.

Except 1  it’s not really a pendulum because there is only so much land( and less then you’d think when you factor in  job access And desirability. But an ever increasing population willing, neh,  eager to get on the inflation defeating elevator. 

Except 2. 50% can be sustainable if your goal is to use real estate as your investment medium.  I realize doing so violates two investment rules.  1 diversify.  & 2. Have a escape plan.  

The second isn’t relevant if you are committed to a particular location.   If for family reasons, business reasons or just plain preference you decide to remain in one location you don’t have to be like most Americans who move every 5 years on average.  There are solid fiscal reasons to remain committed to one location 

As for diversify,  while it is solid advice for most, it also imply’s  that your alternate plans may not be as good.  That if you make a selection mistake if you select enough alternatives  maybe something will “luck-out”.  

Sort of like by buying more lottery tickets you have a better chance of winning.  

Oh, and as for waiting. Remember after two years any profit you made on selling is exposed to capital gains taxes.  ( unless you want to take your one time exemption now instead of at retirement) 

Frenchy, no disrespect, but none of this is correct.  You may want to read up on capital gains taxes.  

EDIT:  Was on the phone, and I hate trying to insert links or edit quotes.  Cleaned up the quote block.  Also, here is the relevant section from the IRS on capital gains on primary home sale:  https://www.irs.gov/taxtopics/tc701

Short version:

• No, it is not exposed to capital gains taxes two years after selling, this is completely backwards.  You must live in the home as your primary residence for 2 of the past 5 years to qualify for an exemption.  2 years after the sale has no relevance to anything for exposure to taxes.
• You can exclude capital gains from multiple home sales over your life, as long as they are staggered to meet the use test in bullet one.  "One time exemption" is nonsense, and could refer to the exemption you take every year, which is not one time, or the lifetime gift limit of ~$5.4 million, recently doubled to $11 million

Flynlow said:

frenchyd said:

Flynlow said:

It does seem to be going mildly pear-shaped lately (aka 2007-ish).  I am relocating for work in the next year, and selling my current home next spring.  I pay ~$1300/month for PITI (principle, interest, taxes, insurance).  I cannot find anything to replace it with, and am slightly concerned...I only bought the house 4 years ago.  Homes (and rents) seem overvalued to me.  I will likely rent for a year or two and see what the market does.  I might pay a short-term penalty in lost equity/rent, but the mobility and ease of changing my living situation and location have their own non-monetary value and are worth it for the short-term.   

While there is the concern it will keep going up, the people that try to use that as a reason to jump in rashly seem to forget something: the market always corrects eventually.  Home prices and rents can only go up so far, unless there is an increase in salary to go along with it.  The median US household income is just under $60,000/year https://www.deptofnumbers.com/income/us/.  Multiply that by .75 (taxes) and divide by 12, and most people have ~$3750/month to play with, not including important stuff like saving to their 401k, or you know...feeding themselves.  And that has to cover everything: food, shelter, transportation, medical, entertainment, etc.  Real estate can't go much over 50% of take-home pay for very long, or there is literally nothing left over.  And even 50% of take home is usually considered unsustainable...stay at that level too long, and the torches and pitchforks come out (or government regulation, or massive shifts in behavior etc.).  So something has to shift, it could take many forms:

• Home prices could drop, ala 2007-2009, to more affordable levels
• Incomes could increase, and home values are returned to an affordable level via inflation
• Corporations and REITs end up owning everything and squeezing us for every nickel, until the population revolts

Hopefully not the last one, but my point is, an imbalance in affordability for most of the population CAN'T continue long term.  The pendulum might swing one way or the other for a few years, but it always goes back the other way. 

You have most of it right.

Except 1  it’s not really a pendulum because there is only so much land( and less then you’d think when you factor in  job access And desirability. But an ever increasing population willing, neh,  eager to get on the inflation defeating elevator. 

Except 2. 50% can be sustainable if your goal is to use real estate as your investment medium.  I realize doing so violates two investment rules.  1 diversify.  & 2. Have a escape plan.  

The second isn’t relevant if you are committed to a particular location.   If for family reasons, business reasons or just plain preference you decide to remain in one location you don’t have to be like most Americans who move every 5 years on average.  There are solid fiscal reasons to remain committed to one location 

As for diversify,  while it is solid advice for most, it also imply’s  that your alternate plans may not be as good.  That if you make a selection mistake if you select enough alternatives  maybe something will “luck-out”.  

Sort of like by buying more lottery tickets you have a better chance of winning.  

Oh, and as for waiting. Remember after two years any profit you made on selling is exposed to capital gains taxes.  ( unless you want to take your one time exemption now instead of at retirement) 

Frenchy, no disrespect, but none of this is correct.  You may want to read up on capital gains taxes.  

ProDarwin said:

z31maniac said:

$2000 month rent for a house in the middle of nowhere seems INSANE. Assuming he's living in the city in his profile. 

I bought a completely, COMPLETELY renovated home (including a new roof, etc) with 0% down and mortgage/insurance/taxes is $1150/month in a 1.5 million person metro area. 

And you would likely be a fool to rent that out for $2k.

You are correct, I would be a fool to try to rent it for that much, because no one would.

I could POSSIBLY rent it for $1400-1500/month.

z31maniac said:

ProDarwin said:

z31maniac said:

$2000 month rent for a house in the middle of nowhere seems INSANE. Assuming he's living in the city in his profile. 

I bought a completely, COMPLETELY renovated home (including a new roof, etc) with 0% down and mortgage/insurance/taxes is $1150/month in a 1.5 million person metro area. 

And you would likely be a fool to rent that out for $2k.

You are correct, I would be a fool to try to rent it for that much, because no one would.

I could POSSIBLY rent it for $1400-1500/month.

 

So what you are describing is a terrible market in which to be a landlord.  Anyone renting a property for $1500/month with an $1150 mortgage is doing it wrong.

Edit:  You are also describing a market where being a renter is awesome.  Because I would totally rent a house for $1500 vs. own it with that mortgage.