I saw this article the other day and I thought it asked a very good question considering the rise in rental rates we have witnessed over the past few years. Are we witnessing a “Rental boom, or rental bubble?”
I tend to think we may be entering bubble territory. Rising rents have been driving up the prices of rental properties. I read about it across the country and am seeing it here in Memphis, TN. Rising rents have also spurred a number of new apartment projects across the United States. Here in Memphis, I can think of several new and planned apartment projects that will be hitting the market in the near future.
All of this makes me wonder; how many more renters are out there to fill up these new projects and how much more can they afford? Honestly, I don’t know and I do not think anyone else does either. One thing I do know, the old adage is true, what goes up must come down. When? That is anyone’s guess.
What is a smarter landlord to do in potential bubble territory? I can think of three things.
- Be conservative with your rent estimates when buying new properties. Remember that cash flow is king. If there is a bubble and it does burst it will drive down rents. You do not want to be in a negative cash flow situation. This strategy may make deals harder to find but it is better to have no deal than a bad deal.
- Sell! Since the value of an investment property is based upon the income it generates then now may be the time to sell. Several properties in my market have sold for what I thought were exceptional values. Perhaps now is time to sell.
- Sit on the sidelines and wait. I did this back in 2006/07. Values had gone crazy high and out-of-state investors were willing to reap a 1% cap rate! I cannot and will not compete with that so I just waited. Waited for the bubble to pop. I knew that when it did those out-of-state folks would be in bad shape. When the bubble burst, they went belly up and I was ready to buy. So you might want to wait, wait until there is blood in the streets. That is when the best deals are made.
So what do you think? Are you seeing the beginnings of a bubble in your market? What is your strategy? Let me know with your comments.
Yes, we have noticed rents coming down. When we bought our first unit in 2012 we were able to list it for $1600 and had lots of activity. We ended up renting it for $1500 to secure the most stable tenant. Last year I noticed a new apartment development a few miles away was under construction, and knew it would impact our rates. This month I listed it at $1600 and had not a single inquiry. I listed it at $1500 and had very tepid interest. Dropped it to $1400 and it’s now a feeding frenzy. We are still ok on our cash flow, but we’re definitely considering selling and instead buying in an area with a lesser chance of having new developments impacting the cash flow, as there’s pretty much no where left to build.
Katie,
That is interesting. Thanks for sharing. If you do mind saying, what part of the country are you in?
Thanks for reading and commenting,
Kevin
We are in the western suburbs of Chicago.