Thursday, April 27, 2006

Rents to rise

If Californians did not enjoy high property appreciating rates there would be fewer and more expensive homes for rent. For the third year the rental market in the Capital Region has been stagnant. Rental rates have only risen about 10 percent since 2002. Landlords have been satisfied with accepting a negative cash flow (monthly rental income, minus monthly payment including property taxes and insurance, minus maintenance) for the high appreciation rates experience over the last few years. Tenants have benefited at landlords expense.

My friend George purchased a rental in 2003 for $325,000. After he put down 20 percent or $65,000, his monthly principal and interest payments were $1,612 he also has $338 monthly property taxes, $100 for insurance and $50 in maintenance for a total of $2,140 a month. George rented the place for $1,500 so he has a $640 negative each month. George called me yesterday about selling his rental. Why? Because, it was now worth $475,000 but the rent was still only $1,500 a month. He figured after selling expense, capital gain tax and reimbursement of his negative cash flow, he was still going to clear over $100,000 profit.

There are lots of landlords like George who are selling their rentals (that they have been feeding the past few years) and choosing to cash in on their investment. Absentee investors and flippers have been leaving the Capital Region for the past year in search of higher returns elsewhere. Consumer confidence and a hot economy is attracting capital out of housing and back into the stock market. Real estate investors who don’t expect high rates of property appreciation to continue are taking their profit now.

Fewer rentals in our region will drive rents higher. Tenants might do well to negotiate now for a longer-term lease or expect to see substantial rent increases. When real estate investors no longer have high appreciation rates, they begin to look for other positive reason to invest in real estate, like cash flow.


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