Do not however expect lower then market rents

Any business that rents out property for less than market rates would certianly be foolish.

However, that does not mean that market rates will not drop.

The average rent in Seattle is $1350 and the vacancy rate fell to 3.5% from 5.2% in 2007.

In 2007 houses and condos were still appreciating. My how things can change in just a year! I think the rental market is still fairly tight, but don’t expect it to continue that way. The simple fact is that there is an oversupply of homes in this market. Some of the oversupply will go to the rental market which will flatline rents. No amount of former owners becoming renters or landlords rasing rents while laughing all the way to the bank is going to affect the housing oversupply.

But Belltown is so “hip”…..LOL!!!!!!

January 2001 $1050
January 2002 $1050
January 2003 $975
January 2004 $975
January 2005 $975
January 2006 $995
January 2007 $1085
January 2008 $1170
January 2009 $1290

As you can see, my rent pretty much stagnated until last year, when my rent increased nearly 18% to its current price. However, if you factor in how much it’s increased since I moved in 8 years ago, I’m roughly at a 2.6% yearly inflationary increase. My rent only increased as housing in Seattle hit its actual peak in the summer of 2007.

But, I suspect that my once apartments-condo-to-apartments landlords won’t be able to squeeze out much more. And since at least 3 apartment-to-condo projects have all reverted back to apartments in the last 8 months in West Seattle, the contraction of available rental units that forced the uptick is now reversing into an expansion of available units. I can only imagine this will at least dampen any rent increases in the area.

you would be completely right based on what the other markets are doing if everything was the same. Those other markets had appreciations in rent also while we did not.

Not really. Florida, California, Arizona and Minesota saw very little rent price appreciation during their boom years. Rents only rose right at the very apex of their real-estate markets (when buying prices stopped appreciating while fewer people wanted to buy). San Diego is an excellent example of this. Their rents were in the dumps, with almost no increases, for a LONG time. There was a brief period of a couple years where rents rose (right when all their new downtown condo complexes were under construction), but then things headed downhill as soon as all the new construction came back on line.

In short, rents never really appreciated all that much in these currently declining markets. That brief 2 or 3 year period of rental appreciations was quickly undone when the foreclosure rates grew significantly and countless home/condo owners began throwing their units on the rental market since they couldn’t sell.

I don’t see how our market is different. Our rents were in the tank for most of this decade and have really only started to see increases in the last year or two. Additionally, we have a tonne of new condo developments under construction. Lastly, our foreclosure rates are now starting to increase at dramatic rates. It looks like we are following EXACTLY the same pattern as everywhere else. By mid 2009 I expect to see Seattle area rents see a lot of downward pressure.

As a landlord’s taxes, maintenance, and other cost go up with time so will your rent.

No, rental rates have little correlation to the landlord’s costs. Look at how rent prices are dropping in Miami, San Diego, Minneapolis, Phoenix and Las Vegas even while taxes, maintenance, have remained the same or even risen. The median incomes haven’t even declined much in the last couple years, yet their rents are falling anyway.

The key factor governing rental rates is the quantity of units for rent and the number of people looking to rent. In regions where there are high numbers of foreclosures, many home-owners turn to renting their properties on the “shadow” market since they can’t sell. Further, people living in declining markets are re-assessing their needs for accomodation, and deciding to downsize. Thus, you wind up with people who used to live in individual appartments moving to shared accomodations, some people moving back in with their parents, etc.

I’ve read plenty of stories from these declining markets where landlords proclaim their pain at being forced to rent their properties for far less than their costs. As I said, the landlords “costs” have little to do with the rent prices when there is a mass of vacant inventory.

Unfortunately, Seattle is headed in the same direction as these other declining markets. The inventory of unsold homes is growing, more and more condo projects are being converted into rentals, and people are starting to change their preferences for accomodations (see my anecdotes about colleagues who are down-sizing). Even the foreclosures are starting to pick up around here. Given another year of continued expansion of the foreclosure rates we should expect to see a lot more properties show up on the rental market.

I do not know the specific risk percentage and imagine is varies greatly based on the amount leveraged, annual cost, and the return on investment.

You can mitigate risk greatly through purchasing intelligently, fixing your costs, and through insurance.

I purchase properties that are near job cores, with good access to mass transportation, and/or educational districts, where rental demand is high and will likely remain high (no suburbs). Ideally you want to get a house where you can rent it for close to cost for the first few years (obvious).

I do like sweat equity, so if a slight fixer upper is in a good or transitioning neighborhood I would consider that as another way to reduce downside risk. Look for houses or condos on the lower end of price/sqft in good or up and coming neighborhoods that are not completely trashed. Painting, plastering, moulding, and installing light fixtures are all doable jobs. Stay away from foundation, roof, and plumbing issues. In general, I have lived in the houses for two years and gradually made them look pretty, before moving on. So far, all have cash flowed when I have turned them into rentals.

I only buy properties that I know I can afford to pay for them even if they were to be vacant. As the rental begins to cash flow take the profit to first develop a rainy day fund (maintenance and vacancies).

I then take any extra profit to pay down the mortgage with the goal of one extra payment per year. If you make one extra payment per year you can reduce the mortgage by 7 years and save almost 1/2 the cost over the life of the loan.

I mitigate increasing costs by getting a fixed rate loan. I have also been able to refinance two properties to lower rates. However I think I have seen the bottom.

The problem with the flippers was they over leveraged themselves well beyond what I would consider for risk and never fixed their costs. Many bought as many houses as they could possible leverage with out ever thinking they would have to make a mortgage payment. The other bought as much house as they could afford at 1.99%. 30 Year fixed is the only way to go!

Insurance covers me for catastrophic events.

As rents go up and my profits increase I look for new houses.

All landlords are not in the same position.

My sole point is rents collectively are going up and they should based on historic norms.

There are several dozen neighborhoods in Seattle and several other buildings and units in Downtown. Collectively rental rates are going up across Seattle and vacancies are down.

Whether it is the bottom moving up on Rainier Beach, I do not know.

I will keep my eye on area 700!!! ;>)

So your advice is sell the units now, pay 6% commission, buy them back later and pay for closing cost again (which are now higher), a higher interest rate, and with a much larger down payment.

Please do not be insulted if I do not take your advice.

At some unit price drop % per year you would certainly come out ahead by selling now & buying back later, vs. staying a landlord. Do you know approx. what that % is for you? A 15% drop in the next year seemed conservative to me, esp. since you can sell for a 4% total commission (1% flat fee for seller’s agent, 3% for buyer’s agent).

Please explain how your 4% CD or corporate 7% bonds are better?

I don’t know for sure. I was just hypothesizing. At some reward% / risk, another investment certainly becomes better than being a landlord, albeit such investment may not exist. Do you know what that reward% / risk is for you? Risk can be difficult to quantify, but what is the annual gain % (the reward) you expect on average? If it was, say, 5%, a CD is almost certainly a better investment, considering your risk. At 10+% you may be better off as a landlord, even when your risk is factored in. You make being a landlord sound potentially lucrative, but a leveraged investment that does 7% annually (unleveraged) with moderate risk can also be lucrative. (There is a precise way to compare apples to apples between investments, like between your landlord investment and investing in a stock index fund. It’s easily done in a spreadsheet. To calculate the risk you need to know the value of your investment on a periodic basis, factoring in all your costs including your time.)

Form 2000 – 2006 rents were flat… they did not go up with inflation. They are currently priced 10% – 15% below the norms based on median income. Which means if they were going to stay in line with inflation, like they historically have, they will likely come up to meet that measure in the future.

When? I do not know. All I know based on the data is that there is a 2.9 vacancy rate which means currently the market is not in your favor and rental rates will likely rise.

Yes, you do not have to sign anything. But it is does not mean you are entitled to or will receive bargain basement prices on your rental. If you are ever forced to move the rental market if statistically not in your favor.

What used to get $3000/ mo at Cristalla now gets $2250

What used to get $3500 and Hotel/1000 Madison Tower is now asking $2900.

Same thing happening at Concord, Newmark Tower etc etc.

Harley Said…

“Can I remind you that the landlord does not pay the mortgage, the renter does?”

Let’s see. After Homeowners Dues my LL has less than $1200/mo to cover his mortgage and taxes. After property taxes he nets around 10k/year (do landlords pay income tax on their rental income?). Even if he paid cash for the place, his return would be less than 2%. on his 500K+ (presale purchase price) condo?

How’s that better than a CD?

I’d say that he’s subsidizing my rent more than I’m paying his mortgage.

You are using two units to measure all of the rents in Seattle???

$2100 in rent is far above the $1350 median. Remember there is a complete opposite side of the the spectrum too… the bottom is coming up.

Lastly, I was not the one who made up that data. If you refute the study and its findings that’s fine, but please use something more than two units in your building as a rebuttal.

One condo in my complex rented 04/07 for $2275 and just turned over on 4/08 for $2100.

That doesn’t even include the $1000 fee that the Landlord has to pay to the complex to move the person in nor the leasing agent’s fee.

Other renters I know in the complex are paying even less $/ psf…(view units I might add) and nobody I know has had their rent raised when their lease ran out. Maybe the landlords were happy to keep them?

Now let’s compare apples to apples when it comes to a comparable unit for sale.

this one…two floors below…pretty much a carbon copy.

http://www.redfin.com/WA/Seattle/910-Lenora-St-98121/unit-S1009/home/11905215

the original asking price of the above unit was $539k.

Now it’s at $488K

The buyer paid 508k 03/07 (let’s not forget the $505 Homeowners Dues in addition to taxes and “content” insurance)

And this is playing out comparably in other buildings also.

Not to mention… more units to come online shortly with no shortage of rentals at this end of the market at the current time.

So…Prices falling in my market, rents falling in my market….and I’m downtown. We’ll see if my Landlord really wants to hit me with a rent raise next year. I really can’t see that would be in his best interest however.

YMMV

The RE bubble has officially popped in the PNW. There is usually a delayed reaction across the board in the PNW especially. Do you expect it to be different for you? Hold on to that thought and remember it next year.

I certainly DO have control over my decision to sign an overpriced lease or not. Not everyone just goes along like you seem to believe, and those who have higher incomes are going to want to get some value for it.

There is no “ground” to make up, when you have really not “lost” anything substanitively in the first place. Other than opportunity. That’s on paper, we are talking real money now. Meanwhile those renters were still covering your mortgage as it was appreciating. Median income, especially based upon two incomes, is not a sufficent crutch to lean on for justification of the rental market, and it does not dictate the rental market rates in isolation. That’s more appropriate for First Time Buyers.

You are also ignoring the other pressures that are coming to bear. Elasticity in the rental market will not likely work in your favor, according to your own logic. It might work better for those who double up, but does that not cut the number of units in demand in that same market as well?

I understand your postion more than you think I do.

So your advice is sell the units now, pay 6% commission, buy them back later and pay for closing cost again (which are now higher), a higher interest rate, and with a much larger down payment.

Please do not be insulted if I do not take your advice.

Can I remind you that the landlord does not pay the mortgage, the renter does? I am sure you are aware that you can depreciate the structure over 27-years. After 21 years the rental income minus costs becomes pure profit (assuming 13 payments per year on 30-year mortgage). In addition to rental income, you have an appreciating asset (house).

You are absolutely right, it is a leverage play. I paid a total of $12,000 for the closing costs and down payment. After 21 years, assuming only that I break even on rent and maintenance, I will own the house outright as well as receive monthly income that will likely be 2.5X what I currently pay for a mortgage based on inflation. Not to mention a house that would have likely doubled in value.

Please explain how your 4% CD or corporate 7% bonds are better?

If you could be sure that the prices on the housing units you’re renting will fall 15+% from today’s fair market value over the next year, seems to me that you’re definitely better off selling those units now, and re-buying units near the bottom. Of course you can’t know the future for sure, but if prices are falling like they seem to be, the odds of losses (compared to selling now) are rising.

Or, if you hope to make 4% annually on your investment on average, maybe you’re better off getting out of the landlord business and investing in CDs instead. I suppose leverage makes the difference here, but if so, you’re taking on greater risk than the CD, and if you’re okay with higher risk, you could make 7% or so on corporate bonds.

You said “the last time the rental market was super tight – and we were on the cusp of a recession. That was followed up by 6 years of basically flat rents. Remember 2000? Ooh, scary… “.

Are you not trying to make a correlation between this tight rental market and the one of 2000? I would argue they are completely different markets in that the renters from 2000-2003 may have gotten a reprieve from rental increases due to the recession and 9/11. Rents then remained flat because renters leaving the market for home ownership and thereby creating “Seattle Bubble”. This part of the argument is foundational to this blog.

How can you not concede the fact that rents are not nearly as high as they should be based on median income levels, historically flat rents since 2000, and decreased vacancies. This is a landlords market right now for most of the job centers.

I never said that rents will increase 10% per year. I am saying they need to move up 24%-32% from the 2000 rental levels to come in line with the median income and inflation. With tighter vacancies and fewer renters entering the ownership side, rentals will remain in high demand. If gas prices continue to climb you will see more people moving closer to the job centers putting further upward pressure on rent prices.

Based on your logic then rents should have been falling since 2006 -2007. That is absolutely not the case. They have been going up and vacancy rates have been going down. Currently rents are below where they should be based on on current income levels.

I am sorry, but you do not determine what you will pay for rent especially when the market is not on your side. As a landlord’s taxes, maintenance, and other cost go up with time so will your rent. Don’t get me wrong, sweet heart deals exist, but they are absolutely not the norm.

Lastly, take a look at these population predictions for the United States. http://www.msnbc.msn.com/id/26186087

Assuming everything is equal for each state you should expect a population growth of 1 million people each in 15 years. This assumes that Washington will not attract more than other states. I’m thinking when I turn 50 I am going to be sitting pretty. High rents and high property values.

There are now countries insulated from what is going on economically in the US that still want the products made here which should mitigate some of that.

And which countries are those? Japan is seeing an outright economic contraction. China is starting to shut-down factories due a sudden drop in export orders (and their real-estate market is falling apart as developers go bankrupt and non-performing property loans increase dramatically. India is facing a major decline as western firms cut-back on IT spending. Just look at how Indian and Chinese markets have been collapsing (my inverse Chinese stock funds have been doing VERY nicely this year).

The oil producing nations will be toast from the demand destruction that will kick in from the global recession. Just look at how quickly commodities took a drubbing in the last few weeks. Sure, a commodity rebound is due now that things are over-sold, but oil will be down below $70 a barrel by the end of 2009.

Europe? That’s hardly a growth region. Denmark, Holland, & Switzerland have had property bubbles that make what’s happened in the US look like child’s play. Ireland, the UK and Spain are already seeing their economies tank with massive credit contractions. Italy can’t even sell their national bonds!

So just which are these nations that are going to drive the economy even while the global credit system goes deeper into reverse (certainly not Canada, Australia, New Zealand, or South Africa, which have plenty of ominous economic portents in their own rights)?

One of the other assertions here is that rents tend to peak along with the highest peak of a SFH/condo bubble. That seems to be following the pattern. Enjoy it while it lasts.

What some of you are missing, is the fact that income, including disposable income left after cost of living, is what actually sets the rental “market rate” in the end.

Actually, I think the relationship between what people are willing to pay for rents (and mortgages) is far more elastic than generally supposed, and does not directly correlate to incomes (disposable or otherwise). In particular, the outlook people have for the future greatly influences how much they are willing to spend. If people become concerned that the economy might contract, and that their jobs might be less secure, then they will look for ways to economize.

Already, I hear acquaintances at work talk about “down-sizing” to cut costs. One family of four we know in the Lakehills area of Bellevue has just decided to sell their single family home and rent an apartment! A couple of single moms in my church who have decided to rent a home together to save costs.

I also know of software engineers who have decided to vacate apartments they are renting and move to cheaper shared housing situations. In none of these cases has anyone’s income dropped, or job loss occurred. There is just a growing concern about the future, and a desire to start saving more and paying down debt.

In fact, I suspect we will find that housing demand in general is far more elastic than generally supposed, and that people can find creative ways to economize and down-size. Kids can share bedrooms, and there is always the basement back at mom and dad’s.

By the way, I might have a claim to being one of the most bearish on this board. I predict a minimum of 50% Seattle area median price declines by the end of 2012, and believe it could actually be in the 80% range by 2014. Before the coming global recession is over I expect we will see unemployment at over 10%, and lay-offs occurring at EVERY major Puget Sound employer. No industry, or major firm, will be immune from the cut-backs in both consumer and corporate spending that is just beginning to pick up speed.

So just beat that for a pessimistic outlook. I dare you!

Deejayoh, this is the first time I think you might be wrong. Not on point, but why. They may stay flat, but when that happened we had the beginning of the funny loans. From your posts you suggest that housing should revert to historical trends. From that same logic, shouldn’t rental rates?

I am agreement with you that rents will return to historical trends. But that is about 4% per year, same as income growth. I’m only responding the the assertion that we should somehow now expect 10% a year projected forward. They were going up at that rate the last time the market got tight – but clearly things can turn quickly, it seems. That’s my point in dredging up the past. I suspect that as the economy slows down rent increases will moderate.

And Harley, the housing boom didn’t really get underway in earnest here until 2004. So how am I trying to have it both ways, again? My position is well documented here.

Many people moved out during the dot com crash, never to return. I remember reading articles about a concern for brain drain. So quoting D&S stats on only a segment of one market’s vacancy rate seems suspect to support current conditions when they are not really the same. We are only in the second inning.

I agree completely.

I loved it when they put up the information about Zillow the other day that confirms the notion that the job centers Seattle, Redmond, and Everett held their values much better than the outliers. An idea in which the Bubble heads vehemently denied.

Sorry, but rental rates are going to go up. With further tightening of the financial industry this would limit new developments and create more renters, this will only put further upward pressure on rents.

Take Care, Ron..

“In-migration” is also caused by high gas prices and the desire to be close to public transportation. As per the poll, The Tim put up asking if people would move towards the city due to high gas prices, 35% answered yes. I imagine that this is true for both renters and home owners alike.

Secondly, correct me if I am wrong, but rents were flat from 2000 – 2006 because the home ownership became a bargain with those extremely low interest rates until the high run-up. You know… the whole premise upon which this blog was created and what you have been touting since it’s existence! Now it is the renter’s turn to come up to reality.

You cannot have it both ways my friend.

im just spoiled with a 50%+ Savings investment– I like Gold Silver Oil investments.. were still in a Bull market for Commodities, just a blip in the price at the moment the Upward movement is still in tact over the long term.

My savings and investment money is NOT DISPOSABLE.. Either is my Coffee money, you cant have that either. Personally I would never part with any of these, if I was forced before I gave up any of the above I would live in my car.. hahaha

Ive read that myself.
always seems the information is after the fact. What is a fact today usually turns into fiction tomorrow…. perfect Example Cramers Mad Money- if Cramers telling you to buy, hopefully you have a position there already- if you do you better be selling..

Median income belongs more in the realm of first time SFH or condo buyers. Things have been very skewed on the greed side, especially since the mid-90’s with rents around here. The majority of renters cannot afford to rent a house, that’s why multi-dwellings exist. The majority of renters do NOT make the median income as individuals, and even those who do would have to take 50% or more of the net pay to do so. You won’t get many first time buyers to bail the underwater butts out, or get them to pay the overvalued property mortgage, under present conditions.

The question becomes who blinks first. The vacancy rate may provide some clues as to when that happens. Hopefully, you will see rents across the board revert back to THAT mean.

I have replaced a roof, a breaker box, and had one special assessment that repainted and replaced some rotting wood in seven years. I had to replace a washer machine (renter paid) that a tenant admitted to overloading with a comforter. My tenants have all been great so far. My total out of pocket for all my expenses has been $6000. I will need to replace some carpet soon, but besides that there is not much I am looking towards. I am sure that I will run into a nightmare scenario before my life is over, but for the vast majority of the time it has been worry and hassle free.

The majority of renters have too much to lose if they trash the place and my rental agreements protects me fairly well. To date I have never had to evict or sue anyone. They are all hard working people who just want a place to live and call home.

Other than that, the only time needed is to cash the checks each month.