We’re going to be digging into why rents will continue to increase over the long term.It’s a common thought to think that investing in real estate is a risky endeavor. Especially in a hot market like we’re in right now. There are all kinds of risks which I addressed in a video HERE. However, as Warren Buffett says, “risk comes from not knowing what you’re doing”.
Today, let’s discuss how the risk of rents decreasing is low and boost your confidence in making that next investment. According to Realtor.com, 44 of the nation’s 50 largest cities now have rental rates that have not only recovered from covid price dips but have surpassed pre-pandemic levels.
Next, the U.S. median rental price increased 8.1% year-over-year to a median of $1,575/month and increased 2.1% in August alone! To recap, market uncertainties created a short term dip. However, the fundamentals of rental demand are back in full force; even amplified. This brings us to our first reasons rents will continue to increase in the long term.
INCREASED DEMAND FOR HOUSE
After so much uncertainty from covid Americans reflected inwardly at their lives and housing situations. This reflection came from when they were forced to stay at home to prevent the spread of COVID-19. They needed more space for work from home situations. Also to just to spread out the family when everyone was at home all day. These trends do not seem to be reverting back to normal quite yet. Many people are permanently able to work remotely and are putting more of an emphasis on their lifestyles.
Next, let’s look at a numerical perspective. The amount of inventory in the real estate market is a whopping 2.6 months worth. This means that if there was no new inventory created, the existing demand would take all the houses off the market in two and a half months. Also, for apartments, there would need to be 4.6 million more apartment units by 2030 to keep up with current demand. That’s insane! We are clearly in a housing crisis. Why is demand so high and supply so low?
For many of the reasons that we discussed a second ago; also because the millennial generation is moving into prime home buying years. They’re having kids and they are the biggest generation ever! The problem is, with current housing prices being so high (in fact 40% of counties nationwide have been declared “unaffordable” for homeownership) many millennials are priced out of the market. This means the will have to continue to rent, which is good for rental prices! Lastly, supply is low as construction of new rental units has been largely undeveloped. This has happened since 2008 when so many builders closed up shop and new development got a high risk reputation.
We all know that as the supply of something decreases, it becomes more valuable due to the idea of scarcity. On the flip side, as something becomes more abundant, it becomes less valuable. The same is true for US dollars. The printing of more dollars leads to lower purchasing power for each dollar because prices of goods and services increase. Inflation is caused by the federal reserve telling the US Treasury to print more dollars into the US money supply.
The reason that so much money is being printed is because of government spending. Types of things such as social programs, stimulus, and infrastructure. Not to say any of this spending is right or wrong, but we must understand that this is happening whether we like it or not and make sure our wealth is not eaten away by inflation. The trick to this is buying physical assets like real estate as these goods often track the rate of inflation. So, when rents increase, so does your real estate, all while your monthly payments are a fixed cost every single month!
BUILD YOUR OWN WEALTH
To further drive this point home, what is a house made of? Goods such as wood and metals! The prices of building materials will go up with inflation as well so you can see how your rental units would increase in value as well as renting for more money each month.
So remember, if you want to build someone else’s wealth, rent from them, but if you want to build your own wealth, rent TO them!
The fundamentals of economics are keeping the real estate market strong and that means rents will continue to increase as both demand increases, supply takes a while to catch up, and inflation continues to rise.
Check out our YouTube channel to learn more about what the real estate market is doing today and our takes on real estate fundamentals. If you want to get started in real estate investing today, set up a call with one of the investment counselors to see what taking the first step could look like for you!