Build-To-Rent Homes: A Renter’s And Investor’s Guide
February 21, 2024
Rising rents have been dominating headlines recently. The cost of living is skyrocketing, making housing increasingly unaffordable. As rents hit record highs, tenants are feeling helpless trying to keep up.
Landlords seem to raise rents wildly without reason. As an example, in our video, we showcase a single mom who lamented that her college grad son still couldn’t afford his own place after 10 months of saving. A Utah woman complained of a $300 monthly increase to $1,910 for her townhome. Videos of minor apartment updates attempt to justify $500 more.
Tenants blame landlords’ greed. But what’s the real story behind climbing rents? What drives operators’ decisions? Are outrageous increases unavoidable market forces or heartless profiteering?
This article will demystify the truth. You’ll understand the key principles guiding rents. We’ll explore operator incentives, renovation strategies, market trends, and more with real-world examples. You’ll gain clarity on if, how much, and why your housing costs rise.
Operators don’t arbitrarily pick numbers. They research an area’s rent comparables (comps) to set market-driven pricing. Comps help establish reasonable rents aligned with a unit’s size, amenities, location, and more.
For example, one investor compared their to-be-acquired property against comparable units in similar nearby buildings. Analyzing one and two-bedroom comps showed the acquisition target rented below market — $195 lower than the average for one-bedroom units and $298 lower for two-bedrooms in competing communities.
This demonstrates landlords charging market rates, not what they subjectively feel like. Tenants’ willingness to pay drives pricing. Operators avoid overreaching, instead targeting the sweet spot balancing high rents with keeping units filled.
The economy also heavily influences rents but with a 1-year lag. 2022’s runaway rent inflation resulted from 2021 trends, as typical 12-month leases delay impact.
Low mortgage rates and limited housing inventory spurred a 2021 rental boom. Aspiring homebuyers couldn’t purchase, only able to rent. High demand plus constrained supply pushed rents up entering 2022 upon lease renewal.
The experience of one woman in Utah encapsulates how macroeconomic forces drive rents. She had signed a lease on a three-bedroom townhome in 2021 for $1,910 per month. This already represented a premium price compared to the region’s average.
When her lease was up for renewal in 2022, she voiced outrage and confusion at the property company informing her of a $300 monthly increase. She lamented in a TikTok video about the incredible difficulty of affording the new $2,210 payment.
However, her original $1,910 rent proved aligned with broader economic conditions. She moved into the property in 2021 — a time of record low mortgage rates. Aspiring homebuyers fiercely competed for limited inventory, sending housing prices soaring out of reach. Unable to purchase, this excess demand spilled over into rentals.
Data showed her Salt Lake City metro suffered 17.1% in 2021 rental inflation. Hence, the woman’s initial $1,910 proved slightly above, but largely consistent with the area’s drastic inflation. Macroconditions manifested locally.
Come 2022’s renewal and now facing a $300 hike, she remained unaware of the economic landscape. Her $300 jump to $2,210 represented a 14% bump. While painful for any household budget, it proved significantly below the prior year’s 17.1% market explosion that she had willingly signed onto with her initial lease. The increase also stayed consistent with ongoing above-average inflation in the region due to microscopic vacancies.
This woman’s experience shows in microcosm how macroeconomic trends transmit into individual rents. Initial moves coincide with conditions of the time before renewal hikes reflect the latest external dynamics. Expect shifts up or down when re-signing aligned with broader indicators for your local market.
Apartment upgrades also enable rent increases, but market rates control overall pricing limits. Landlords can’t charge whatever they want just because units are updated.
One social media commentator voiced that updated 2023 rents should come with new 2023 appliances and fixtures. Operators absolutely leverage renovations helping justify rent hikes. But absolute top-of-the-line finishes don’t guarantee securing sky-high rents exceeding what tenants will bear.
Consider an investor projecting $1.5 million on capital improvements across a 200-unit complex. That’s $11,000 per apartment for upgrades like stainless steel appliances, granite countertops, gooseneck faucets, and more.
Will pricing climb equal to renovation costs? No — No-operators analyze median incomes and average property values around their asset to estimate reasonable market rents. Going overboard on gold-plated luxury could stay vacant if overly exceeding what nearby residents can pay.
Landlords balance maximizing rents while keeping apartments filled. Charging 2023 prices requires providing 2023 amenities. But absolute top-notch features don’t assure securing equally premium pricing in lower or moderate-income areas.
Remember real estate is intensely local. Macroeconomic trends like rising interest rates and rebounding travel have slowed 2023 rental demand in many cities after 2021-2022 spikes.
While some metro areas still exhibit rising rents, declines emerge in others. Apartment List tracks effective rent (pricing factoring concessions like 1-2 months free) finding drops across Sun Belt cities including Phoenix, Las Vegas, and Austin as inventory rebounds post-pandemic.
Yet operators in still high-demand markets like Los Angeles and South Florida continue raising rents at double-digit percentages annually on vacant units. One OC tenant in our video lucked out despite complaints — with his rent effectively priced at more than 20% below the going market rate in the area.
This shows location heavily impacts directional rental trends. One complex could push record rent hikes while another blocks away drop pricing due to micro supply-demand dynamics.
Ultimately most landlords seek appropriate risk-adjusted returns through rents and appreciation, not maximum extortion. Profit motivates, but is aligned with providing quality housing.
Many operators commit to improving communities despite challenges in lower-income areas. For example, one investor fully transformed a neglected Austin complex while creating welcoming residences with upgraded floors, fixtures, and amenities.
His renovation aimed to enhance tenant safety and quality of living. Rent increases funded the overhaul. While reached through pressure and persistence, the win-win outcome delivered happier residents satisfied paying fairly for enhanced apartments.
But operators face difficulties keeping rents affordable with taxes, insurance, maintenance, and utility expenses often spiking faster than local incomes. Those costs must pass to tenants or properties deteriorate, hurting communities needing stability.
While no one likes paying more, carefully controlled increases allow landlords to provide nice housing while staying financially viable. Sensible revenue growth fuels upgrading aging stock across the country — an absolute necessity with millions of units needing billions in repairs. If owners can’t profit, properties crumble.
In any industry, some players view maximizing self-interest over a balanced win-win as an acceptable strategy. Real estate similarly suffers some who prioritize extracting maximum rents over improving communities.
For example, one apartment tour showed minor updates like appliances and sinks but claimed a $500 rent increase simply because the market allowed it. Commentary highlighted the increase despite only minor improvements.
Other reports show landlords failing to maintain livable conditions while still repeatedly raising rents. Their properties deliver minimal value, yet they leverage market tightness to hike pricing on trapped tenants unaware of rights like withholding rent until remedying uninhabitable units.
Thankfully market rents act as a counterbalance limiting how high bad actors can push pricing. And industry associations like the National Apartment Association have enacted Codes of Ethics and Professional Conduct for members.
Still, renters facing issues must vigilantly assert their rights. Transparent communication and reasonable negotiation often deliver improvement or compromise from even initially resistant property managers soaked daily in tenant complaints.
So while income-maximizing sharks exist in apartment ownership and operations, most sober landlords focused on ethical long-term investing avoid highly aggressive policies risking reputation and community relationships.
Financially optimizing doesn’t mean mercilessly wringing the highest penny from every unit. Beyond legal protections, public pressure and ethics codes discourage overly extreme rent increases even if supply-demand dynamics enable them.
Instead, quality operators understand that financially sustainable affordable housing with modest return potential still produces satisfactory profits. Total greed frequently devolves into community conflict threatening asset values. Cooler heads instead respect pricing power’s bounds.
The bottom line is that while no property owner wants to leave money on the table, reasonable policies balancing risk and return promote positive community development and financial performance. $100 rent hikes fund maintenance protecting future property values. Five percent yearly increases support measured renovations and win-win stakeholder alignment.
In closing, rental rates depend on a variety of complex interplaying microeconomic and macroeconomic factors making real estate markets challenging to predict yet essential for communities to thrive.
Landlords rely on rent increases to maintain aging housing stock, fund renovations improving livability and safety, and support operational viability enabling the provision of clean, quality affordable residences. Yet they must balance targeting financially sustainable pricing with keeping units filled and communities stable.
Though a few unethical operators overexploit scarcity dynamics, most sober seasoned landlords focused on appropriate long-term returns avoid highly aggressive policies, instead promoting positive development through modest improvements and reasonable renewals.
Ultimately win-win solutions benefit both residents desiring welcoming neighborhoods as well as operators needing profitable sustainability. Achieving workable compromise requires proactive communication, vigilant protection of rights as well as creative problem-solving from all parties.
With good faith prioritizing understanding before reacting, tenants and owners can find an acceptable middle ground balancing individual interests with collective needs.
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