February RIA Roundup: How Did the Pandemic Impact Rental Markets?
The RIA Roundup is a monthly real estate newsletter with the latest stories, data, and insights curated especially for rental property investors.
In this issue:
Lead Story: Pandemic Impacts on Rental Markets
Portfolio Updates
In Other News…
Final Thoughts: Cooperation
Lead Story: Pandemic Impact on Rental Markets
Among the pandemic’s myriad impacts, real estate was among the biggest, and certainly the most talked-about. At first, people were stuck in place; but then they started moving around in unusual ways that created distortions in the real estate market. Big city rental demand fell off a cliff, while the demand for single-family homes in less dense areas surged and causes home prices to soar.
Now that the pandemic is largely behind us, and the dust has settled somewhat on those real estate upheavals, where do we stand? Did the pandemic significantly change the game for rental property investors? And how did pandemic impacts vary by market?
I got curious about these questions, and as always, I wanted to turn to the data to answer them. So I downloaded the Zillow home value and rental data for the past four years, covering the period from February 1st, 2020 — just before the pandemic hit — to February 1st, 2024, the last month for which data is available.
Then I analyzed the data for 12 markets, bucketed into three groups:
Legacy Coastal Cities: New York City, Washington DC, Chicago, and San Francisco
Pandemic High Flyers: Phoenix, Tampa, Orlando, and Charlotte
Cash Flow Mainstays: Memphis, Birmingham, Kansas City, and Buffalo
Let’s see what the data tells us about the pandemic impacts across these markets!
National Averages
First, we’ll establish a baseline using national averages. Over this period, average home prices across the country rose from $240K to $342K, a 42% increase. Meanwhile, rents rose from an average of $1,504/mo. to $1,958/mo., a 30% increase. As you probably already knew, both home prices and rents rose very quickly during this period, though home prices grew slightly more than rents. This resulted in a small increase in average price-to-rent ratio from 13.4 to 14.6, or a 9% rise, making overall conditions somewhat less favorable for cash flow rental property investing. (Price-to-rent ratio is measured as the price of homes divided by the annual rent.)
By now you’re probably already saying “Sure sure, but where are the charts, Eric? Where are the CHARTS?!” I thought you’d never ask:
Legacy Coastal Cities
But the national trend can obscure nuances at the market level. Let’s start with our legacy coastal markets: New York, Chicago, DC, and SF.
Intuitively, because of the flight from these cities caused by the pandemic, we’d expect the price increases in these markets to lag the national averages — and they did, increasing an average of only 24% over this 4-year period vs. 42% nationally. Similarly, rent increases were just 15% compared to 30% nationally. (Rents in these markets dipped significantly when the pandemic hit, as we would have expected, before recovering strongly since then.) An interesting takeaway here: this data means that the home price and rent “premium” that residents of these markets are used to paying over other locales is actually LESS than it was before the pandemic. Of course, they’re still among the most expensive markets in nominal terms.
Price-to-rent increased 16% over this time in these big markets (compared to 9% nationally), rising to 20.8 These were not good places to invest for cash flow before the pandemic, and that’s even MORE true today when compared to the average market nationally.
NOTE: For the purposes of this discussion, I’m going to use the AVERAGE values for each group of markets, which will keep things simple and allow the differing trends to be clear. So here’s how our big legacy markets compared to the country as a whole:
Pandemic High Flyer Markets
Now let’s look at the flip side of that coin: the pandemic “high flyer” markets, the places people moved TO during the pandemic creating a real estate frenzy. This group includes Phoenix, Tampa, Orlando, and Charlotte. (Notice anything in common? They’re all warm weather cities.)
In these markets, home values increased a whopping 57% in the last four years, vs. 42% nationally. Meanwhile, rents rose 39% compared to 30% nationally. So both prices and rents rose faster than they did nationally — as did price-to-rent ratio, which rose from 15.1 to 17.0 over this period, an increase of 13%.
In total, then, these markets became noticeably LESS attractive for cash flow investing than they were before the pandemic, due to their huge increases in home values and the disproportionate increase in price-to-rent ratio. Here are the charts for these high flyer markets:
Cash Flow Markets
Finally, let’s examine the old, boring, stodgy cash flow markets, a group that includes Memphis, Birmingham, Kansas City, and Buffalo. What impacts did the pandemic have in these places?
Prices rose 42% to match the national average, while rents rose 33%, a bit more than the 30% figure nationally. This means that price-to-rent ratio grew a bit more slowly in these places than the national average (7% vs. 9%), rising from 14.3 to 15.3.
Note on the data: why would the price-to-rent in these cash flow markets be higher than the national average? I’m not 100% sure, but I think this is due to how Zillow is defining a market when it segments its data. They appear to be including outlying areas/suburbs with higher prices — i.e. Memphis home price average is $230K in the Zillow data, while the median home price is no more that $150K. This could also be a problem with averages (mean vs. median). Regardless, the Zillow data is still “apples to apples”, so it’s useful for comparing markets to each other regardless.
Here are the charts for our cash flow markets:
Summary
Here’s a look at all the market groups together, simplifying the third chart to % rent increase only for the sake of clarity:
What can we learn from this analysis? For me, there are two main takeaways:
Market-level changes are SLOW. This four-year period was unusually volatile due to pandemic impacts on real estate, causing unusually large swings in prices and rents. And yet, the way these markets relate to each other has not changed a ton: the legacy coastal markets are still expensive, though a little less so compared to other markets, and they’re still terrible places for cash flow; the high flyers are still flying a bit higher than before; and the cash flow markets haven’t changed much at all. No markets moved into a different group (or even close). This proves the point I often make with clients: if one market is going to markedly outperform another, that will be on the timescale of decades, not months or years.
Cash flow markets are cash-flowier than ever. Before the pandemic, it was clear that cash flow markets (like those I describe in this article) were the best places to build a rental portfolio if you wanted to generate passive income. After the pandemic, that is even more true than it was before, because the cash flow characteristics of these low-cost markets have diverged somewhat from other markets, which have become even less favorable by comparison.
Portfolio Updates
2024 got off to strong start with my rental portfolio, as detailed in my January Portfolio Report. My cash flow exceeded $10,000 — love to see it! Unfortunately, I know already that February will be significantly worse, in part due to the costs of a turn at Property #13.
But there’s good news: that turn has just been completed, and the house has already been pre-leased with the tenant moving in on March 8th. The new tenant will pay $1,395 per month, $100 more than the previous tenant. I also retained the security deposit due to tenant charges associated with damage and trash left behind. Overall, it was a very successful and efficient turn.
I did something with this turn that I’ve never done before on a house: I painted the outside of the house. Exterior paint is not usually a critical aspect of rentability, and many of my homes have brick exteriors anyway. But in this case, it was warranted. The old paint was a pretty awful mint toothpaste color, and this house is in a somewhat nicer neighborhood where I imagined tenants would care more about curb appeal. So I decided to do it, in the hopes that it would help attract a tenant quickly at the rent we were asking — which is just what happened. I’m happy I made the decision, and it looks great! Check out the before and after (forgive the watermark, but this is the best before image I have):
BEFORE
AFTER
Finally, here is the running tally of my monthly cash flow vs. pro forma expectations:
And now this!
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In Other News…
Real Estate & Business, Domestic News
Labor market shows continued strength. Job growth accelerated with another 353,000 jobs added in January, along with strong year-on-year wage gains of 4.5%. Updated figures show that 3.1 million jobs were added in 2023.
Uber turns an annual profit. For the first time ever, the ride-sharing giant made more money than they spent in a full year. This was driven by strength in their core ride division, as well as in their food delivery service, Uber Eats.
Stock market sizzles. Powered by a strong US economy, growing hopes of a “soft landing”, and AI fever, investors have driven the stock market to new highs in the early weeks of 2024. Nvidia, the maker of AI computer chips, also soared when it reported breathtaking quarterly results: $12B in profit on $22B in revenue. (Those are some healthy margins! Which can’t possibly continue as competition increases in the sector in coming years, btw.)
CHIPS Act spurs domestic manufacturing of computer chips. Speaking of computer chips, one of the Biden administrations signature legislative achievements, the CHIPS Act, is swinging into action: chipmaker GlobalFoundries will build a new factory in upstate New York and expand production in Vermont. There’s more to come: deals with other chipmakers like Intel are expected to be announced in the coming weeks. The law was designed to bring chip manufacturing back inside the US, for both economic and national security reasons.
Trump fined $350M+ and barred from NY businesses. The verdict in the New York civil fraud trial is a blow to Trump’s finances and his ability to lead the NY-based Trump organization. He was found to have fraudulently inflated/deflated the value of his assets in his dealings with lenders, insurance companies, and other partners. He has said he will appeal. This is on top of the $83M he has already been ordered to pay in the E. Jean Carroll defamation civil case.
Trump’s first criminal trial slated to begin March 25th. On the criminal trial front: after his federal trial on charges related to January 6th was delayed while courts deliberate his claim of “absolute immunity”, the judge in his New York State criminal trial surrounding his hush money payments to porn star Stormy Daniels set a March 25th start date.
Supreme Court is skeptical of banning Trump from the ballot. After the Colorado Supreme Court ruled that Trump is ineligible for office due to his participation in an insurrection, the Supreme Court heard arguments in the case. Justices across the ideological spectrum seem poised to rule in Trump’s favor.
International News, Science & Technology
Apple launches the Vision Pro headset. The early reviewers have been blown away by the tech, but the $3,500 price tag may make it a niche product for now. Or not…several reviewers mentioned that once they got used to the experience of headset, their old 2D devices and TVs felt like relics. Sounds to me like another potentially must-have tech product we can get ourselves addicted to! But I still really want to watch a movie on this thing.
US conducts retaliatory strikes in the Middle East. After repeated attacks on US forces in the region since the Israel-Gaza war begun, the US struck back at hundreds of sites controlled by Iran-backed militants. Meanwhile, international pressure increased on Israel to pause the military offensive in Gaza, where civilians continue to suffer from lack of food, medicine, and basic supplies.
Russian opposition leader Alexei Navalny killed in prison. He becomes the most recent in a long line of Vladimir Putin’s enemies and detractors to be executed. His wife has bravely vowed to carry on his work.
Greece legalizes same-sex marriage. The country becomes the 16th of the 27 EU member nations to take the step. Same-sex couples will also now be legally allowed to adopt children. The new law was strongly opposed by the Greek Orthodox Church.
Hungary approves Sweden’s NATO bid. After a long delay, the Hungarian Parliament voted overwhelmingly in favor of Sweden’s membership, clearing the last hurdle for them to become the 32nd member of the military alliance.
We landed on the moon! (Again). NASA contracted with a private company (a first) to build and deploy the Odysseus lander, which successfully touched down on the south side of the moon. Unfortunately, the lander ended up on its side after landing, and won’t be able to complete most of its mission goals. Among other scientific objectives, Odysseus was to scout new areas of the moon in preparation for manned missions planned in the next decade as part of NASA’s Artemis program.
Arts & Culture, Sports, and All the Rest
Solar eclipse to darken skies across the US on April 8th. If you missed the 2017 eclipse, you have another chance: on April 8th, an eclipse’s path of totality will cut across the country from Texas to Maine, and envelop several major metro areas including Austin, Dallas, Little Rock, Indianapolis, Cleveland, and Buffalo. If you’d like to see it, get ready for surge pricing: hotels and airbnbs in the path of totality are taking full advantage of the demand. The next eclipse visible to this many Americans won’t be until 2045.
Taylor Swift makes Grammy history. She was honored again at this year’s awards, earning her fourth Grammy for Album of the Year, a record.
Kansas City Chiefs win second straight Super Bowl. An overtime drive led by quarterback Patrick Mahomes ended in a game-winning touchdown. Sadly, the victory celebration a week later in Kansas city was marred by a deadly mass shooting in which 22 people were shot, and one killed.
Chocolate fever will cost you. If you bought any chocolate for Valentine’s Day, you might have had to dig deeper in your wallet: the price of cocoa is spiking, which may affect the cost of your favorite treats.
The latest TikTok trend is “hurkle-durkling”. The term refers to lounging around in bed after the time when you should be up. If this qualifies as the “latest TikTok trend”, they must be running out of ideas. It’s pretty fun to say, though.
Final Thoughts: Cooperation
As a remote rental property investor, I rely heavily on my on-the-ground partners, especially my property managers. I’ve come to appreciate just how important those relationships are, so I do my best to nurture them. Even when my PMs occasionally get something wrong (which is inevitable), I try to work through the issues in a cooperative manner, assuming positive intent from their side. We’re a team, after all, and our interests are reasonably well-aligned. I also try to be friendly and empathetic, remembering that I’m going to need their help to get the resolution I want. You catch more flies with honey, as they say. In the long run, cooperation pays dividends.
A piece of news captured my attention this month that also illustrates the power of working together. Ransomware attacks — where hackers infiltrate and take control of systems inside a company, organization, or government agency, and then demand a ransom to give back control of those systems — have become increasingly common. So common, in fact, that many victims of these attacks choose to simply pay the ransoms as part of the cost of doing business. Because these hacking gangs can operate anonymously from anywhere in the world, it’s quite difficult to track them down and hold them accountable. Except that this month, an international consortium of law enforcement agencies brought down Lockbit, one of the biggest ransomware gangs in the world, making several arrests and seizing the group’s website and digital infrastructure. This is what the dark-web homepage of Lockbit looks like now:
I count 16 law enforcement groups and 11 countries. Now that’s cooperation! You can’t help but feel a bit of pride that we won this battle against this group of greedy scam artists and chaos agents. Like other problems that cross borders, international cooperation can be a game changer.
Questions about international cooperation are behind numerous other global news stories recently:
Q: How should we respond to stateless rebel groups threatening cargo vessels and disrupting global shipping channels in the Red Sea?
A: A group of allied countries, led by the US, is hitting back hard at them.Q: How long will international allies stand behind Israel’s military response in Gaza?
A: This is unclear, but their support is clearly wearing very thin. (Today’s breaking news about a civilian gun massacre won’t help, though details are still murky about what exactly happened.)Q: What is the right way to deal with the increasing threat posed by Russia on the world stage?
A: Remains to be seen. We have been providing financial (and other) assistance to Ukraine, but additional funding is now stalled in Congress due to GOP objections in the House.
The last question may be the biggest of all. After a brief historical moment in the 1990’s when Russia appeared poised to join the international community, Vladimir Putin has turned AWAY from cooperation in favor of old Soviet-style relations — including, of course, naked territorial ambitions to reclaim land in Ukraine and elsewhere that was part of the old Soviet empire. Russia has turned inward, squashing freedoms at home for its citizens and severing economic ties with the world (partly as a result of western sanctions), while also ruthlessly pursuing its perceived enemies wherever they may be. Alexei Navalny is now dead, surprising nobody, but there’s also Maksim Kuzminov, a Russian military defector who flew a helicopter covertly across the Ukrainian border to surrender, and later spoke out against Putin and the war. He was recently found dead in Spain, his body riddled with bullets. There is no mystery as to who is behind his murder.
Russia has also been active in cyberspace, running large influence campaigns in other countries designed to weaken western democracies, create internal doubt about their elections and institutions, and make them more pliable to his designs. It’s working: even the Republican party, famously hawkish on Russia for decades, now seem to be in Putin’s corner, so much so that Tucker Carlson recently went to Russia to tell us all that it’s not so bad there after all because they have grocery stores! Just don’t look too closely at the political oppression and state-sponsored assassinations.
Then there was the weird “nukes in space” episode this month, in which it came to light that Russia was developing some kind of orbiting nuclear weapon that could take out critical satellites. And the increasing fears that Russia will expand its invasion to a NATO country. And Putin’s repeated nuclear saber-rattling whenever a western country hints at more aid or involvement in helping Ukraine’s war effort. (This happened again just today.)
It’s all pretty scary stuff. How can the international community deal with all this? History tells us that cooperation and a united front against Putin is the way. In 1949, the North American Treaty Organization (NATO) was formed as a defensive military alliance to provide security for the US and Europe from the Soviet Union. The central tenet of NATO is that an attack on one member country is an attack on all. In other words, if you attack a NATO country, you’re promised a retaliatory strike from the combined military might of the United States and 30+ other countries, an unwelcome proposition even for the likes of Putin. (Quick aside: if you want a some fascinating insight into this kind of “tit for tat” approach to international relations, I highly recommend this video on the Veritasium YouTube channel, which examines the famous “prisoner’s dilemma” problem in game theory. His stuff is truly phenomenal, you won’t regret it.)
Anyway, NATO has been extremely successful as a deterrent to attack. The one and only time that Article 5 (the “tit for tat” part of the defensive alliance described above) was invoked was after the September 11th attacks in 2001.
NATO has grown steadily in membership since 1949, and Russia’s invasion of Ukraine prompted other previously neutral countries to jump in: Finland, which shares an 800-mile long land border with Russia, joined the alliance in 2023, and Sweden is set to do the same this year. (Ukraine is also on a path to join NATO in the future.)
This history and context makes it clear that NATO is our best bulwark against an increasingly aggressive and confrontational Russia — a fact that makes Donald Trump’s recent comments about NATO, in which he promised to openly encourage Russia to invade any NATO country that didn’t meet its military spending targets, so profoundly troubling.
If cooperation is required, are we doomed? It might seem so given today’s hyper-charged political environment. And yet, even in our largely dysfunctional Congress, good things have happened recently in which the normal red vs. blue teams came together: notably the bipartisan infrastructure bill, and the CHIPS Act.
And regarding the “nukes in space” episode, there was another tiny silver lining if you looked closely: after initially criticizing the White House for mishandling the threat, Republican congressman Mike Turner and his colleagues affirmed their support for the Biden administration’s approach after a meeting with them. Seems like they agreed that standing together — cooperatively — in the face of the Russian threat was paramount. Let’s hope this also means that the additional funding that Ukraine desperately needs will be approved soon.
Oh, and let’s keep taking the fight to those ransomware thugs, too.
Happy investing,
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
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