November RIA Roundup: The Great Rent Run-Up
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: The Great Rent Run-Up
Portfolio Updates
In Other News…
Final Thoughts: The Next Big Thing! (!!!)
Lead Story: The Great Rent Run-Up
Recent data suggests that inflation may have peaked, and is on its way down. (Called it!) As prices stabilize in the coming months, we are likely turn our collective attention to more pressing matters, and the year when all we could talk about was inflation will fade to memory.
But one of the lasting markers of this inflationary period will be higher rent prices, which in the last two years have surged even more quickly than the overall inflation rate. And while other consumer prices may actually fall as we move forward (certain categories, such as used cars and apparel, are already seeing sustained price declines), rents are unlikely to fall. Why not? Because historically, they almost never do.
Let’s take a look at rent increases over the last few years in a broader historical context, and discuss what’s most likely to come next.
How Much Have Rents Increased?
If you’re either a landlord or a renter, you already know that rents have been rising rapidly. As it turns out, I am BOTH a landlord and a renter, and I’ve seen it through both lenses. As I’ve shared in my regular monthly portfolio updates, I’ve been able to increase rents significantly in the last ~18 months — sometimes by as much as 20-30% — when I turned properties and placed new tenants, because market rents had risen so much while the previous leases were in place. And as a renter, I was on the receiving end of the same phenomenon when my landlord asked for a 30% increase on my renewal last year! I negotiated her down to less than 20%, but she was correct that market rates had risen dramatically as the pandemic eased and rental demand in New York City resurged.
But rather than understanding this by anecdote, let’s look at the overall data. Since 2015, Zillow has kept detailed data on rent prices, both for individual markets and for the country as a whole. Here is their national rent index measurement going back to the beginning of their public data set:
Note that this measurement is smoothed (to avoid statistical noise month to month) and also seasonally adjusted (to avoid the annual up-and-down cycle of rents, which increase a bit in the spring and summer, and ease in the fall and winter.)
It’s visually obvious that the increase over the last few years wasn’t typical. Rents were steadily increasing ~3-4% per year since 2015. When the pandemic first hit in the spring of 2020, they flattened out — but in 2021 they shot up 16%, and they’ve risen another 8% through November of 2022. That’s a 25% increase in less than 2 years, which is pretty nuts.
Zooming out further is a bit tough, because this level of data granularity is not available for much of the historical record. Still, all the efforts I’ve found from analysts who have attempted to reconstruct this history (such as this one, which relies on US Census and Consumer Price Index data) tell the same story: rents tend to slowly increase alongside overall inflation, and large sustained drops in average rents are essentially absent from the record.
So is the 25% increase in rents over the past two years unprecedented? We don’t have enough data to say for sure, but it may be — and at a minimum, it is extremely unusual. We can also confidently say that steep or sustained drops in rent are also extremely unusual.
What Will Happen To Rents Now?
After such a steep run-up in rents, shouldn’t we expect them to fall? In brief, probably not — because, again, rents tend not to fall. Rent prices are also likely to be propped up by low vacancy rates, itself a function of the overall housing shortage the country has suffered since the Great Recession:
Still, we are starting to see signs that rent increases are slowing, a trend that should continue, particularly if overall inflation continues to cool. While I try to refrain from crystal ball prognostications, I think it’s most likely that we will see a return to some sort of pre-pandemic normalcy in the rental market, with stable or slowly-increasing prices.
But that is not to say that all markets have experienced these recent rent increases the same way, nor that they will exit them the same way. I’ll go out on a limb and make another prediction: I think the high-flying markets of the last several years are more vulnerable to rent decreases than steady, cash flow markets. (This same pattern may also hold true for home prices, according to some analysts.)
Let’s see if Zillow’s data supports this hypothesis. Here is the same graph of the Zillow Observed Rent Index, but this time broken down to a sample of major markets. I’ve included four of those “recently high-flying markets” (Phoenix, Tampa, Austin, and Nashville), and five steadier cash flow markets (Buffalo, Birmingham, St. Louis, Indianapolis, and Cleveland):
While both sets of markets were clearly subject to the same macro-economic forces, the “high flyers” responded much more steeply to those forces, which suggests they run a greater risk of a correction. Meanwhile in the cash flow markets, rents increased as well, but more slowly and steadily, making a retrenchment less likely.
Also, in just the last few months, a change of momentum is apparent if you look closely: rents in those high-flying markets have flattened out completely, and in a few cases (Phoenix and Tampa) are outright dropping. But in the cash flow markets, the trajectory is still pointing slightly upward, with no reversal apparent (so far).
It will be interesting to see how these inter-market trends develop as we move into 2023. Will these high-flying markets come back down to earth while lower cost markets keep chugging along? I think this is likely, but only time will tell.
Portfolio Updates
I recently published my October Portfolio Report. That month, I tacked on another $6K+ in net cash flow for the year, with full occupancy and 100% collections — though a costly roof repair and property taxes on my un-mortgaged properties meant that I fell short of my pro forma cash flow target:
Meanwhile, it’s been an especially busy period in my portfolio for new acquisitions. As I mentioned in last month’s Roundup, I sold my final NYC condo, with plans to do a 1031-exchange into several new cash flow properties in Memphis. As of the date of writing, I have now closed on all four of the new properties that I purchased as part of the 1031-exchange! The first of those properties (Property #20) is detailed in this Property Spotlight, which includes photos, financials, and the full story behind this house. It’s already rented, and the tenant moved in a few days ago!
In the coming weeks and months, I will publish Spotlights for the remaining 1031-exchange properties (Properties #21, #22, and #23), as well as two other properties I’ve purchased outside the exchange (Properties #24 and #25). Lots of new houses to finish off the year!
I’ll also eventually write an article about the 1031 exchange in total, so that you can see how it works, and how much it saved me in taxes.
In Other News…
High mortgage rates have discouraged first-time homebuyers, who now make up the smallest percentage of buyers on record.
In the world of short-term rentals, there is some fear of the “AirBNBust”, with demand softening while an ever-larger number of investors get into the game. Not everyone is convinced there’s a problem, though.
There are now more than 8 billion humans on planet Earth, with one billion added in just the last 12 years. Demographers expect the human population to peak at 10-11 billion mid-century, and then begin to fall.
In the mid-term elections, Republicans retook the House of Representatives, but Democrats over-performed expectations and kept control of the Senate. Inflation, abortion, and election-denialism seemed to loom largest in voters’ minds as they went to the polls. Business leaders generally like a divided government because less gets done — so they’re no doubt privately cheering a the results.
Congress has moved to intervene in a rail labor dispute in order to avoid a strike. Congress has this right thanks to a law passed in 1926 — and they have exercised this power to intervene in the rail industry nearly 20 times since then. The basic justification here is that keeping the trains moving is a vital national interest…which is pretty hard to argue with, no matter how strongly you support organized labor.
The right to same-sex and interracial marriage has been enshrined in federal law. In 1990, about 30% of Americans supported same-sex marriage; today, 70% do, marking one of the fastest shifts ever recorded in public opinion on a hot-button social issue. The vote was solidly bipartisan in both the House and Senate.
Thanksgiving travel this year returned to pre-pandemic levels. Gobble gobble!
Final Thoughts: The Next Big Thing! (!!!)
It has been a very bad month for “the next big thing” in investing, whether you thought that was crypto, meme stocks, NFTs, or anything Elon Musk touches.
Let’s start with so-called “meme stocks” like GameStop and AMC, whose prices were artificially inflated during the pandemic by rag-tag bands of Reddit-ers in order to expose the crookedness of inequality of financial markets. (And in order to — shocker! — enrich themselves.) The more we learn about this recent phenomenon, the less it seems like a David vs. Goliath story, and the more it seems like just another pump-and-dump scheme. This was loosely orchestrated by a small number of leaders in those Reddit groups who — shocked again! — got super rich in the process on the backs of ordinary retail investors who bought the David vs. Goliath pitch. An excellent recent Netflix documentary exposes the underbelly of this story, and nobody comes out looking like a hero — not the hedge funds or short sellers, not the Reddit-ers, not Robinhood (the popular trading app that facilitated many of these trades), not the SEC. Meanwhile, the Justice Department has taken notice — turns out manipulating the stock market is still illegal! They recently filed a federal class-action lawsuit against “meme stock king” Ryan Cohen, and former Bed Bath & Beyond CFO Gustavo Arnal, who decided to leap off his 18th-floor balcony rather than face the legal consequences of his actions. So in every way possible, the sheen has very much come off meme stocks — both as some sort of virtuous, “stick-it-to-the-man” act of defiance, or as a viable way to invest money.
Next up: if you thought NFTs were the next big thing…time to think again. NFTs, or “non-fungible tokens”, are essentially unique digital widgets managed on blockchain technology. What’s the point of that, you might ask? Well, in one use case, it would allow someone to “own” a digital asset (such as, say, a piece of digital art or a digital photograph) in the same way that someone owns a piece of physical art. Except it’s not really the same at all, since anyone could still see an image of that digital art on their respective screens — which is, after all, the only way any digital art CAN be viewed, even if you “own” the NFT. But the owner of the NFT could prove “ownership” of that digital art, and could therefore sell it to someone else via a blockchain transaction. The most famous example of this is “Bored Apes”, which are a collection of 10,000 digital images of apes, procedurally generated by code, each unique because of their expression, the color of their hat, their facial hair, etc. The most expensive Bored Ape ever purchased was for this handsome guy, who can be described this way:
“The most expensive BAYC NFT is Bored Ape #8817, which sold for the towering sum of $3.4 million. While it isn’t the rarest NFT in the collection (it’s listed as the 17th rarest at Rarity Tools), its desirability comes from its combination of rare traits. Bored Ape #8817 sports gold fur against an orange background, with a comical spinner hat on its head and a blue and white party horn hanging out of its mouth.”
Rrrrright. (Note, btw, how easy it is to view and re-use this image — and it didn’t even cost me $3.4 million!)
Feeling some Bored Ape FOMO? Not to worry: you can still buy Bored Apes on this exchange. They’re selling for ~$80,000.
There are other NFT use cases as well: sometimes the NFT is associated with a real-world object, enabling things like “buying and selling the physical object without ever having possession of the physical object”, or “fractional ownership of a physical object”, such as a real-world collectible. There are also truly asburd examples like the New Zealand auction house who sold a set of historic glass plate photographs along with an NFT, and then told the buyer to smash the originals. (“No worries, you still have the NFT!” Huh?)
To a person who has a brain and isn’t afraid to use it, none of this ever made much sense, and no amount of breathless techno-babble could obscure that fact. And it turns out this may be one of the fastest boom-bust cycles in the history of stupid fads: since its peak in January 2022, NFT trading volume is down more than 97%. (Not a typo.) So…yeah, NFTs are — shocked again! — emphatically NOT the next big thing.
And then there’s crypto, the king of all “next big things”. If we had believed the initial hype of the crypto-bros — which they’ve been feeding us for well more than a decade — none of us would need banks or dollars anymore, and we’d all be blissfully using Bitcoin to buy deodorant at Walgreens. Strange that banks and dollars are still, you know, everywhere. I wonder what went wrong?
Amazingly, the overall outline of this story is pretty much the same as NFTs and meme stocks: an interesting market problem or technology adaptation is hijacked by grifters who hype it as the next big thing, dupe credulous media and equally credulous investors, drive up the price, get rich, and leave retail investors holding the bag. Far from being the next big thing, this is a tale as old as time. Which reminds me: can I interest you in some wildly overpriced tulip bulbs?
The implosion of the crypto market in the last few weeks has been breathtaking, if not exactly surprising. After all, cryptocurrency is perhaps history’s greatest example of a solution in search of a problem. As much as I’ve read about crypto — and I have read a LOT, I am not a crypto newbie — it just never made sense. Finance is more seamless than it has ever been, our dollars work just fine, and they never randomly go missing from banks in enormous quantities (something that happens to crypto with alarming frequency). The fact is that after 13 years, Bitcoin (and all other crypto-currencies) completely fail to do the two things that currency ought to do: first, remain relatively stable in value; and second, be broadly accepted at places where you want to buy things.
Thus, it has been painfully obviously for many years that crypto is nothing but a speculative bubble, fueled by a group of obnoxious young assholes — sorry, “innovators” — in order to enrich themselves at our expense. If you think that’s harsh, let’s briefly review what we’ve learned in the last few weeks about Sam Bankman-Fried (usually known by his initials, SBF), who as recently as a few months ago was arguably the most powerful man in crypto, and had been hailed by some commentators as the next Warren Buffet:
His company, FTX, which until very recently was valued at over $30B, went bankrupt with astonishing speed when investors lost confidence, attempted to make large withdrawals, and discovered that FTX did not actually have their assets. Billions of dollars of customer funds were wiped out.
Sequoia Capital, a large investor in FTX, claimed at one time that FTX could overtake banking giants like Wells Fargo or Bank of America, which the VC firm used to justify its $32 billion valuation of the exchange. After the bankruptcy, Sequoia was forced to write their $214 million investment in FTX down to zero. Oops.
Tom Brady and Gisele Bundchen, also FTX investors and spokespeople, filed a class-action lawsuit against SBF for his mishandling of investor funds.
Speaking of mishandling of funds: after coming in and examining the financial wreckage, bankruptcy lawyers for FTX say that they’ve never seen anything like it:
SBF ran the company as his “personal fiefdom”, routinely using company funds (in other words, investor’s deposits) for his own personal use, including over $300M in real estate in the Bahamas for himself, his parents, and FTX senior staff;
Shortly after the bankruptcy, over $500M was transferred out of the company — SBF says it was due to a hack, but the lawyers have voiced concerns that SBF is working with Bahamanian authorities to shift assets out of the company (I’m no lawyer, but pretty sure you’re not allowed to do that after you declare bankruptcy);
In total there are apparently more than $1B in assets that are “missing”;
We also learned that he used $10B in FTX funds to prop up his separate trading business, Alameda Research;
All of which is ESPECIALLY galling from a guy who basically told us he was trying to become a billionaire so he could do the most good for the world. (Throwing-up emoji.)
Then — and this is definitely the best part — he had a long and surprisingly candid text message exchange with a Vox journalist. (You HAVE to read this, it will absolutely blow your mind.) In the course of the conversation, he willingly gives up the game, showing that he was never anything more than a con artist. Some choice selections:
His public advocacy for regulation in the crypto market was “just PR. Fuck regulators. They don’t protect customers at all.” I guess he think we should trust him with that responsibility, even after criminally misappropriating his own customer’s funds.
He also admitted that all his talk of ethics and doing the right thing in business was just a game as well, designed to craft the best public image
He said his biggest mistake was filing for bankruptcy, and that he could have raised funds and fixed it. (Declaring bankruptcy was a bigger mistake in his mind, apparently, than using his customer’s money to buy himself a fancy home in the Bahamas. Which is…curious.)
When challenged on previous statements that FTX never invests customer deposits, he said “it was factually accurate” — a claim that rests on the technicality that FTX didn’t invest the deposits directly, but instead lent them to his other company Alameda Research, who then invested them. When the reporter points out that this is a distinction without a difference, he said “life creeps up on you”. This guy is SO easy to hate.
So this 30-year-old king of crypto is now fully revealed to be a liar, a thief, a charlatan, an incompetent CEO and manager, and a total douchebag. Sounds about right.
The fallout of the FTX bankruptcy is just beginning, and could end up dealing a mortal blow to crypto markets. Just the other day another crypto company, BlockFi, declared bankruptcy as well, and may have as much as $10B in debt obligations. They stressed to the bankruptcy court that they are “the antithesis of FTX”. Sure you are.
The fallout may continue — and as usual, retail investors will be left holding the bag. Because what’s left after a speculative bubble bursts, with nothing undergirding it but a functionally useless “currency”? Not much. As for me, I’m going to keep my money in good old American dollars, and in regular old banks, thank you very much.
Not unlike SBF, another business “hero” has recently been giving us a candid glimpse of their true character: Elon Musk. His tenure as Twitter CEO has been so comically inept that one wonders if he’s TRYING to drive the company into the ground. The twists and turns of this story are remarkable, and require more time and space than I have in this issue — but perhaps I’ll queue up this story for next month. It’s a real doozy.
As we take stock of these various stories, the take-home message is this: perhaps we should all re-evaluate how we think about these “geniuses” who are so eager to sell us the “next big thing” — because it seems that a lot of the time, they’re just pulling the wool over our eyes so they can pick our pockets. On a related note, Elizabeth Holmes is going to jail for more than 11 years as punishment for the massive fraud she ran at Theranos. (SBF’s fate may not be too different, in the end — he’s currently under investigation by the SEC and the DOJ.)
And yet, at the same time the crypto market was imploding, “boring investing” was having a headline moment of its own: there was a mad rush for i-bonds, an interest-bearing asset backed by the federal government. Because the interest rate for this bond is adjusted regularly for inflation, it was being offered at 9.62% interest until the end of October, at which point the rate (for newly-purchased bonds) would be adjusted down. In the last few days those 9.62% bonds were available, the demand for them was so large that the traffic crashed the government website where individuals can buy them. You can still buy i-bonds, though — the interest rate is still pretty good at 6.89%, and you can learn more about i-bonds here.
In light of the spectacular collapses of crypto, NFTs, and meme stocks, maybe boring investing will become sexy again. For what it’s worth, my boring, steady, old-fashioned, definitely-not-the-next-big-thing style of rental property investing is chugging along quite nicely. I’ll publish my 2022 Annual Portfolio Report in a few months, and — spoiler alert! — I did a lot better than crypto.
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.
Free Rental Property Analyzer
You probably know that a well-designed rental property calculator is the most important tool a real estate investor has. It allows you to quickly calculate key metrics and understand your cash returns on a target property. You can also answer questions like:
How much do your cash-on-cash returns improve if you use a mortgage vs. paying in cash?
What will your average monthly cash flow be?
How will your returns change in future years?
Those questions can be easily answered with side-by-side comparisons in the RIA Property Analyzer. I guarantee this is the best free rental property calculator out there today, and many of my readers have told me the same. It’s both powerful and very simple and intuitive to use. Check it out!
