Guest-host Leonard Baron, a real estate professor at San Diego State University and principal of LPB Services, a real estate consulting firm, tackles your real estate questions today as part of Savvy & Sage: Buying and Selling in 2009.
During the recent rent survey, the rent decreased for the first time in a long time. I want to know, if this is the beginning of a new downward trend in the rental market. Is the rent decrease caused by the first time home buyers are jumping into the market to buy their homes due to the incentives offered and low mortgage rate?
Hi, and herein I am just saying, let’s look at the bigger picture. I am assuming you are a potential investor wondering how rents will impact returns.
I believe I saw an article that rents dropped 1.6 percent in San Diego. That means they dropped $21 per month on an average $1,344 rent.
OK, my thinking is on the glass-is-half-full page and I see that many moderately priced rental houses and condominiums have dropped 50 percent or more in value, usually $100,000 or more. So on a $100,000 (was $200,000) condo my mortgage plus taxes dropped from $1,117 to $559 — or $558 savings per month.
Hmm, the rent I collect dropped $21 per month but mortgage/taxes/cost of ownership I pay dropped $558 per month. Net additional cash flow to me from this property since I am buying it in 2009 is $537 per month.
Hmm, wow, I don’t really care about 1.6 percent drop. It makes almost no difference in my investment returns — the super-low prices on properties are incredible! I can pencil out investment returns of 6, 7, 8 percent based on today’s prices … and that is incredible! Now if rents dropped 15 percent, that would be a bigger issue. But vacancy in most areas of San Diego is 5 percent or less, so large drops in rent are probably unlikely. A few areas have high vacancy, so watch out for those.
Anyhow, vacancy is generally very low in San Diego. Typically when units are empty, landlords offer rent reductions to fill them – but we do not have that many that are empty. So while they may ease a little, it is unlikely drops will be significant. There are lots of reasons rents could decrease including what this reader noted.
I suggest keep rental properties in good shape and try to keep tenants in place – losing one month of rent (8.3 percent of year) during a lease turnover will do a lot more financial harm to you than a 1.6 percent drop in average rent.
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