In urban areas around the country, people are struggling to afford housing. The cost of purchasing a new house is so high that it’s unreasonable for many workers to even consider it as an option. At the same time, monthly rent is increasing at an unprecedented rate, making it harder and harder for people to save up money for a down payment on a home of their own.
In some ways, we are already in the middle of a housing affordability crisis. So, what can you do as a landlord to mitigate this and still keep your operation profitable?
Causes of the Housing Affordability Crisis
Let’s start by exploring some of the main causes of the housing affordability crisis.
How did we get here?
Some critics suggest that housing affordability is merely a byproduct of greedy landlords, but this is far from the case. Instead, these are the primary factors leading to higher housing costs:
- Low interest rates. For the past couple of years, the Federal Reserve has attempted to gradually increase interest rates to reasonable levels. But before that, rates were ridiculously low (bordering on zero). Lower interest rates increase the money supply, which motivates people to make more investments, thus stimulating economic activity. But higher demand and higher money supply levels lead to much higher prices in the housing market.
- Investment firms. Major investment firms have taken a recent liking to investment properties, buying up as many as they could when interest rates were at historically low levels. As a result, available real estate inventory has decreased, prices have increased further, and properties are more likely to be under the control of investors, rather than individual homeowners.
- Restrictions on land usage. In some areas, this crisis is spurred by restrictions on land usage. Developers may be unable to use certain sections of land to develop residential housing. With no new housing options, the prices of existing housing options increase.
- Lower levels of construction. Similarly, housing construction has slowed down in recent years. With fewer new homes available for purchase, buyers are forced to buy existing homes, thus increasing demand further.
- Lagging wage increases. Economic inflation is burdening the entire economy; prices are rising across the board, but wages remain relatively stable. Higher rent prices wouldn’t be as unpalatable if people were making more money, but wage increases are lagging behind other economic indicators.
- Rent controls. Rent controls complicate the problem. While these types of economic policies are usually well-intentioned, they ultimately have a counterproductive effect. When property investors and developers have less incentive to invest, supply is artificially limited, and the housing affordability crisis gets worse.
- Demographic changes. Some demographic trends, like retiring baby boomers, a wave of new millennial buyers, and rising immigration rates, also influence higher property and rent prices.
Your Role as a Landlord and Real Estate Investor
Why should you care about this? After all, if rent prices are increasing, don’t landlords stand to strictly benefit?
Like with most financial considerations, this is a complicated equation. Higher rent can be a good thing, but it can also decrease renter demand, increase potential vacancies, and reduce tenant retention rates. Also, higher housing costs mean it’s typically harder to invest in new properties.
As a landlord and real estate investor, you’ll have three main goals in this process:
- Continue making a profit. You need to make sure you can still turn a profit; otherwise, there’s no reason for you to take this financial risk and continue doing the work as a landlord. Accordingly, making a profit is going to remain a top priority.
- Increase appeal to renters. Assuming you can accomplish this priority, your next goal should be increasing appeal to renters. It’s important for you to avoid vacancies, fill those vacancies quickly, and keep your tenants happy so they stick around.
- Expand your portfolio in a worthwhile way. You may also take this as an opportunity to expand your real estate portfolio. Strategic purchases can allow you to acquire new properties for reasonable prices and set high rent prices that help you accumulate more wealth.
What You Can Do to Address the Housing Affordability Crisis
Now let’s take a look at the actionable strategies that real estate investors can pursue to address the housing affordability crisis while still accomplishing your main priorities.
- Choose investment areas wisely. Think carefully before purchasing a new property. Some areas are suffering from the housing affordability crisis much more than others; for example, major cities in California have much more housing affordability problems than rural areas of Ohio. Lower housing prices aren’t always a good indication that an area is worth investing in, but absurdly high housing prices mean you should probably stay away.
- Look for building opportunities. One of the root causes of the housing affordability crisis is a lack of inventory; you can fight back against this by building new properties in areas with reasonable levels of demand. This may be tricky, as you may be forced to deal with restrictive regulations or minimally available plots, but if you can thread this needle, it could be very profitable for you.
- Offer incentives to reliable tenants. Tenant retention is increasingly important in this environment, to offer incentives to your most reliable tenants. Show them thanks and appreciation, provide them with little bonuses, continue upgrading the property whenever it makes sense to do so, and try to keep rent reasonable.
- Increase rent strategically. There are situations where landlords are practically forced to increase rent. For example, if you face higher property taxes, higher insurance rates, and higher expenses in other categories, you’ll be forced to increase rent to remain profitable. However, it’s not always a good idea to try and exploit a situation that justifies a rent increase; if you increase rent by too much or increase rent too quickly, you could end up with a vacancy that’s much harder to fill.
- Allow roommates. As a simple measure, you can allow your tenants to have roommates. This way, they’ll be more likely to afford higher rent. Avoid making it extra difficult for your tenants to pay for living expenses.
- Introduce opportunities to reduce rent. You may also reach out to your tenants with opportunities to reduce monthly rent. As a simple example, You may have your tenants do odd jobs around your properties in exchange for a lower monthly rent.
Are you searching for strategies that allow you to remain profitable while still allowing tenants to find an affordable place to stay? Are you struggling to keep up with the demands of being a landlord? Green Residential can help. Contact us for a free property management consultation today!