Effects of inflation and market forces on rental housing

Effects of inflation and market forces on rental housing

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The last eighteen months have transformed many aspects of our lives. From higher prices at the gasoline pump to the cost of groceries, we see increases in many of the things we need and use from day to day. The housing market has not been immune to those same forces. As a result, landlords are beginning to feel the impact of increased costs, reduced availability of labor, and higher property values.

Leases typically have a fixed term and rent amount, locking the landlord and tenant into a static cost and return for the duration of the contract.  As those leases are renegotiated and renewed, the landlord’s operating costs play a role in establishing rent levels. Below are some key areas where rental property has been affected by inflation and other market forces.

Home prices have increased due to a very active sales market.  While this sounds like a great thing for those who own rental property, taxes and insurance costs are driven by the value of the home – so landlords pay more for those expenses than they did a few years ago.

Many “accidental landlords” who chose to rent their property out of necessity rather than desire have decided to cash out in a “seller’s market.”  The result is reduced supply of single family, townhome, and condominium rentals, while demand has remained relatively constant. Scarcity of affordable rentals also affects the ability of renters to qualify and stretches already thin budgets for housing, since lower supply drives rent prices higher.

Holdover tenancies are higher than normal. A tight rental housing supply means that some tenants who intend to move may discover there is nowhere for them to go. When a tenant fails to vacate the property at the end of their lease, they become “holdover” tenants under the law. Removing these tenants involves a legal process and the time and costs associated with it. To complicate matters more, if the property has been re-rented and the new tenants cannot endure the delay in taking possession, the landlord may lose the replacement tenants as well.

Many small businesses, including the types of maintenance vendors typically used by landlords and property managers, suffered with inability to find work during the pandemic.   Going in and out of homes was discouraged or prohibited and routine maintenance needs were deferred. Many small vendors closed or lost enough employees that it negatively affected their ability to perform work as quickly as before. Maintenance now takes longer to accomplish, and vendors have raised their labor rates across the board.

Material costs have risen in some cases as much as 50%. Lumber, plumbing supplies, roofing materials, and so on have all increased. Even if a vendor has held the line on labor costs, it cannot control the cost of materials which must be passed along to the landlord customer.

Eviction moratoria impacted landlord and tenant attorneys, who had no cases.  The complexity of landlord and tenant law compels most management firms to employ the services of attorneys who specialize in that area, but when no cases can be filed those attorneys don’t work.  As a result, costs to pursue a non-paying tenant or one who breaches the lease in some other way have increased significantly.

Parts and equipment are slow to acquire. Many repair parts are made outside of the U.S., so failure of a component part can mean a lengthy delay getting a replacement. Availability and selection of new appliances is limited and costs for those have increased as well. For landlords who have an urgent need such as a repair that is required by law to be expedited, this can create real headaches getting prompt service in order to comply with the law.

Turnover costs have increased. Many of the issues above come into play when there is a change of tenants, including labor and material costs to prepare the rental unit for new occupants. Finding common ground and attempting to keep reliable tenants in place makes sense now more than ever.  Providing prompt service and being responsive to tenant concerns is the best strategy to ensure quality tenants renew their lease.

While many of these factors show signs of stabilizing, the challenges they present will be with us for some time to come. Having an expert property manager in your corner to advise you and employ their resources with vendors and attorneys is a good business decision. If you own rental property or are considering investing in one or more income properties, contact TREG to discover why so many landlords feel we are the RIGHT CHOICE as your partner in property management.

 

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