I had yet another problem with one of my condo rental units and it got me thinking about the long term viability of rental properties for small operators. I’ve written several posts now about the Pareto distribution and how 80% of the wealth (or properties) end up in the hands of the top 20% of owners and it’s entirely possible that’s what the future holds for property rentals.
Sky Rocketing Costs
There are three components to my thesis but they all center around costs and the only way to manage these costs is to be able to scale via volume to make it economically feasible to run rentals.
Capital Costs
Let’s face a simple reality, home values have remained elevated and it makes me wonder if this is the new permanent normal where the average home now costs $350k+ and lower interest rates won’t help as it simply bids up demand when mortgage rates fall down enough. I like to follow a variant of the 1% rule so if you’re buying a property for $350k then you need to be able to rent it out for $3500/month for it to be feasible. I don’t think the current earnings matrix makes this feasible over the long term – Strike 1.
Insurance Costs
With hurricane Milton about to wipe out a chunk of Florida, it’s only a matter of time when we all feel those higher insurance premiums but the disaster problem isn’t limited to Florida. Wild fires in California, Colorado, and Texas, tornadoes in the midwest states, hurricanes in the gulf coast all add to the toll. Many insurance companies are leaving high risk states and those left behind are jacking up premiums to astronomical levels. I wrote a post here about the sleeping giant in real estate.
Maintenance Costs
I have a firm belief that we have too many skilled people retiring, according to the Census, all the baby boomers born from 1945 to 1964 will be retiring by 2030 and there won’t be enough trades people left to do the maintenance on properties unless you have large contracts with firms. Again, this is something that only someone that owns many properties can maintain over the long term. If you were a plumber or electrician would you prioritize someone with a couple of property rentals or someone that owns 100?
Alternative Options
Being an investor means being forward looking into what the investment ecosystem is going to be not what it is now. I like having rental properties but I am also considering alternative options some of which include REITs, syndication, and other things I’ll keep to myself for now but the team across all of them is “scalability” to be able to leverage economies of scale.
Share The Wealth
What do you think? Will the property rental market become radically expensive to maintain? How have your costs changed? Let me know in the comments below.
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