Theo dives deep into the top cities with the highest growth in rent. Everything being equal, a higher rent growth should mean higher payouts to your investors over time. Of course there are multiple factors to take into account, as Theo explains by giving an example of how some towns will have high growth rent but the other important factors are missing so it would not be a good fit to invest in. The states with the most cities listed are Texas, Nevada, and Phoenix.
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“You always want to be conservative in your annual income growth assumption, if its 5%,10%, 4%, 3%, whatever it is you want to assume it’s going to grow less than the previous historical rate” -Theo Hicks
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Theo Hicks: Hi, Best Ever listeners, and welcome to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week, we do two Syndication School episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes and series, we offer free documents. These are free PDF how-to guides, PowerPoint presentation templates, Excel template calculators, things like that, that will accompany the episodes and help you on your syndication journey. All of the past syndication school series and past free documents are available for you at syndicationschool.com.
In this episode, I’m going to try something new and we are going to talk about the state of the apartment multifamily market in terms of rent. So we’re going to talk about the cities with the largest rent growth in 2019.
Obviously, the rents are going to be important for multifamily investors and apartment syndicators as well as for your passive investors, because the rents are the income side of the equation, and all things being equal, the higher the rent, the more cash flow you can distribute to your investors, as well as the higher the value of your property. So it’s an indication of the demand of apartments in a market, if the rents are continuing to increase.
An increase in these rents, in a sense, can be directly correlated to an increase in demand for rental property. So when you’re selecting a market to invest in or analyzing the current market that you’re in, you’re going to want to see an increase in rent. In particular, what’s going to be more important is that not only is it increasing, but it is increasing at a rate that is greater than the national average and greater than inflation, really. So just because it’s going up by 0.1% each year, doesn’t necessarily mean it’s a good market. Now, even if it’s going up by 0.7% each year, it does not automatically means a good market, but it means that that market should warrant further investigation.
This is going to be data for January 2019 to January 2020, so very timely information… My plan is to do further conversations like this on other important supply and demand, and multifamily metrics, and then continue to do them on an ongoing basis as the data is updated. So I’ll do this again in 6 months, or in 12 months with the new data.
So for that timeframe of, again, January 2019 to January 2020, the national average change in rent was 1.6%. Now comparing this to the same time period in 2008, it also increased by 1.6%, so pretty flat… However, in 2017 it increased by 2.6%. So on the surface, this seems to indicate that the rent growth is continuing (based off of last year’s numbers) to be sluggish on a national scale compared to previous years. Because I think in 2016 it was also around 1.6%, then the years previously it was greater than that. So it looks like in 2016 it was also 1.6%, but in 2015 it was greater than 3%.
So on the surface, it seems like, okay, well, it looks like rents are slowing down. However, because it is an average, there’s going to be markets that are performing way worse than the national average, but there’s also going to be markets that are performing a lot better than the national average. So you as a an apartment syndicator need to not take this as something that says, “Okay, well, I probably shouldn’t invest,” but instead take it as a positive and say, “Okay, well, where can I go that is experiencing rent growths that are greater than this national average?”
So overall, and this is just again for 2019, out of the 720 U.S. cities that the data was collected for – and this is coming from Apartment List Rentonomics – of those 720 cities, 217 experienced rent growth of 2% or more. So again, greater than that 1.6%. 96 had a rental growth of 3% or more; 36 had a rental growth of 4% or more, and 12 had a rental growth of 5% or more, and these are going to be the cities of all sizes. I think they put a limit on them. I don’t think we’re talking about cities with four people in them, because you know, not a big enough sample size.
The city that actually had the greatest rental growth is the city of Madison, Alabama, which I’ve personally never heard of before, but it’s got a population of 50,000 people, and it increased by 6.9%, so significantly five times greater than the national average. Now, you’re probably not going to go invest in Madison, Alabama, because it might not meet the other important metrics for a target market, which you can learn about those by going to joefairless.com, or you could probably just google “Joe Fairless target market” and there’s some blog posts, as well as past Syndication School episodes that have talked about how to analyze a market and all the important metrics.
But I wanted today to focus on some of the large U.S. cities that experienced the most rental growth from, again, 2019 January to 2020 January. So we’re going to talk about medium one-bedroom rents, medium two-bedroom rents, and then that year over year change. So nationally, the medium one-bedroom rents were $952 and then medium two-bedroom rents were $1,193. Again, that year-on-year change was +1.6%.
Coming in number ten is going to be Arlington, Texas, with a medium one-bedroom rent of $1,016 and medium two-bedroom rent of $1,262. So both greater than the national averages, plus a year-on-year change of 2.6%, so 1% greater than the national average. What’s interesting here is that being large cities the rents are going to be higher than the national average. So not only you’re benefiting from the rental growth, but you’re also benefiting from the higher rents.
Coming in at number nine is another town in Texas, more specifically Dallas-Fort Worth area, and that is Plano, Texas. Medium one-bedroom rents are $1,186; two-bedroom, $1,474; year-over-year change is 2.8%. Joe, in his business, invests in both of these markets, so it looks like they are on the right track and those markets are continuing to do well and be strong investment markets.
Next, we’re moving into number eight, and we’re going across the country – at least from where I’m from – to California. So Stockton, California is coming at number eight. The medium one-bedroom rent is $994; two-bedroom, $1304. So a pretty big gap between those two compared to the gap between the national averages for one and two beds. That’s something else that’s interesting, that it seems like two beds make more sense in this market than the one-bedrooms do… Unless these one-bedrooms are obviously very small, and you had to know what the square footage was to be exact, but I’m assuming that they’re probably proportionate… And the year-over-year change is 2.8%.
Moving in number seven, we’re getting to the cities that have a year-on-year rental growth greater than 3%, to Las Vegas, Nevada, which has been a very strong market for rental growth for quite some time. I think the last time I did an analysis of this was 2017, and Las Vegas was in the top five, for sure. One-bedroom rent, $963; two-bedroom, $1,193, which is very close to the national average. So $1,193 is the national average, and then $963 is $1 greater than the national average. So right on point with the national average in terms of rents. However, the year-over-year change is two times greater than the national average, at 3.2%.
Number six, we’re going back to Texas, to Austin, Texas, where the one-bedroom is $1,191; two-bedroom, $1,470; year-over-year at 3.3%.
Five, we’re moving a little bit to the North-East, to Nashville, Tennessee. One-bedroom at $947, a little bit less than the national average; two-bedroom, $1,163. Also, slightly below the national average. However, the year-over-year rental growth was 3.3%.
Coming in at number four is Colorado Springs, Colorado, which is also another strong market. It has been a strong market over the past few years. Medium rent for one-bedroom is at $986; two-bedroom, $1,272; year-over-year change is also 3.3%.
Now, the last three are going to be all in the West – two are in the same state,; they’re basically right next to each other. We’ve got three, Phoenix, Arizona. One-bedroom rent, $883; two-bedroom, $1,101. So both below the average. However, year-over-year change is 3.7%. The top two are the only major cities that break the 4%, and number one actually breaks 5%.
Number two is going to be Henderson Nevada. One-bedroom rent, $1,127; two-bedroom, $1,397. Both greater than the national average, and of course the year-over-year rental growth is also greater than the national average, at 4.2%.
Then coming in at number one is Mesa, Arizona. One-bedroom, $915; two-bedroom, $1,140. Again, both below the national average. However, the year-over-your increase is 5.1%.
So going back to those top 10 cities, we’ve got three cities in Texas, we’ve got two in Nevada, two in Phoenix, and then randomly, one in Colorado, one in Tennessee, and one in California. But lots of West Coast cities, and then obviously Texas is the most dominant in the top three, and two of those are actually in Dallas-Fort Worth. So two locations are close to each other. In fact, Mesa and Phoenix are actually very close to each other as well, and Henderson and Las Vegas are also very close. So kind of just two big cities by each other, but Texas seems to be very dominant on this list. Then obviously, Arizona is twice in the top three.
So if you want to get more information on the rental growth, you want to go to apartmentlist.com, check out their National Rent Data Rentanomic section. They update this data every month, so you can get the year-on-year rental growth from whatever the current month is to the previous month. They’ve got data up to the month after. So they add the January data, and by the end of January [unintelligible [00:13:18].05] February. So the next update will probably be late February, early March. We’ll also include data on some of the previous years as well, comparing some of the big cities with a lot of rental growth, to the five year average to the previous 12-month period.
It’s nice to have a little data table that you can look at that has every city that they analyze and get the medium one-bedroom and two-bedroom rents. You get the month-over-month rent change, as well as the year-over-year rent change. Then they also have rental reports on some of the biggest cities. So Denver, Atlanta, Charlotte, Chicago, Colorado Springs, San Francisco, things like that.
So I hope you enjoyed this breakdown. I plan on doing more in the future, and if you have a recommendation on a certain metric you want me to analyze, let me know at firstname.lastname@example.org. I’m opening up the email inbox, so feel free to reach out for a specific metric – vacancy, occupancy, cap rates, anything specific you want me to go over. And if not, I’ll choose, and hopefully it is going to be helpful for you and your syndication business… And it should be.
Now one last note before we sign off is – let’s say you decide to say, “Well, Mesa, Arizona sounds amazing. 5% rental growth?” [unintelligible [00:14:31].24] analyze and say it’s been 3% plus over the past five years, so you decide, “I’m going to move my investment business there/ I want to start my investment business there.” Then you start looking at deals, you start underwriting and you get to the point where you make your rental growth assumption, your annual income growth assumptions. And you say, “Oh, well, the past five years it has been increasing by 5%, so let’s go ahead and assume it’s going to continue to increase by 5%, and then I sneakily buy a deal for more than what other people can because I’ve got stronger projections.” You don’t want to do that, because you cannot predict that it’s going to continue to grow by 5% each year, which is why you always want to be conservative in your annual income growth assumption. So if it’s 5%, if it’s 10%, if it’s 4%, if it’s 3% – whatever it is, you want to assume it’s going to grow at less than the previous historical rate.
For our deals, we do 2% to 3%, depending on the market. So if we’re looking at Mesa, we’d probably be closer to 3%. If we’re looking at a place like Stockton, California, we’re looking at closer to 2%. So you do not want to assume that it’s going to continue to grow at that same rate, when you’re underwriting. Now, in your mind you can say “Well, I think it’s going to continue to grow by 5%.” So if it does grow at 5%, and you’re only assuming 2% – well, you are just getting extra meat on the bone for yourself.
So that’s gonna be my parting note when talking about these rents – you don’t want to assume that the income is going to grow at the year-over-year change, the month-over-month change, the five-year change, the ten-year change; you want to be conservative in that assumption.
That concludes this Best Ever market report. To listen to other syndication school series in the meantime until we come back next week, and to learn about the how-to’s of apartment syndication, you can go to syndicationschool.com. Also, again, those are where our free documents are located. Thank you for listening. Have a good day and I will talk to you soon.