The Basics – Why do We Buy Rentals?
In most basic terms I think we can all agree that the basic premise behind rentals is fixed income. We buy rentals because we want to replace earned income or at least supplement it. It is only fair to say everyone tends to focus on income as the defining driver of value in rentals.
Why Do Rental Rates Grow?
The answer is twofold:
· Because of what they are and where they are, your rentals remain desirable to the marketplace, and as price inflation drives up costs on many other things, your rents also go up.
· Because the demographic trends and population trends in your market/submarket are conducive to rent growth.
How Does Investment Property Equity Change?
The value of income producing assets improves as function of income. If the marketplace and the asset possess aspects of desirability which facilitate rent growth, the property will more than likely appreciate over time. If people want to live in that property so much that they are willing to pay more rent over a year, then property investors would want to continue wanting to own the property.
Economic Losses and Rental Properties
The lower your rents get relative to the marketplace, the less quality tenants you will be able to attract. People with credit and money will pay more rent to be in a better location and in a better property. The issue with less qualified tenants is that they are less financially stable, which in the end results in much higher economic losses.
What Happens to my Rental’s Equity in this Situation?
You’ve brought a property which looked good today, but since it never appreciated you cannot count on the backend equity to offset the ever increasing losses to your cash flow.
Equity and Cash Flow simply cannot be decoupled in your decision making process and it is impossible to say which is more important in the long run.