- The Washington Times - Thursday, March 24, 2005

Demand for apartment rentals jumped in the last quarter, giving real estate investors in various markets some hope that the rental market may be softening.

The National Association of Home Builders (NAHB) released its multifamily market index (MMI) last week. Among other things, it shows that there are no signs of the hot condo market cooling off.

“The improving job market is driving a rebound in apartment rentals,” David Wilson, NAHB president and a builder from Ketchum, Idaho, said in a statement posted at the group’s Web site (www.nahb.org). “At the same time, attractive interest rates and strong price appreciation rates continue to spur condo sales.”

“These numbers indicate that a healthier multifamily housing market is emerging, one in which demand more clearly aligns with supply,” NAHB chief economist David Seiders said. “The positive outlook for the economy in general, and for job growth in particular, means that the news for multifamily housing should continue to be good.”

The MMI is based on a quarterly nationwide survey of multifamily-housing builders and property owners, who are asked a series of questions about current market conditions as well as their expectations for the next six months, the NAHB says.

Survey answers are assigned numerical values to calculate two indexes, one tracking demand and the other tracking supply. The scale is from 1 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses.

The 2004 fourth-quarter report continued the yearlong upward trend.

Like all other factors in real estate, rentals are based on supply and demand. The tracking of available apartments for rent fell 13.2 points from 69.6 in the fourth quarter of 2003 to 56.4 in 2004’s fourth quarter.

At the same time, the MMI tracked call volumes from prospective renters as on the rise, from 45.9 to 50 on the 100-point scale.

The average vacancy rate for rental apartments is 7.8 percent, down from 8.5 percent in the previous quarter.

In a booming sales market, real estate investors can come out empty-handed. Home sales will rise because of a burgeoning job market, low interest rates and a low supply of homes to sell. For rentals, it can work the same way, but it can backfire even when the economy is good.

In the Washington area, for instance, in the late 1990s, rents were climbing at a fast clip — 25 percent in some markets. I teamed up with several friends to move a single parent and her children from an apartment that had just priced her out.

She liked the location, but the rent was moving up from $1,200 to $1,450 on the anniversary date of her lease. She found a subsidized town house for $1,250.

Now that particular multifamily development is singing the blues, dropping its rates, offering signing bonuses and farming heavily for renters. It became so expensive that renters started buying — it was cheaper to have a mortgage than to rent. The rental market, on the whole, outpriced itself.

It’s tempting to keep moving rents up, and you would think it makes sense to do so, but think of the long-term effect.

Most small investors own one or two rental units and can get eaten alive by dropping rates if they don’t keep an ear to the ground. Most investors have a mortgage on their property.

Even if they’re making a couple of hundred dollars of cash flow per month, a year’s worth of cash flow can get eaten up with just one month of vacancy.

Real estate investing can provide astounding return on investment. Just don’t get greedy.

You want to charge the amount of rent your local market will bear, but you don’t want your house sitting empty for even one month just because you wouldn’t drop your rent.

An investor in my neighborhood did just that. He was listing it for $2,300 per month (the going rent) but didn’t watch the local market. Other mistakes he made included not fixing several issues inside the house and not painting the exterior when it was obvious to any passer-by that it needed it. The house sat for nearly three months.

If his payment was $1,600 per month, he just had to make more than $4,800 in payments without any support from renters’ income. That’s $4,800 he will not be able to make up for a long time.

The property eventually rented for $1,700. His stubbornness for holding to his desired rent cost him thousands of dollars.

As an investor, listen to the market — both rental and sales. Keep your property in shape, and respond accordingly.

M. Anthony Carr has covered real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Post questions to his Web log (https://commonsenserealestate.blogspot.com).

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