Inflation and Its Impact on Rents and Tenants

award-73085_1280-PDIt’s no secret that the Federal Reserve is making money.  Most of our products sold in the US, except rents, are imported.  Inflation will likely start to take effect.  What happens to your tenants, and your profitability, is in your control.

Rental expenses are going up too.  Property taxes, utilities, repairs, insurance, etc. are mostly affected to the upside too.  In order to continue to have the same profit and Return on Investment (ROI), you have to increase rents, or lower expenses.

When consumer goods prices go up, wages may or may not go up.  Rents are a function of wages.  That is, if people are making more money, they can pay more in rent.  The Federal government recommends that a family spend no more than 30% of their household income on housing.  If consumer prices go up, and wages do not, your renters are left with less disposable income.  If your renter is paying more than 30% of their income in rent, your renter is financially stressed.   Take away more of their formally disposable income to pay for groceries, gas, clothes, etc., and they have less for rent.

When a renter is already paying more than they can afford, you cannot raise your rent without changing renters.  Your renter will eventually default.  You will be required to evict, negotiate a rent forgiveness, use part of your deposit (if you have a large one), play the IOU game, or other card tricks to get your rent.  You are only kicking the can down the road.

If you were getting renters with an income exceeding 3.5x the rent in the first place, your renter can absorb the higher prices and not dramatically affect your ability to collect rent.  If the renter is making less than three times the rent, you will start to notice your renter start to suffer in their ability to pay the full amount of the rent, and to pay it on time.

Changing renters will be an expense that you are eventually forced to do; tenant turnover is your number one avoidable expense as a landlord.  Get a good renter with income that can afford it in the first place, and you will not be stuck with this losing scenario.  Keeping good tenants year after year is the way to win the profitability game, not getting the first tenant that applies to your unit or being able to get the highest rent.

Are we in for inflation? Or Deflation? What is your thought of where we are headed?

4 Replies to “Inflation and Its Impact on Rents and Tenants”

  1. Good food for thought. My plan is to raise rents 3% annually (adjusted for when we have renewals/new tenants) to account for inflation. But you make a good point about not trying to do this in a vacuum. Wages need to rise along with inflation or else there will be some sort of consequence.

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