The conversation this year is still dominated by inflation, and what it means and what is to come. Although it is impossible to predict the future, we have breadcrumbs along the way that to follow. Let’s start first with the number one rule: never lose money. As mentioned earlier, we ‘lost’ out on two deals this month. Maybe we underwrote too conservatively by keeping our proforma rents too low? Yet one metric we always keep in mind is the rent to income ratio. The common rule of thumb is that this ratio should average 30% of income towards rent.
When underwriting deals, a lot of brokers and agents come up with their own proformas. Do your homework and find your own numbers. One of many factors why the Salt Lake market continues to show promise is the rent to income ratio (RTI) average is 23%. This ratio is calculated using an average rent of $1,550 per month and an $81,000 annual salary. This metric not only helps when underwriting deals, and when considering what market to invest in next.
Perhaps nowadays the 30% rent to income ratio is especially important as the CPI (consumer price index) continues to increase YOY. When necessities begin to increase, households start making decisions on what things to buy/not buy. Typically, rent ‘eats first’ as people need shelter, rather than relocating their families. To what end though? Unfortunately, the next crisis on the horizon is affordable housing.
The rent to income ratio needs to be 30% or less to avoid being rent burdened.
A simple solution would be to build cheaper dwellings. However, developers are more heavily involved in Class A apartments as Class B and C projects do not currently ‘pencil’. The land is the same price regardless of the type of building placed there. This helps explain why rents across the board are increasing. Although not everywhere in the US is facing the burden of higher rents, the level of income being spent on shelter continues to rise across all housing types. This rent burden directly ties to the migration of people causing shifts in the housing market. As this demand shift comes, it will be important to stay relevant and become a part of it.
