Analyzing Rent Growth in Multifamily Markets: Striking the Balance
As interest rates rise, investors are keen to understand how rental income can offset these changes. In our previous discussion, we explored the necessary Net Operating Income (NOI) growth to achieve a target 5-Year Internal Rate of Return (IRR). Now, let's delve into the vital question of how much rent growth a market can sustain before rental units become unaffordable for the local population.
Our research draws insights from Site to Do Business, ESRI, and ALN Apartment Data, utilizing essential data points:
Current market gross rents, including rent and utilities, a metric that HUD employs to assess affordability.
Current area median income.
Projected income growth rates over the next five years.
The good news is that many of the markets we operate in offer considerable room for rent growth. In fact, there are 19 secondary and tertiary markets in West/Central Texas where annual rent growth potential exceeds 10% over the next five years.
Let's take Lubbock as an example. Our analysis reveals that, based on the current Area Median Income and projected income growth rates, it's possible to achieve an 11.49% annual rent growth for the next five years before reaching the 30% affordability threshold. This means there's currently a $474 rent gap between current gross rents and what the market could sustain if residents paid 30% of their income on housing.
For a more comprehensive view of this data across multiple markets we serve, visit our website: Where Rents and Wages Collide
With the potential for higher rent growth in most of these markets, you can still attain your target returns even in today's interest rate environment.
Feel free to reach out when you're ready to discuss your multifamily investments. We offer services such as market valuations, asset management analysis, and brokerage support. We're eager to earn your business and collaborate with you to achieve your investment goals.