How Much Rent Growth Can a Market Handle?
The biggest thing that can compensate for the rise in interest rates is rent growth. Last month, we discussed how much NOI growth was needed to yield the same 5 Yr IRR target return. This month, we’re going to figure out how much rent growth is possible in a market before your units become unaffordable for the people in the market. We were able to get this info from Site to Do Business, ESRI, and ALN Apartment Data. Here’s the data that we used for this study:
Current market gross rents which include rent plus utilities. This is the metric that HUD uses to determine affordability.
Current area median income
Projected income growth rate over the next 5 years
Most of the markets that we work in have plenty of room for rent growth! There are 19 secondary and tertiary markets in West/Central TX that have over 10% annual rent growth potential over the next 5 years.
Here’s an example for Lubbock.This is showing us that based on the current Area Median Income and the projected income growth rate, we can grow our current rents by 11.49% per year for the next 5 years before we will hit the 30% affordability threshold.There’s currently a $474 rent gap in current gross rents v. what the market could achieve if people paid 30% of their income on housing.
Check out our website where you can see this data for several of the markets that we’re in: Where Rents and Wages Collide
Since most of these markets can support higher rent growth, you can still achieve your target returns with today’s interest rates.
Call us when we can help you with your multifamily investments. We provide market valuations, asset management analysis, and brokerage services. We would love the opportunity to earn your business and go to work with you!