As the cost of housing in many American cities continues to skyrocket, San Diego is no different. Rents have risen dramatically, and so have home prices. In some cities and markets, steep increases have come as quite a shock. In San Diego, we’re talking about a region where rental values were already high.
This puts you in a pretty strong position if you invest in rental properties. People will always need a place to live and in a market where buying a home is more and more challenging, rental homes will be in high demand.
While it mostly feels like business-as-usual in San Diego, there are some changes to the market that rising rental rates have influenced. As local property management experts, we’ve been tracking those shifts and anticipating the new trends. Today, we’re taking a look at the effects of rising rental rates on the housing market as a whole, and explore the most promising investment strategies in the current landscape.
Higher Demand for Affordable Housing
California has some pretty strict rent control laws in place. Many local cities and communities already had rent stabilization ordinances on the books, but The Tenant Protection Act of 2019 made rent control a statewide initiative. This does not cover all properties; if you’re renting out a single-family home and you’re not a corporation, you aren’t bound by the rent control laws. If your multi-family building is fewer than 15 years old, you’re exempt for now (the law will apply to you once you’ve reached that magic 15th year of possessing your Certificate of Occupancy).
The affordable housing crisis is worsening, and as rental rates escalate, low-income residents are feeling like they’re priced out of the market altogether, even with housing vouchers and even with the government assistance that was provided during and after the worst of the pandemic.
The rising rental rates has created a greater demand for affordable housing solutions, such as subsidized housing or co-living arrangements. If you’re looking for a way to diversify your portfolio, smart investors are taking advantage of the need for affordable housing by exploring investments in these types of properties, or by partnering with housing organizations to develop such solutions themselves.
Renting vs. Buying: Where Do People Land?
You might think that the higher rental rates are sending people to the sales market. Why not buy, when rents are so high?
Well, there are a couple of reasons not to buy.
First, the housing prices in the sales market have risen dramatically, too. It’s not just rents that have gone up. Home values have, too, and buying a property isn’t as easy as many would-be homeowners think. There’s still a lot of competition, and getting a mortgage isn’t the cakewalk it once was.
Second, mortgages are more expensive. Thanks to interest rates that are at record highs, borrowing money is not cheap. A lot of people are feeling priced out of homeownership because of the costs that would come with simply getting a loan.
So, the rising rental rates are not driving residents out of rental properties the way you might imagine. The resident pool is still pretty strong, and you have an opportunity to earn more on your investment by keeping good residents in place and raising the rent every time the lease renews. You don’t want to raise it too much; you should still give them a good reason to stay with you. However, the market does allow you to implement higher rents from year to year. You should take the opportunity to do it.
Keeping Your Investment Property Competitive in an Expensive Market
Luxury rentals are becoming more popular, which may come as a surprise when rents already feel too high for a lot of residents. However, those who can afford the high rents want a lot of value and a lot of extras for the money they pay. High-end rental properties are becoming an increasingly desirable option, and the residents looking for these homes will prioritize amenities such as fitness centers, rooftop decks, and other perks over actual square footage. Real estate investors who are looking to capitalize on this trend may consider investing in high-end apartment buildings or partnering with developers to build such properties from the ground up.
Another property type that’s growing in popularity amidst the higher rental values is the short-term rental home. Remote workers are flooding the rental market, and not all of them want to sign a 12-month lease. You may find visitors wanting to rent a home for three months or even one month. They’re looking for furnished homes that include utilities, maintenance, and amenities. Make sure you understand the local laws pertaining to short-term rentals if you decide to invest this way. San Diego has municipal code requirements that must be followed.
Whether you’re providing a luxury rental, a short-term Airbnb property, or a long-term residential rental home, make sure that prospective residents are going to be willing to pay the higher rental value that you’ve attached to the property. To do this, you’ll need to make frequent updates and improvements. Renovations will help, especially when we’re talking about floors, kitchen appliances, and outdoor landscaping and curb appeal.
Keep your home attractive and modern, and you can continue keeping up with the rising rental rates. Residents will want to rent your home.
While there might be a bit more turnover and a few more vacancies due to the rising rental rates that we’re seeing, the impact in our market has not been arresting. That doesn’t mean you should ignore the way the market is shifting. While there are certainly challenges to investing in rental homes right now, there are also significant opportunities for investors who are willing to adapt and pivot their strategies as needed.
Awareness of current market trends is critical in order to make informed investment decisions, so be sure to stay up-to-date on the latest news and insights. We can help with that. Contact us at PURE Property Management, and we’ll help you appeal to residents in a pricey market like ours.