Jason R. Rubin is an entrepreneur, real estate investor and real estate lawyer based in South Florida. He specializes in handling complex real estate matters and advises investors on strategies that help mitigate risk and maximize returns. In addition, Jason serves as Chief Development Officer for Richr, a real estate PropTech/FinTech startup dedicated to creating a more streamlined, equitable, and all-inclusive real estate buying and selling experience. Mr. Rubin holds a Bachelor’s Degree in Business Administration from The George Washington University and also holds a Juris Doctor Degree from Nova Southeastern University’s School of Law.
Statistically, rental rates in Florida are higher than the national average and, while there were a couple of months throughout 2022 where the average rent fell slightly, the fact remains: renting residential property in Florida is an expensive proposition.
In the last article, we discussed the role interest rates were having on the American economy and how, together, their impacts were affecting the cost of living—and, as a corollary, the affordability of housing. However, this was just one aspect of the housing equation.
In this, the second article in a two-part series looking at impacts of the changing economy on the residential housing market, we consider how and why rising costs are affecting landlords, and what this means for tenants, as a result.
A Quick Synopsis
Getting inflation under control remains one of the Federal Reserve’s number one priorities. The minutes of the meeting in January 2023 recorded the Fed’s focus on controlling the pace of price increases to prevent the economy from overheating. Despite increasing rates by only half a percentage point—down from the three quarters of a point previously—indications are that rates are set to keep on rising, not dropping.
This makes home loans and commercial loans all the more expensive for anyone seeking to obtain finance, as well as for those with three- or five-year adjustable rate mortgages, who will be resetting their loans this year. For those who are owner occupiers, there is little to do other than tighten their belts and curb spending so they can afford to make the repayments. For those who are investors, they too may look to curb spending; however, they have the option to pass on costs to tenants. Yet, doing so may not be as beneficial as it may seem at first, as there are potential ramifications that could come from doing so.
Implications for Tenants
Tenants are rightly concerned about the role the cost of living has on their ability to live in the property of their choice.
But the reality is, inflationary pressures are one part of the equation and rental costs another. It is not as cut and dry as assuming rising interest rates mean landlords are raising rent. The truth is, landlords have been getting creative with how they try to recoup losses and maximize their incomes. In fact, there are numerous articles discussing how many landlords are unbundling costs associated with renting a property.
Unbundling is the practice of breaking out the various costs associated with rental and passing costs onto the tenant. These unbundled costs are then passed on to tenants, often at premiums, with some landlords even pushing the envelope of ethical practices by charging tenants for things that should be included. One such practice that has been scrutinized has been charging prospective tenants for background checks and then charging them for the process of running the background check.
While technically not illegal, our practice frowns on this behavior. If you are unsure whether you are being charged for things you should not be, contact our offices.
Other factors that we foresee potentially impacting tenants and their out of pocket costs include:
- Rising insurance costs
- Increases in the Common Area Maintenance costs
- Increasing electricity prices. In fact, some estimates believe there will be three increases to rates this year.
Implications for the Broader Market
We are now more than twelve months into an interest rate upswing. With the passage of time, more people who have had adjustable rate mortgages will be forced to refinance at rates that could be greater than double what they had locked in before. For investors who operate on low margins, this will be devastating—but, more than this, there could be ramifications for the broader market in general.
Many investors hold property for ongoing short-term stays such as AirBnB. As mortgage repayments increase, owners will want to recoup their costs, and may seek to do this by increasing overnight rates.
However, doing so is likely to be detrimental for numerous reasons.
- As people reduce their discretionary spending, they will seek accommodation that is cheaper.
- This may push people back to hotels, hurting the short-stay rental market.
- As vacancy increases, more mortgage holders may default on their payments. This will lead to an increase in distress sales and influx of property to the market, potentially at lower prices.
However, there is an interesting juxtaposition that exists. Investors with long term fixed rates, or even those with no loans, will be in a position to be more competitive than those aforementioned investors with adjustable rates. This latter group may have the option to maintain their overnight rates and competitive edge over hotels with little impact on their bottom line.
Ultimately, no one knows what the market is going to do. However, we can make projections based on historical data, knowledge of the market and ongoing trends. Unfortunately, the economic environment within the United States is likely to undergo ongoing monetary policy adjustment that will make it more expensive and tough for all.
Notwithstanding these market circumstances, we are of the opinion that opportunities exist for savvy buyers and sellers. As Real Estate Lawyers we encourage you to contact us to discuss how we can help you make sound real estate decisions in this changing economic landscape.