Rent growth forecasts can be great tool when selecting a target investment market or underwriting a potential deal. However, if you are a Best Ever Listener, you’ve heard me strongly encourage you to take these rental growth projections with a grain of salt.
Rather than assuming your rental rates will organically grow at the forecasted rate (or even the historical rate), I recommend conservatively underwriting a 2% to 3% annual income growth factor. In doing so, if the forecasted rent growth rates are indeed a reality, that’s extra money in your and your investors’ pocket. If the forecasted rent growth rates do not come to fruition, you’ll still hit your return projections.
Yardi Matrix just released their Summer 2019 US Multifamily Outlook report (which you can download here). One of the factors they track is the year-over-year actual rent growth compared to their 2019 projections.
The national forecasted percent rent growth for 2019 was 2.6%, but we’ve actually experienced a growth of 3% so far (hence, the 2% to 3% annual income growth assumption).
Here are the 9 metros with the highest rent growth so far in 2019:
Setting the conservative 2% to 3% annual income growth assumption for investments in any of these 9 metros would result in extra money in your and your investors’ pockets. While all top 9 metros experienced an actual rent growth that was greater than the forecasted rent growth, that wasn’t the case for all metros. For example, Miami only experienced a 0.9% rent growth whereas 4.1% was forecasted.
Imagine what would have happen if you invested in Miami and rather than projecting a conservative 2% rent growth, you projected 4.1%. Instead of only being slightly behind on returns, you would be in a significant hole.
That is the power of conservative underwriting.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.