Hot rental market = hot market for apartment buildings

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The LA Times had an interesting article a few days ago about the state of the LA rental market. Here’s the money quote:

“Few new units and tight standards for home loans add to the pressure. The average monthly US rent is at an all-time high, and a 10% jump in Los Angeles County over the next two years is forecast.”

As we know from our discussions about valuing apartment buildings, rents are directly correlated with values, all other things being equal. So a 10% increase in rents should, all things being equal, result in a 10% increase in building values.

To put that in perspective, let’s look at an example:

  • Buy an apartment building for $1M, with $250k down and $750k mortgage
  • Rents increase by 10%, so¬†building value increases by 10%
  • Building now worth $1.1M
  • Loan is still $750k, so there is now $350k worth of equity
  • Your $250k just turned into $350k

Now, the above is not rocket-science, which is why the market for apartment buildings is so hot right now. So, if you’ve got buildings, hold on to them and look to push the rents. And if you don’t, now might be a good time to get one!

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