I was on the phone the other day with one of my clients.
Let’s call him “Steve”.
Steve told me that he was really concerned about where expenses trending.
Not only that, compared to rents, the market was definitely changing.
What we were talking about was like a frog that starts out in a pan of cold water over a flame.
The frog doesn’t notice that the water is gradually getting warmer and warmer.
Eventually, the frog is boiled.
This is a cautionary article. It’s a warning that you need to pay attention.
Make no mistake: Oklahoma City rental property cash flow is declining.
In a nutshell, expenses are increasing, but the income is not keeping pace.
Below I’ve written about this trend. In addition, I’ve included five tips for savvy investors that came as a result of this conversation.
Oklahoma city rental property cash flow consists of two components, expenses and rents.
I’ll start with expenses.
Property Insurance is Skyrocketing
First of all, property insurance is going through the roof.
I’d estimate that my landlord policies have easily doubled in the last five years.
According to www.homeinsurance.com, Oklahoma had the highest average home insurance rate of $1,535 per year. Hazard insurance rates have gone up dramatically in the last 10 years due to the number of storm-related insurance claims. The Oklahoma City metro area has experienced many years of damaging hail storms.
In addition, there have been many devastating tornadoes in the metro area. As a result, insurance rates have skyrocketed. Many insurance carriers have exited the market completely due the scale of the losses.
Don’t get me wrong, my typical landlord policy for a single-family home with a $50,000 value is $600 to $750 per year. Still affordable, but double what they cost 5 years ago.
Property Taxes have gone up, and continue to go up…
According to figures from my rental portfolio, property taxes average 1.5% of the value of the property.
Property taxes have gone up consistently, year in and year out. At the same time, those property taxes just keep going up as property values continue to rise.
Rents are NOT keeping pace
On the other hand, most rents have leveled out.
As I have pointed out in other posts, rents are dropping for properties in the $1,000+ per month price range. Click here to read an article about why properties in the $1,000+ per month range are struggling right now.
For lower priced properties, the rents aren’t dropping, but they aren’t rising, either. For properties that are in the $500 to $900 per month price range, rents are strong which reflects the continued strong demand for these properties.
Oklahoma City Rental Property Cash Flow is Declining. Here are five ways real estate investors can protect themselves.
The bottom line is that oklahoma city rental property cash flow is, overall, declining.
It seems obvious to my client Steve and I.
Based upon this trend, my recommendations are:
#1 Stay invested in properties in the lower price range.
There is strong demand for properties that rent for the $500 to $900 price range.
Why is that? It really comes down to what the average Oklahoma City resident can afford. The people in this demographic are not going anywhere. They are not moving away from Oklahoma City.
Contrast that to people in oil-related jobs. They are the high wage earners. More of them are moving away than moving into the area.
In addition, builders are not building new units in the lower price range. If anything, the demand seems to be growing.
#2 Two- and Three-bedroom units are in particularly high demand.
When I originally penned this article in April 2017, demand for one- and two-bedroom units was high.
I wrote that “…the demand will continue to be high”.
I was wrong.
As of August 2018, there is now a glut of one-bedroom apartments.
You now need to show skill to keep these leased.
One approach is rent them Section 8 all bills paid.
I believe it’s due to all the construction of new apartment buildings, and the renovation of previously vacant units that is contributing to this trend.
But when I look at my response statistics, response for these units is all on the low side.
Right now, the 2- and 3-bedroom single-family homes and duplexes have by far the greatest amount of demand.
These types of properties are always the easiest for us to keep rented.
So is it time to dump all your one-bedroom units? No, I didn’t say that. Real estate always runs in supply and demand cycles.
Just be patient. The trend will turn around at some point.
#3 It’s a good idea to price shop on property insurance.
It’s true that many carriers have left the Oklahoma market.
Sometimes a company will jack up the rates.
The only defense is going with another carrier.
There are sometimes dramatic differences from one carrier to another. The quality of the coverage can also widely vary. Get all the details.
#4 Consider Replacing your $1,000+ per month price range properties.
There are pluses and minuses for owning properties in the higher price range ($1,000+ per month).
On the one hand, when you go to sell these properties, you usually have plenty of potential buyers.
In addition, property values go up more in the higher price range than lower price-ranged properties.
But right now, these higher-priced properties are selling for relatively high prices. They have retained their value.
But the rents have suffered.
As a result, you should consider selling properties in the higher price range if you are struggling with cash flow. Think one- and two-bedroom units.
#5 Stick to a Disciplined Approach.
The name of the game is protecting and enhancing your oklahoma city rental property cash flow.
From my start as a real estate investor in 1996, I’ve used a simple rule of thumb to guide my purchase criteria. It’s called the 2% rule. The rule dictates that the monthly rent should not exceed 2% of the entire investment for the property. For example, if the property rents for $600 per month, the total investment should be no more than $30,000.
The purpose of the 2% rule is to make sure the oklahoma city rental property cash flow is adequate to service debt. If the cash flow is too low, I’ll have a hard time making a 10-year amortization work out.
Many real estate investors are satisfied with a 1% return. Investors can do better.
I’m not suggesting that the 2% rule should be your rule of thumb. You have to find out what works for you.
However, the 2% rule has kept me out of trouble as a real estate investor. I don’t buy as many properties as other real estate investors because those types of deals are prized, and not the normal offering on the MLS. Deals like these are in demand because so many people have gotten the message that real estate investing so profitable. And, the Oklahoma City rental market is very good.
Adopt a disciplined approach to your investing. Find your own rule-of thumb and stick to it. Don’t make the mistake of paying too much money for a property that you will later regret. Be patient.