The real estate market never stays the same. Every quarter, things are changing. One time rents are going up, and other times the rents are trending down.
Right now, we're seeing something that's making a lot of investors nervous: rents in most markets are projected to be flat or mildly down.
After years of steady rent growth, many investors built their business models around consistent increases. Now they're asking tough questions about how to keep buying and scaling properties when the fundamentals have changed. In this article, I’ll show you how we’re rethinking the way we approach deal analysis in flat or declining rent markets.
What Do You Do When Rent Growth Disappears in a Market?
The asking rents you could’ve gotten a couple of years ago aren’t so readily available right now. In many cases, we're seeing negative lease tradeouts happen. That means when a tenant moves out and you try to re-lease that unit, you're actually getting less rent than the previous tenant was paying.
Public people say, “Oh, this is bad. Interest rates going up is bad. Rents not going up is bad. And how do we deal with that?”
The question becomes critical: in an environment where we're trying to buy and scale, how do we do it? Do we just wait for the market to improve or do we do something else?
This problem goes deeper than just lower rents. There's still an oversupply issue that hopefully should clear up in the next year. We're still in the middle of that oversupply. Deliveries are high, and they're still coming in.
Investors who don't adapt their approach are either going to overpay for properties or sit on the sidelines indefinitely. Neither option helps you build wealth or scale your portfolio.
How to Adapt Your Strategy When Markets Shift
The key is understanding that you're constantly adjusting your underwriting. You can't keep using the same assumptions from two years ago. Here's how to handle the current market conditions:
First, adjust your rent projections realistically.
Let's say, for example, your rent is $1,400 on a current unit. That tenant moves out, but you can only get $1,350 now. If you have a $100 rent bump from renovations, you have to price that now at $1,450. So, $1,350 plus the $100. Instead of going $1,400 plus $100, you're going back $50 and up $100. It's a little bit of a different dynamic, but that's what has to go into the underwriting now.
Second, focus more on renewals.
We're talking about it in the podcast on renewals because that's where you can maintain your income. When markets are flat, keeping good tenants becomes even more valuable than trying to push rents on turnover.
Third, use reliable data sources.
You have to look at CoStar data to really understand where they're projecting rents to go, so you can have that organic rent growth kick back in after a year. Don't just hope things will get better – base your projections on solid market research.
Fourth, factor in forced appreciation correctly.
You're forecasting whatever the forced appreciation rent bumps are. Let’s say you renovate a unit. Ideally, those renovations should allow you to ask for higher rents for that unit. But right now, you might have to start at a lower baseline. Even though your improvements still add value, you still need to be realistic about your starting point.
Better Deals Are Available
Here's the good news: you're typically able to get a price reduction on whatever you're purchasing as long as the market understands that going into whatever you're purchasing. Sellers are starting to recognize the new reality, which means better acquisition opportunities for investors who underwrite conservatively.
It's very difficult or impossible to try to time the market. The market is never perfect. If we try to time the market, no one would be buying anything, right? Instead, you adapt your underwriting and your tactics so that they fit the current market.
This creates opportunities for disciplined investors. When others are backing away from deals, you can step in with realistic projections and secure properties at better prices. The key is making sure your conservative assumptions still support profitable deals.
Moving Forward in Today's Market
The current market isn't perfect, but that doesn't mean you should stop investing. There's still a lot of demand for renters. The fundamentals of real estate investing haven't changed – people still need places to live. What has changed is how we need to analyze and approach deals.
You just have to make sure you're covering that in your underwriting. And if you are, it's a good time again to get into something as long as it supports your underwriting. Conservative assumptions aren't pessimistic – they're realistic. And realistic projections lead to sustainable growth.
Don't let market uncertainty keep you on the sidelines. Instead, use this time to refine your skills, build relationships, and position yourself for the opportunities that always exist for prepared investors.
Ready to learn more about navigating today's challenging market conditions?
Watch the full video below to see exactly how successful investors are adapting their strategies and continuing to scale even when rents are flat.
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