Rent Growth Solves All Problems

Story Time

When I purchased my first deal, two duplexes in Wayzata, I found myself spending countless hours handling repairs, making updates, landscaping, and even cutting up and hauling away 10+ massive trees. On paper, the properties were generating income, but only because I wasn't accounting for all the free labor I was putting in each weekend.

A turning point came when two tenants gave notice to move out. After researching the local market, I discovered my 2 units were underpriced by about $300 each. Once I had successfully re-rented the apartments at market rates, I suddenly found myself with an additional $7,200 in annual income.

With this new income, I found myself hiring professionals for maintenance and repairs, versus taking the DIY approach. The property no longer relied on my free labor, and as a result I got my weekends back. The experience taught me an important principle: Rent growth solves all problems.

The Holy Grail of Real Estate Investing

Rent growth is often described as the "holy grail" of real estate investing. As rents rise, the property's revenue and Net Operating Income increase, while the mortgage payment remains constant. This widens the gap between income and debt service, directly increasing cash flow and enhancing the property's financial performance. It not only boosts the property's value but also helps overcome unforeseen costs or operating challenges.

Recently, some expense categories have far exceeded typical annual increases. For example, insurance costs for multifamily properties in most markets have increased by 20-30% annually. A property with strong rent growth can withstand and outpace these rising operating costs, thereby preserving profitability. Similarly, strong rent growth mitigates the impact of unforeseen expenses such as repairing water damage from ice dams or replacing a prematurely failed boiler.

Rent growth also creates a powerful virtuous cycle. The extra cash flow enables revenue-producing upgrades like kitchen renovations, bathroom updates, and improved landscaping. These, in turn, justify additional rent increases and attract higher-quality tenants who tend to stay longer and care for the property better.

Is The Ship Floating or Sinking?

A real estate investment without rent growth can be likened to a ship with a leaking hull. It may float today, but given enough time, it will end up at the bottom of the harbor.

What does a sinking ship in real estate look like? It’s a property where rental income fails to cover operating expenses, plus adding to the property’s reserve account each year. For a typical 50-unit apartment building, this equates to $15,000 per year ($300/unit) earmarked for future replacements like roofs, windows, boilers, and other critical systems.

Stagnant rents lead to a gradual but persistent erosion of financial stability, much like water seeping into a ship’s hull.

In Summary

Rent growth solves all problems. It serves as the foundation of thriving investments, fueling a self-reinforcing cycle where rising income supports professional maintenance, funds ongoing upgrades, and covers capital expenditures as they emerge. For investors, focusing on properties with healthy rent growth potential is essential to achieving sustained long term profitability.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.