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What Does Rent Pay For?

What does rent pay for? After things like taxes, insurance, and the mortgage, what kind of profit remains?

Looking at some of Montana’s rental markets, you might think: landlords must be making hay.

With vacancy dipping to an all-time low of .95% in Missoula, almost every apartment in town is full. That’s similar to the case in places like Bozeman as well. In Missoula, on average, rent went up 5% in 2020. When almost every unit is occupied and rents are going up, what does that mean for property owners? Is this the right time to make your fortune in multifamily housing?

The National Apartment Association broke down $1 of rent and where every last penny goes. Of each dollar, .10 cents covers payroll expenses for the management and maintenance staff who help maintain the property. The NAA estimates this portion of rent funds the 17.5 million jobs in the sector each year. Each year, the cost of living increases – which leads to an increase in this cost for property owners. 

Out of every dollar, .14 cents goes to property taxes. Those property taxes support critical community services accessed by tenants and landlords alike – things like schools and emergency services. (Remember, these numbers come from a national survey – depending on your location, some may shift up or down a few pennies). Depending on your location, property taxes increase on a regular schedule. 

Keeping a property in good repair can be costly. Of each dollar, .16 cents goes to insurance, maintenance, and utilities that aren’t covered by renters. Usually, renters need to secure rental insurance in addition to the facility insurance carried by their landlord. 

And that’s just basic maintenance. What happens if the roof starts leaking? How about a boiler that needs to be replaced? Another .12 cents goes to large capital expenses. The larger the multifamily complex, the faster these costs can go up. For example, a commercial boiler can run up to $50,000. While major capital expenses like this aren’t a regular issue, the ones that do pop up can require an increase in rent from each tenant to cover the repair. 

The largest chunk of each rent check goes to pay the mortgage – that’s .38 cents from each rental dollar. In some ways, this .38 cents is going back to the owners as profit in the form of equity. The landlord benefits from this equity in the long-term, which is usually why people look to own a home instead of renting indefinitely.

What’s left?

About .10 cents of each $1 of rent is profit. If you’re hoping to get rich on multifamily properties, you’ll likely need a good number of units for that ten cents per buck to accumulate. While landlords are working with lower vacancies and increased rates, an unstable economy (like the one we are in now) is bad for all involved. 

Delayed and Absent Rent

When rent payments are delayed or absent, that usually means mortgage payments are similarly delayed. That’s when the clock starts ticking on how long the multifamily complex can be carried by the landlord. 

Once a landlord defaults on their loan, both the landlord and the tenant are at risk. The landlord may lose their investment and the tenant may lose housing – especially worrisome in a market as tight as Missoula. Some experts make the point that delayed or absent rent may lead to delayed or absent payment of property taxes – which translates to less money for public services like schools and firefighters. 

While working with renters to determine a payback plan is strongly encouraged (and seems likely as the incoming administration extends the eviction moratorium through most of 2021), landlords and tenants should explore city, state and federal funding options. These stopgap funds can bridge the delta of un- or underemployment caused by the pandemic.

Get more information on multifamily properties in Missoula with Nick Chaussee.