Landlord-tenant relationships are filled with myths and misconceptions. In this article, we’ll address the myth that landlords don’t rely heavily on consistent rent payments to stay afloat.
Based on the latest data from the National Apartment Association (NAA), this article breaks down how each dollar of rent is distributed. These are only national averages, and individual cases may differ. Throughout this breakdown, we’ll demonstrate how technology can help you get the most out of each dollar.
1. Owners: 7 cents of $1 of rent (Down from 10 cents in 2020)
Approximately 7% of the income generated by a property goes to the owner. People often “own” rental properties without realizing it. This small percentage also goes to investors via pensions and 401(k) plans that are invested in real estate, often through REITs. Rental property success is a key factor in the success of these funds.
The decrease in income for property owners from 10 to 7 cents may be caused by higher operational costs, higher property taxes, and rising mortgage rates, resulting in smaller profit margins. Those who depend on rental income to make a living, especially small business owners and individual investors, will be most affected. Retirement plans tied to real estate investments could also be affected by the drop. Occasionally, this can be a reflection of a change in the market, with more rental income being reinvested into properties or other expenses.
A good property management software solution can help property management companies save time and money by centralizing and automating routine tasks like maintenance requests and invoice processing. Our software solutions offer convenient online portals that investors and owners can access 24/7. Owner-investor relations will improve as a result of increased transparency and communication.
2. Payroll: 7 cents of $1 of rent (Down from 10 cents in 2020)
The fees that property managers charge owners typically range from 8 to 12%. 7 cents of every dollar of rent collected goes toward payroll, which supports 17.5 million jobs. As a result of changes in the industry’s structure or increased operational efficiency, the decline from 2020 may reflect a decrease in the number of jobs.
By reducing payroll costs, property management companies may be finding more efficient ways to operate through technological advancements or process improvements. Other rising expenses may also be contributing to this. Businesses in trouble may have to reduce staff or wages, which could negatively impact the job market and employee satisfaction.
3. Capital expenditures: 2 cents of $1 of rent (Down from 12 cents in 2020)
Capital expenditure reserves will only account for 2% of rent income in 2023, a significant decrease from 2020. Reserves are crucial for funding significant repairs and updates (e.g., roof repairs, HVAC replacements). Residents can count on them to keep their properties in top condition.
The decrease may reflect financial pressures or a market trend of delaying maintenance to preserve cash flow. It is possible that property owners are opting for cheaper, short-term fixes rather than investing in long-term improvements. In the long run, this could result in a decline in property conditions and resident satisfaction. To maintain profitability, it may also indicate a short-term focus on cutting costs.
With built-in job costing, you can track vendor, maintenance, and renovation costs all in one place. We can’t change what vendors charge, but our platform can help organize your preferred vendors, manage your budget and strategize more efficiently. This can reduce waste of financial resources, improve communication and save you significant time and effort.
4. Property taxes: 11 cents of $1 of rent (Down from 14 cents in 2020)
Rent is still heavily influenced by property taxes. Schools, emergency services, and road maintenance are among the essential services they support. Despite a slight decline from 2020, they remain a crucial component of the rental breakdown.
The decrease may be attributed to changes in local tax laws, property assessments, and public policies. It may provide short-term financial relief to property owners, but it may have long-term implications for community funding and services.
Tax preparation can be simplified and streamlined with property management software.
5. Operating expenses: 27 cents of $1 of rent (Up from 16 cents in 2020)
In addition to property and liability insurance, utilities and ongoing maintenance, operating expenses cover a wide range of necessary expenses. A $1 of rent in 2023 will be covered by 27 cents of these expenses. Maintaining a property is more expensive than ever, as evidenced by the 11% increase in operating expenses from 2020 to 2023.
During the peak of the pandemic, 55% of eligible remote employees in the U.S. worked from home full-time. The percentage dropped to 35% in November 2023 (7% higher than the pre-pandemic estimate).
Hybrid models are used by 41% of remote employees. In other words, 76% of the population works from home at least some of the time. As a result, property managers see an increase in energy consumption, wear and tear on buildings, etc.
Additionally, operators have seen a rise in work orders due to residents spending more time in their units. This significant increase in operating expenses could also be due to rising costs of utilities, insurance, and maintenance services.
6. Mortgages: 46 cents of every $1 of rent (Up from 38 cents in 2020)
Property owners continue to spend the most on mortgage payments. They increased to 46 cents for every $1 of rent in 2023. Rent income plays a crucial role in preventing foreclosures. In addition to the increases in operating expenses and capital expenditures, the 8% rise in mortgages is putting a strain on property management companies.
The increase could be caused by higher interest rates, larger loan balances, or changes in loan terms. When owners finance property acquisitions or building improvements, their mortgages can also rise. This situation could lead to financial instability if rental income doesn’t keep up with mortgage rates. Owners and investors might also become more cautious in their property investments, potentially slowing rental market growth.
In the property management industry, the breakdown of $1 of rent from 2020 to 2023 reveals important trends. Property owners are facing increased financial pressure, rising operating expenses, and higher mortgage payments. In order to navigate a changing rental market, efficient property management strategies and technology are needed.
The data does not support the myth that landlords are out to extort every penny from their tenants. Setting goals and priorities is easier for property managers when they understand the rental industry’s financial realities. In addition to helping renters see how their rent payments contribute to the entire economy, savvy property managers can also help them understand how their rent payments contribute to their communities.