Intro

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Welcome to the 5 Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5-Minute Prime Podcast.

Is 1% normal?

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Say you own a rental, and the asking rent index for your metro just came in up about 1% from a year ago. Is that good news? Or is it nothing at all? Here's the honest answer. 1% doesn't mean anything on its own. In one metro, 1% is a slowdown. In another, it's the strongest reading in two years. The number only means something next to that metro's own history. So that's today. Not which market is beating which. Just how to tell whether your market did something it doesn't usually do, and what to check before you act on it.

01 · The same-month test

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Here's a way to read a rent number that works on any metro. Take its asking rent this September and compare it with last September. That's the year-on-year change. Then do the same thing for every month of the two years before. 24 readings. Now you know what this metro usually does, where its year-on-year change normally sits, and how much it normally wobbles. Why the same month? Because asking rent isn't seasonally adjusted. In a lot of places, it runs up into summer and eases into winter. So September against August tells you more about the calendar than the market. September against September takes the calendar out. Then you ask one question. Is the latest reading inside that usual range or outside it? A number is only big or small next to its own history. We ran that test on the 53 metros of a million people or more that we track, using a metro level index of asking rents for September. Nine of them came in outside their own usual range, on a move of at least 1% or $15 a month, and all nine were rising. Every one of them printed above anything it had shown in the two years before. Two more broke above their own highs too, but on a move smaller than that. Not one of the 53 had rent falling by an amount that's unusual for it. Five more did something quieter. Their rent rose, but well below their own usual pace, and two of them dipped just under the bottom of their own range. If you own in a metro like that, the word rose is hiding the news. For that market, a rise is a slowdown. Why not just hold one metro up against another? Because every metro has its own normal. A city that's added rent at four or five percent a year for years, and a city that's hovered around zero aren't running the same race, and a single national yardstick will call one of them hot and the other one cold for reasons that have nothing to do with this year. Your own metro's history is the only yardstick that's measuring the thing you own.

02 · Jacksonville, Milwaukee, Phoenix

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Let me make it concrete with three of the nine. Alphabetical order, because this isn't a contest. Jacksonville, Florida. Typical asking rent about $1680 a month in September, up about 2.2% from a year earlier. Over the two years before that, Jacksonville's year-on-year change ran from barely above zero to about 1.7%, and it averaged under one. So 2.2 is the highest Jacksonville has printed in two years, and August set a high too. That's a real move for that market. Milwaukee. About $15.50 a month, up about 5%. 5% sounds big, and in plenty of places it would be. But Milwaukee's year-on-year change spent the last two years between about 3.5% and 5%. So 5.1 is just past the ceiling of its own range, by less than a tenth of a point. That one goes on the watch list. Phoenix, Arizona. On a metro level index of asking rents, typical rent was about $17.20 a month in September, up about 1% from September of last year. 1%. Say that at a meetup and people shrug. But for the better part of the two years before, Phoenix's year-on-year change sat below zero, bottoming out at minus 1.3. It turned positive in July and has climbed every month since. So 1% isn't a big number. For Phoenix, it's the highest reading in two years, and the third straight month it set a new two-year high. That doesn't make Phoenix a hot market. It makes it a market that's changed direction. And a turn that's three months old is a flag to watch, not a forecast.

03 · The second line

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Now, before anybody reprices a lease off that, one line moving outside its range doesn't make a market. So you check the other lines the same way, each one against its own history. In Phoenix, payroll jobs in September were up about 1% from a year earlier. That's ordinary for Phoenix. Beside it, the unemployment rate was 4.2%, the same as a year ago. Jacksonville reads the same way. Payroll jobs in September were up about a third of a percent from a year earlier, which is ordinary there, and unemployment was 4.5%, up from 4.4%. So in both metros, the rent line broke out of its range, while payroll jobs stayed inside their own. That's worth knowing, because I've made the case before that a soft rent line can come from two very different places. New buildings filling up, which works itself out as the unit's lease, or renters who are already stretched, whose paychecks don't catch up on the same schedule. A rent index turning up tells you something about the first one. It tells you nothing about whether your tenant got a raise. One more thing about what this index measures. It's asking rent for homes listed for rent, and that's the price on a new lease. Your tenant who renewed last spring isn't in it. So a metro reading outside its range tells you what the next lease might start at. It doesn't tell you the rent on your roll today moved with it. And if your metro's line went the other way, slower than usual or flat, there's nothing to fix this morning. It isn't a sell signal, and it isn't a call on where rent goes next. One reading outside the range is a flag. Look at the months before it, too. If the line has been moving toward it for months, the turn is already underway. Then look again next month. This builds on something we keep coming back to. A national average blurs very different markets together, so the work happens one metro at a time. This goes one step further. You judge the metro against

Tonight's challenge

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itself. So here's your challenge for tonight. Pick the metro you own in or the one you're shopping. Pull up its rent line for the last three years from any source you trust. Write down this September against last September. Then, for each month of the two years before that, the same year-on-year number and circle the highest and the lowest. Then what? If this year's number sits inside that range, nothing about your rent assumption needs to move this month. If it sits outside, check the jobs line the same way before you change anything. And if rent and jobs both moved outside their own ranges in the same direction, that's when you rerun the rent assumption on your next deal. Big and small aren't properties of a number. They're properties of a place. Read the place first. I'm Martin Maxwell. This has been the Five Minute Prime Podcast. I'll see you next episode.