DFW v. Abilene - Where Do Rentals Fare Better?
We manage for an investor who asked the question: did I do the right thing when I sold my Dallas rentals. Earlier in the year, I attempted to give context to this question by looking at gains in rents and sold price by ZIP code and school district for single-family homes. The detail of the data was a bit blinding, so rather than consider individual school districts & ZIP codes, I compared Abilene ISD and Wylie ISD to an average of Dallas-Fort Worth prices for rent and sold homes values. While you lose granularity, the graphs won't blind you.
Relative to Abilene, the DFW market is characterized by real estate appreciation show by this graph of rent/sqft. The data shown is unadjusted for inflation, so a good portion of the gain in rents is a secular trend. Too, this data starts with September of 2008 when our economy was in the midst of the Great Recession. Those two factors cause the trend lines for Abilene ISD, Wylie ISD and DFW to have a positive slope.
To remove the bias of inflation and prices influenced by a weak economy, I:
- adjusted for inflation using the CPI-Housing and
- trimmed the data set to reflect rent/sqft after January 2012 to get on the other side of the June 2011 - the month when recovery from the Great Recession became evident.
A few observations about the graph:
- Wylie ISD rents are about 20 cents above Abilene ISD rents. Part of this can be attributed to age; WISD homes are newer than AISD homes.
- When adjusted for inflation, WISD and AISD rents are flat between 2012 to 2018. Inflation-adjusted DFW rents rose across the same period.
- In 2012, WISD rents were better than DFW rents. By 2016 - DFW rents (from Highland Park ISD to DeSoto ISD) surpassed flat WISD average rent.
We can see similar trends when we look at housing prices:
Unadjusted for inflation, average housing prices rose by:
- 3.5% in Abilene ISD
- 3.8% in Wylie ISD
- 6.1% in the DFW area
If you consider that housing inflation tracked about 2.6% per year since January 2012,
- Abilene ISD homes have picked up, roughly, 1% in real value per year
- Wylie ISD homes have gained 1.2% in real value
- and DFW homes have gained 3.5% in real value - more than double what we experienced in Abilene.
I've always viewed the Abilene real estate market as a cash flow market - you better buy at the right price going in if you want to make any money. In Dallas, there's always an appreciation play and this data underscores that.
To meld these two statistics into one story, I took total average annual rent and divided it by average home price for the three areas investigated:
We can see that:
- rent per price of home fell in all three markets - our return on our investment has decreased over this period. Tolerance for this decrease in return comes from cheaper interest. With multiple years of 3.25% interest rates, investors were willing to take lower returns and these three graphs demonstrate that.
- Abilene ISD returns are consistently better than Wylie ISD returns. The margin between the blue trend line and red trend line allows us to visualize that while returns fell in both ISD's, Abilene fared better. An additional qualification: this doesn't take into consideration that WISD rentals may rent faster and have less significant maintenance issues because they are newer.
- In 2009, the return on Dallas rentals was comparable to that of the AISD. Today, the return on Dallas rentals is comparable - or worse - than WISD rentals. Much of this is fueled by appreciation - it's less expensive to get a WISD rental and even cheaper if buying a AISD rental, but the 6.1% annual escalation in DFW real estate prices have eaten up opportunities for return.
So for my Dallas-area investor that sold out in 2009 - it looks like you lost 8 good years of appreciation and growing rents on your Dallas properties. However, we are due for an overall market correction and when it comes to bear, both markets will be negatively affected.
The difference is Abilene's economy is driven by institutional dollars shaped by universities, military spending, hospitals. Consequently, the drop in Abilene's economy will be less dramatic and any impact in housing values - and rent - will be blunted by the structure of our economy. Being liquid would be better, but this blunted downturn makes Abilene a safer haven for equity in a downturn.
Conversely, the DFW economy is shaped by the private market. This economy will whipsaw farther in a contraction and this swing will manifest in falling prices and rents. Once this occurs, here's the opportunity for our investor to take equity out of the Abilene market, buy wisely in DFW, and await the next cycle of economic recovery and growth.