Why renters took a big hit during the pandemic: High utilization
As a landlord who did a post-mortem epidemic review, I realized that tenants also took a big hit once the lockdown began.
I’m not talking about tenants who decide to stop paying rent even though they continue to work gainfully. Many mom and pop landlords are affected by these non-paying tenants because the landlord’s expenses still need to be paid.
And I’m not talking about renters who were able to lower their rent or find cheaper places during the pandemic. Obviously, these renters also benefited from lower prices.
Instead, I’m talking about the majority of tenants who will continue to pay the same rent that includes the scheduled regular rent increases from March 2020 to May 2023, when the pandemic is officially declared over.
If you missed out on the real estate boom, this post will make you feel better. Tenants were able to get 14% – 50% more on rent paid over three years.
Increased utility for the same rental price
One of the things a landlord worries about is depreciation. The longer the occupants stay in the rental house, the higher the depreciation. A higher occupancy rate is defined as the amount of time the tenant spends inside the rental, and the higher the depreciation.
The most common wear and tear problems include:
- Damaged walls
- Damaged equipment
- Chipped countertops
- Dented floors and damaged carpeting
- Failed plumbing
- Scratches on doors
- Faded paint
- HVAC failed
And in addition to wear and tear, there can often be liability issues. For example, tenants who are overcrowded may increase their chances of catching a fire from cooking or smoking fires. A tenant who stays in the house longer may have more people.
Before the pandemic, most people woke up at 8am, went to work at 9am and came back at 6pm. Roughly 14 hours They spent 10 hours at home and outside. Therefore, the pre-epidemic usage rate is about 58% (14 hours / 24 hours).
In other words, the rent a tenant paid got 14 hours a day of pre-pandemic accommodation. Post-pandemic, the average tenant has spent more hours per day at home on average. As a result, the average tenant received more accommodation value for the rent they paid.
Conversely, the average landlord received a lower return on the rent they received due to higher depreciation. A landlord can only maintain their profit margin if they keep raising rents to cover increased costs.
An increase in the utilization rate of tenants
As the pandemic began, the utilization rate for most tenants rose to 87.5%+ (21 in 24 hours at home) throughout 2020. Due to the lockdowns, we cannot go anywhere for at least three months. Some never leave home!
In the spring of 2021, a full year later, there was access to a COVID-19 vaccine. However, even with the vaccine, most people are unable to get it. However, most companies that instituted work-from-home policies in 2020 continued their policies in 2021. The utilization rate for tenants who can work from home remains at 83% (20 in 24 hours).
As boosters were introduced in late 2021, gradually, more people gained confidence to return to work. However, to date, many companies have a work-from-home or hybrid policy. Therefore, the utilization rate for tenants could be as high as 65% (8.4 hours per day outside the home) in 2021.
In other words, tenants got more value for their money for the same amount of rent paid by the tenant. How much more is it worth you ask? Below we can do some simple calculations.
Estimated rental property utilization rates by year
Of course, how much time each person spends at home is different. However, in general, more people spent more time at home in 2020, 2021, 2022 and 2023 than before 2020.
I’m going to make these rental property utilization rate assumptions based on people who can work from home. For those who have to work in an office, the usage rates may be higher, but not by much.
2020: The average usage rate may have risen from 14 hours pre-pandemic to about 21 hours per day. So, a regular tenant got 50% more value on the rent paid in 2020.
2021: The average usage rate may have been raised to about 20 hours per day compared to 14 hours before the pandemic. Do you really spend more than 4 hours a day outside the house? Hence, a tenant received 43% additional value on the rent paid in 2021.
2022: Average usage rates may drop to an average of 18 hours per day compared to 14 hours pre-pandemic. Therefore, a tenant received 28% additional value on the rent paid in 2022.
2023: The average usage rate may continue to decrease to an average of 16 hours per day. Therefore, renters get 14.2% more value on rent paid in 2023.
In other words, over three years, renters were able to get 14.2% to 50% more value than what they paid for rent. A 14.2% to 50% increase equates to a range of home price increase percentages across the country during this period.
What is your household consumption rate?
To get some more concrete data, estimate what your estimated utilization rate is in 2020/2021 and 2023. I think you will be surprised by the results. It will be interesting to see how the usage rate has changed, if anything.
As a writer with two kids, my usage rate in 2020 was about 83% (20 hours a day at home). I would take the kids to the playground for two hours and play tennis or softball for another two hours. In 2020 and 2021 we cooked our own food or ordered 100% delivery.
In 2023, my usage rate is closer to 75% (18 hours at home), so not much difference. I still mostly write and record my podcasts from home since I don’t have a day job. The same goes for exercising outdoors year-round due to the mild San Francisco weather.
However, I now spend up to two hours a day taking my kids to school, doctor’s appointments, play dates, and extracurricular activities. At that time some people would sit idly as my wife chaps. But now there are more social events and trips to the mall. On weekends, we are regularly out for three to four hours at a time.
Before 2020, my usage rate was closer to 71% (17 hours at home) due to more meetings and conferences. By 2024, I suspect I’ll be back to my pre-pandemic usage rate.
Renters saved and invested the difference
In addition to getting more value for the accommodation a tenant pays for over three years, the financially savvy tenant will continue to invest their cash flow in the stock market, real estate stocks, private real estate funds and alternative investments.
If the lessee had invested regularly through the pandemic, they would also have benefited from risk asset pricing. Despite the bear market in 2022, risk assets have largely risen since the start of 2020.
Although data shows that most Americans save only 5% of their household income and invest even less than that percentage, I believe the typical financial samurai renter saved more.
Every renter against housing told me that he or she saves and invests the difference. Although the data says that the average home owner is 40-44 times richer than the average renter, I see no reason not to believe them. In the long run, everyone makes rational decisions to improve their situation.
Both homeowners and renters were hit during the pandemic
It’s rare for both homeowners and renters to win, but that’s what happened to most during the pandemic.
Of course, some renters faced evictions and higher-than-average rent increases. Some homeowners lost their homes or suffered costly damages. But for the millions who were able to rent the same space at the same price, they benefited greatly.
Renting is not a waste of money. That money is used to pay for shelter. Renting has no financial returns compared to owning. On your own, you can make money on your own, but there are no guarantees. Please know the difference.
With a high utilization rate, the value tenants receive in return for rent has risen over the years. For the millions of employees who can continue to work from home or have a hybrid setup, renting will continue to offer better value, at least temporarily.
In the long run, rents will increase to cover the additional costs of depreciation and amortization. However, market forces can take years to play out, especially if you’re renting from a mom-and-pop landlord. If you’re a renter, feel good knowing you got a better deal on those years!
Reader questions and suggestions
Any renters out there feeling better about getting more accommodation for the rent you pay? Do any landlords out there notice a significant increase in wear and tear during epidemics? If so, how do you plan to cover these additional costs?
One way to keep up with real estate prices as a renter is to invest in real estate. Instead of buying a primary residence, you can invest in private real estate funds through Fundrise. Fundrise primarily invests in residential real estate in the Sunbelt, where valuations are cheap and rental yields are high.
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