Where does a dollar in rent go? The results may surprise you
No matter where you look in 2022, prices have surged. The cost of a gallon of gasoline is hovering at record levels. The prices of household staples like poultry, beef, eggs and milk have shown double-digit increases. In Phoenix, the cost of rent has risen by as much as 30%, according to media reports.
Currently, median gross rent in the Valley (a figure that combines the monthly cost of rent and utilities) stands at $1,177 per month, according to the Maricopa Association of Governments. With more than 620,000 occupied rental units across metro Phoenix, that raises an important question: When residents pay the rent each month, where does that money go?
The 30,000-foot-level answer: Almost entirely to meet mortgage costs, make payroll, pay for overhead and to pay property taxes. And to a little bit of profit for property owners.
To get more specific on the subject, the National Apartment Association recently broke down how $1 of rent gets spent in 2022. The results may surprise you.
The biggest cost for property owners and moms and pops who own a rental unit or two is the bank loans on their properties. Paying the mortgage each month typically eats up about 38 cents of every dollar paid in rent. With bank interest rates rising quickly, this is a number likely to track upward into next year. Failure to pay the mortgage is not an option, because foreclosure puts both owners and renters at serious risk.
The next largest costs: Operating expenses, which consume 17 cents of every rental dollar; and property taxes, which claim another 15 cents. The cost of maintaining rental properties has spiked over the past year, exactly as it has at your house.
Property taxes, meanwhile, represent a double-edged sword. They’re costly to pay, yet they help communities across Arizona pay for schools and teachers, roads, and emergency police, fire, and medical services.
Capital expenditures on rental properties account for 11 cents of every dollar of rent. These necessary mega-projects include HVAC repair and replacement and upkeep on roofs, swimming pools and apartment community security features. With three-fourths of the apartments in our state built before 1999, capital projects are a must.
Next, there’s human capital, the 10 cents of each dollar property owners spend on payroll. Statewide, the apartment industry is responsible for about 6,000 jobs each year, contributing about $2.7 billion to local economies.
All told, the above expenses total 91 cents out of every dollar paid in rent this year. The remaining nine cents will be returned to rental property owners in the form of profit. At a time when many Arizona property owners collected no rent for months under the federal eviction moratorium, this comparatively slim profit margin can make it difficult for some apartment owners to remain sustainable as a business.