Do minimum wage increases affect rents?
Increases in the minimum wage can be good for landlords.
A stand-out benefit is that renters are less likely to default on their monthly rent payments. This equals more financial security for you and your tenants.
But while your tenants may have the ability to afford rent much better than before, you could also raise your rates.
How does wage affect rent prices in the grand scheme of things?
Overview of minimum wage in the United States
According to reports, 26 states will increase their wage in 2022, but unevenly.
For example, the minimum hourly wage in Colorado increased by as little as $0.22 to $12.56 per hour on January 1. More substantially, in Florida, the wage rose from $8.56 to $10.00 per hour this past September.
Here’s a current breakdown of minimum wage in the United States:
Minimum wage has been a topic of discussion for a long time, with proponents on each side arguing that it’s either essential or debilitating to the economy as a whole. Overall, $15 per hour is viewed as the gold standard by most wage increase supporters. So far, the only state that has achieved a state-wide $15 minimum wage is California, which also happens to be one of the most expensive states to rent in.
How a higher minimum wage affects the ability to pay rent
One factor of a higher minimum wage that’s beneficial in the real estate industry is the greater ability of tenants to afford housing costs.
A study published in the Journal of Urban Economics analyzed rent payment data from 14 states from 2000 to 2009. Researchers found that one of the benefits of increasing the minimum wage was that renters found it easier to meet rent obligations. For example, several months after the increase in wages, there were 10.6% fewer rent defaults than in states where wages remained the same.
However, the 2022 study found one caveat — higher minimum wages also resulted in an average rent increase. On average, it took landlords three months to raise rent. However, increasing the price of rent didn’t drive missed payments. According to the data, the boost to tenant incomes was enough to cover the rent hikes.
What does this mean?
It means that an increase in minimum wage equates to an increase in rent price. An upward movement in median rent prices implies that rental properties remain a good investment, despite a changing economy.
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