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Thinking About/ Understanding Rental Housing Sector

Thinking About:  Dealing with Private Property Owners

UNDERSTANDING THE RENTAL HOUSING SECTOR

 

 

The rental housing stock

In contrast to what is widely believed, most American renters do not live in large apartment buildings or multi-building apartment projects. One out of every three renters lives in a single-family home, while another almost two out of five live in two-to-four family properties. In some cases, the owner lives in one of the units, while in others the building is absentee-owned. Another one in eight lives in small apartment buildings with fewer than 10 dwelling units. This adds up to almost two-thirds of all renters.

 

These buildings make up an even larger share of the private-market (as distinct from subsidized) rental market, and a very large part of the private housing occupied by lower income households. In many inner-city areas, the majority of single-family houses are owned by investors or landlords, rather than by homeowners. Maintaining this stock is critically important, because millions of households depend on it for shelter. At the same time, it can be a source of many problems. Almost all of the owners of these buildings are “mom and pop” owners, and many of them do not earn that much more than their tenants. While many are responsible, others lack the resources or the skills to be effective landlords. Others may be irresponsible owners, exploiting their properties, while still others, despite good intentions, may be burdened by high purchase costs and may not be able to generate enough cash flow to maintain their buildings.

 

It is difficult to find the right balance in putting together a strategy to deal with problem property owners, particularly owners of occupied rental properties. At the same time as one wants to crack down on problems, one needs to avoid either driving landlords out of business, or – assuming the market will bear higher rents – pushing rents up to the point where many families looking for rental housing will no longer be able to afford them. In some respects it is easier to deal with owners of vacant properties than owners of occupied rental buildings. An effective strategy to deal with those owners, however, needs to be grounded in a realistic understanding of how they look at the world.

 

The economics of landlords

Landlords can look for their return in two ways. One is through the cash flow from the property, if rental income exceeds the cost of carrying and maintaining the property. The second is from appreciation if the value of the property goes up over time, and the landlord or her heirs can sell the property for a capital gain. Ideally, landlords hope to have both a positive cash flow today and a longer-term capital gain in the future.

 

Contrary to what many believe, most small landlords do not make much money off their properties. According to the only in-depth study of private landlords that has been done, less than half of all small landlords came out ahead on the cash flow on their properties, and roughly one-third lost money. This is particularly common in inner-city areas, where the low incomes of the tenant pool mean that a landlord is severely constrained in her ability to raise the rent, even as her costs may go up. For a landlord with substantial carrying costs from acquisition of the building, it may be difficult to put more than a small amount into maintaining and repairing the building without going into the red.

►Go to the only detailed national study that documents how landlords operate and their financial parameters, the 1995 Census Property Owners and Managers Study.

 

In strong markets, a landlord may be willing to see no cash flow (or even a negative cash flow return) if properties in the area are appreciating at a solid pace, and she can expect a significant capital gain in a few years. In today’s housing market conditions, however, those markets are the rare exception. Most housing markets are either appreciating only slowly, or still going downhill. As a result, few people are willing to invest money in buying rental property solely for the future appreciation, and existing landlords faced with a negative cash flow are more likely to walk away from their properties than accept the prospect of years without any net income from the property.

►Go to Toolkit sections on landlord regulations and incentives.

 

Go to The Effects of the Foreclosure Crisis.