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What Your Tenants Won’t Tell You

by Steve Cook on October 10, 2012 · 8 comments

  

A new study of single family and multifamily tenants by John Burns Real Estate Consulting based upon data from Fannie Mae’s American Homeownership Series fills a huge void in our understanding of single family rental tenants and how they differ from multifamily.

Especially on topics that your tenants probably will never discuss with you, the findings include more than a few “Aha” moments, a few surprises and useful insights that could help you better understand your tenants and help you manage your properties more successfully,

The full study, which is an analysis of 2011 data from Fannie Mae’s National Housing Survey, is available in the form of a free white paper called The Homeowner Wannabes.

Here are some findings that you should know about your tenants:

  1. Nearly three out of four single family tenants plan to become owners.Some 69.5 percent of SFR tenants are counting the days until they can become homeowners─or become homeowners again─compared to 58.9 percent of multifamily tenants who plan to buy at some point.The survey confirmed what’s well-known about most of the differences between SFR and multifamily tenants:  SFR tenants make more money (but much less than owners), they have larger families and need more space (in fact, 25 percent have more than 5 people in their households).  But they aren’t much older (prevalent age range for both groups is 25-34) and, like multifamily, are more likely to live in urban than suburban neighborhoods.
  2. Credit, not Income, is the biggest obstacle keeping SFR tenants from buying.Considering the timeframe of the Fannie Mae data, the SFRs in the survey might have been more concentrated in heavy foreclosure markets than they are now.   If so, it’s likely that a large number of those surveyed were families who had lost their homes to foreclosure and are renting until they can buy again. Unfortunately the Fannie Mae survey didn’t probe to find out how many SFR tenants are former owner/defaulters.However, there’s a clue in the report.  Nearly a third, 29 percent, of SFR tenants cite their credit as the biggest obstacle they would face getting a mortgage compared to only 23 percent of multifamily tenants, even though more SFR tenants earn over $50,000 a year (25 percent of SFR tenants vs. 19 percent of multifamily tenants).  Multifamily tenants, on the other hand cite income as their biggest obstacle.

    Whether the problem is credit, income, debt, job security, rates, or down payment, three quarters of both single family and multifamily tenants believe it would be somewhat difficult for them to obtain a mortgage.

    If you are renting to someone whose credit report reveals a foreclosures and short sale in their past, it’s useful to remember it will remain on their credit report for seven years.  Chances are good they’ll be looking to buy again as soon as they can.

  3. The younger the tenants, the more likely they are planning to become owners.Contrary to what you might think, younger tenants, not older tenants, are more likely to leave you in order to become homeowners.Some 93 percent of single family renters under 24 and 81 percent of those age 25-34 plans on buying at some point. Among 55 to 64 year olds, only 21 percent plan on becoming owners.

    The 35 -44 year age range is the sweet spot for ownership.  Some 71 percent of single family tenants in that range plan to buy and the middle years are also a time when tenants are least satisfied with their renting experience.

  4. Multifamily tenants are more likely to anticipate rent increases. Multifamily management companies may be doing a better job preparing their tenants for rent increases than single family managers.  The data, from 2010 and 2011, was collected during a period of increasing rents (see Rental Outlook 2012: The Good Times Roll on).  It’s not surprising that large numbers of SFR and multifamily tenants expected to see rent increases.What is surprising is the different between the two groups.  Some 43 percent of SFR tenants in 2010 and 44 percent in 2011 felt their rents would increase.  Among multifamily tenants, 43 percent i2010 and 53 percent in 2011 felt their rents would increase.

The single family tenant differs from multifamily in a number of significant ways.  They earn more, are more likely to be families and have more household members, and need more space.  Because the category has grown so quickly, little is known about the single family tenant.  The John L. Burns study makes a huge contribution to our understanding of this segment, which is larger today than multifamily.

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{ 8 comments… read them below or add one }

Larry Arth October 10, 2012 at 9:46 am

Thanks for the great article. Today there are so many new investors and as you state, not much is known about their target audience. This piece of information I believe is critical to the investors knowledge base and will help them in their long term success.

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Dale Osborn October 10, 2012 at 12:08 pm

Not sure about where they got their numbers on how many want home ownership. What I have seen in tenants over the years is there is a certain category that I refer to as having a disease called “renteritis”. You advertise a home for sale and all you receive are calls from renters wanting to rent the property. They have no desire to ever own anything of their own – they just want to be a renter forever. As a renter there are no headaches from having to pay taxes & insurance, utilities on their own, etc. When something breaks, they call the manager and the manager gets it fixed for them. They tear the place up and move on to the next place = still suffering from “renteritis”.

On the credit issue – who can we blame for this problem? I prefer to lay a lot of the blame on the school system that teaches you a lot of worthless junk, but does not teach financial education or skills to actually help you survive in the “real world” outside of a classroom. A straight A student can go try to look for a job and realize that report card is no longer important. With no job skills to offer, they end up flipping burgers along with those who dropped out of the school system. Running up a lot of debt on credit cards is also their problem as they do not know the fundamentals of financial management. They are just sold on getting a credit card so the companies can rack up high interest at a great cost to the individuals.

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Steve Cook October 10, 2012 at 12:20 pm

Dale,

Thanks for your comment.

You can find out more about the Fannie Mae National Housing Survey, which provided the data for the John Burns study, by going here. http://www.fanniemae.com/portal/research-and-analysis/housing-monthly.html

Steve

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Sharon Vornholt October 11, 2012 at 12:25 pm

Those are some very interesting statistics Steve. For those folks that like multi-families, these numbers should make them even more attractive.

This leaves open one more thing to think about. Maybe landlords should think about getting more pretty houses in nicer neighborhoods into their portfolios with the intention of putting (only) lease option tenants in those houses. These would be nicer houses with folks that just need a few years to fix their credit in order to refinance and buy the house.

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Ali October 11, 2012 at 7:29 pm

Great thought, Sharon. I’m actually involved with turnkeys in Atlanta that are in primarily owner-occupied neighborhoods, versus renter-heavy neighborhoods, and they are under lease options. They are under 3-year leases, which helps decrease vacancy pretty dramatically. Plus, repairs are almost minimal compared to normal rental properties because the families believe they are going to own the property in the future, they tend to take better care of it. The tenant quality in general is just on a whole new level of awesome! Plus, my exit strategies are dramatically increased- those tenants exercising the option, higher rental payments because of higher quality tenants in case i want to hang on to it for awhile, great appreciation potential, and better chance of a good resale. The reality is most of the tenants won’t end up exercising their options, for one reason or another, but in the meantime my vacancy and repairs are much less expensive!

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Sharon Vornholt October 11, 2012 at 7:45 pm

Ali –

It’s great that you are already doing this. I think it’s one more way to think of how to best take advantages of the changes in the market.

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Ali October 11, 2012 at 7:31 pm

Great blog, Steve! Definitely statistics I haven’t heard before. Very welcomed information.

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Charlie Epp November 12, 2012 at 8:13 pm

Great post, I would not have guessed that the younger tenants were as likely to move as you state. But I guess I should know better from my land-lording days. They do seem to move out the most.

I wonder if that trend will reverse itself now that SF homes are getting more difficult to qualify for?

I see us moving to a more renter based society, rather than a owner occupied type of environment.

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