It’s no secret that single family rentals have provided a haven for families who have lost their homes to foreclosure. Rather, relocating to substantially less-desirable neighborhoods or more crowded living conditions. They are not likely to live in considerably lower quality homes than they did before. Largely because investors have created an affordable alternative, foreclosure does not impose an economic burden so large enough as to force foreclosed families to severely reduce housing consumption, according to recent research by economists at the Federal Reserve .
What’s less well known is impact single family rentals are having on other rental categories.
The growth of the single family market share has been astounding. The latest American Community Survey data from the Census Bureau confirm recent research showing that single-family housing has absorbed much of the increase in rental demand. Single-family detached units accounted for 27.9 percent of the renter-occupied stock in 2011, an increase of 0.5 percentage points since 2010 and a gain of 2.0 percentage points since 2007.
An item in Fannie Mae’s Housing Insights newsletter, published by its economic and research staff, suggests that foreclosures are not the only source of tenants for single family rentals. “The increase in market share for single-family detached units was much larger than for any other building type, and came largely at the expense of small multifamily buildings,” states Housing Insights.
“These trends in market share are shifting the composition of the rental market toward higher-cost unit types. Single-family homes and apartment buildings with 50 or more units – building types that captured market share in recent years – have average rents that are at least $100 per month greater than small multifamily buildings, which lost market share.”
Are tenants leaving small multi-famly apartments for sigle family rentals, even if they cost more? Fannie’s newsletter cites no evidence to that effect, but simply notes that one category is rising as the other is falling.
Ironically, investors in single family and small apartment buildings are often the same people. Many apartment owners started out in single family and decided to move larger. A big reason is cash flow.
“Five years ago an investor would take a negative cash flow because appreciation was so great. Now it’s all about cash flow.” says Joe Adkins, an investor and commercial broker in Altamonte Springs, Florida told CNBC last March.
Properties of four units or less, so called four-doors, have features that can be particularly attractive to investors. Properties of this size can still qualify for long-term mortgages up to 30 years. Buildings of five units or more, meanwhile, must be financed through commercial loans that typically mature in seven years or less, forcing owners to refinance at prevailing interest rates that could lead to higher mortgage payments.
Jeffrey Sica, President of SICA Wealth Management in Morristown, N.J., says buying small multi-family units now can be a good inflation hedge. He advises investors to lock in a long-term fixed-rate mortgage since this loan will be cheaper when interest rates rise.
Multi-unit properties can be easier to manage and maintain than a portfolio of individual properties too. And they can also present a stronger case to banks for a loan as multiple tenants are considered a safer investment than a single tenant. Moreover, smaller, one-story multi-family living is a different, more human-sized and community-oriented alternative to single family rental sprawl and big, impersonal mega-multifamily towers. It was not uncommon in the post-war era to build duplexes, triplexes. fourplexes and eightplexes amidst swaths of single-family homes.