Small multifamily properties, housing between 5 to 49 units, are a crucial source of unsubsidized affordable housing in the United States. They constitute about 17% of the nation's rental housing landscape with approximately 8.2 million units.
To better offer insights on how to preserve the affordability and financial viability of this segment of the rental market, the Terner Center of Housing and Innovation (UC Berkeley) conducted a study on landlord management practices, as well as the demographic of landlords and their financial motivations. This blog will highlight the key takeaways from the report along with policy recommendations.
Insights on Ownership Characteristics
Ownership Structure: Most of the small multifamily properties are owned by individuals, although they sometimes tend to establish a Limited Liability Companies (LLCs) to hold the property.
Management: Nearly half (45%) of the surveyed properties are managed solely by the property owner, while the rest are either managed by a multifamily property management company hired by the property owner, or a directly employed agent such as a building superintendent.
Demographic Profile: Owners of small multifamily properties tend to be less demographically diverse and have higher incomes compared to the general population.
- Age: Two-thirds of properties are held by owners aged 60 or older, with nearly 40% owned by individuals aged 70 or older.
- Ethnicity: 59% of the U.S. population in 2022 identified as non-Hispanic White and a significant majority (82%) of small multifamily rental property owners were non-Hispanic White individuals. The remaining 18% of properties were owned by individuals identifying as Hispanic (6.8%), Asian or Pacific Islander (5.9%), Black (3.7%), or some other race (1.7%).
Insights on Tenant Screening Practices
Whether a property is managed by multifamily property management companies or directly by inidviduals, the study discovered that a variety of tenant screening methods were being utilized.
Difference in method utilized depended on scale of ownership: According to existing research, smaller scale landlords tended to rely on subjective and informal screening methods, such as personal interviews and home visits, while institutional owners prioritized a formal selection process based on factors like income, credit history, and criminal or eviction records. Either way, most owners use a combination of various different screening methods, with variations based on the size of their property portfolio.
Common Tenant Screening Methods: On average, most owners and managers utilized 5 distinct methods to screen tenants. Employment verification, rental application responses, and credit checks were the most prevalent screening methods, each utilized in over two-thirds of properties. More than half of the property owners used personal interviews, proof of meeting minimum income requirements, references from a prior landlord or rental agent, and criminal background checks.
Correlation with Portfolio Size: Owners with larger rental portfolios (50 or more units across multiple buildings) tend to utilize third-party online screening services like RentPrep or RentSpree. These services consolidate data on a renter's income, credit, evictions, and criminal history, providing a score indicating the applicant's perceived risk level for renting. There is a lot of existing research on how such scores can be discriminatory and biased, but there are new innovations that are trying to combat bias in tenant screening. If you are a small multifamily property owner, in search of a multi family property management software or a tenant screening tool, look for products that are transparent about how they are addressing bias and discrimination in their systems.
Insights on Rent Setting Practices
Below Market Rate (BMR) rents: The study of small multifamily property management trends discovered that most small multifamily property owners primarily charge below market rents. Owners of 49% small multifamily rental properties reported that they believe most or all of their units are rented below market rate. When researchers matched their assumption with HUD rental data, they found that the assumptions were generally correct.
Motivation for charging below market rent:
- Prevent high tenant turnover - Most of the owners with BMR units said that they were keeping rents low to retain good tenants and prevent high turnover. Owners of 37 percent of the properties take into account what their tenants can pay, while setting rents.
- Policy restrictions - Owners of 41% of the BMR properties cited 'other' reasons for renting below market rates. These reasons included policy restrictions such as rent control laws, rent stabilization laws, or rent freezes during the COVID-19 pandemic, that kept them from increasing rents.
- Condition of the property - Some owners noted that the reduced rental rates were influenced by the condition of the property itself, such as its small size, old age, or the necessity for substantial improvements.
Insights on Tenant-Default Management
The study attempted to find out how owners react towards missed rent payments, especially during financial crises like the COVID-19 pandemic. Here are some of the key findings:
- Adverse impact of pandemic on rent payments: 58% of small multifamily properties witnessed an uptick in rent delinquency during the pandemic. Owners of about a quarter of properties encountered moderate to severe cash flow problems due to missed rent payments.
- Financial challenges faced by owners due to non-payment of rent: 73% of property owners reported minor cash flow problems, 19% faced moderate cash flow issues, while 9% encountered serious challenges resulting from nonpayment of rent.
- Response Strategies: 45% of owners assisted or facilitated tenants in applying for rental assistance to address late rent payments. Owners with larger portfolios, who were more tech-savvy, were more likely to direct tenants to rental assistance programs.
- Eviction Trends: Evictions were pursued in one-third of small multifamily properties in response to unpaid rent during the pandemic. Tenant
eviction procedures were initiated at some point during the pandemic, for about 41 percent of small multifamily properties.
Insights on Maintenance Practices
Multifamily property management needs to address preservation needs: Based on U.S. Census’ 2021 American Housing Survey data, the study reports that over 3.8 million rental homes are of severely or moderately inadequate quality. These rentals, of which about a third are located in 5-49-unit structures, are disproportionately occupied by lower-income households. Lower income households also feel the shortage of affordable housing most acutely, as we demonstrate in our Housing Count project.
Owners mostly report good quality rentals: According to the study, 71% of those surveyed believed their multifamily rental property was in good or excellent condition, with only minor work or improvements needed.
Maintenance postponement: 25% of property owners acknowledged postponing some form of maintenance tasks, with those experiencing serious cash flow issues more inclined to defer maintenance responsibilities.
Valuable policy suggestions for the affordable multifamily property management segment
Supporting the 5-49 unit structure segment - The study finds that 5-49-unit properties are major contributors to the supply of unsubsidized lower-cost housing in the market.
Need for more data and greater representation: Small multifamily property management practices tend to be very fragmented, along with owner behaviorus, both of which are governed by a patchwork of state, federal and local-level legislation. There is not enough representation of owners of the 5-49-unit properties, in policy conversations. This is because the ownership is very fragmented and semi-formal. Therefore, policy making should begin with collection of more nuanced data on this segment and having more of this segment represented in policy research.
Capital improvement funding can be incentivized to maintain affordability - The study finds willingness of owners to invest in property repairs and keep rents low to prevent tenant turnover. However, landlords suffering from financial gaps and experiencing serious cashflow issues are unable to do so. If property repair funding could be provided in exchange for a commitment to keep rents affordable, it may help address the quality and habitability of housing while preserving unit affordability.
Need to raise awareness about available resources - Smaller-scale owners or multifamily property managers are not always aware of the range of supports available to them. There is a need for more robust awareness programs to help them access the resources they need to maintain the financial health and physical quality of their properties.