New Report Underscores Importance of Small Multifamily Properties as Source of Affordable Rental Housing

A report published by the Terner Center for Housing Innovation, “Ownership and Management of Small Multifamily Rental Properties,” presents the results of a nationwide survey of the owners and managers of small multifamily properties. The report aims to shed light on a segment of the rental housing market – rental properties with 5 to 49 units – that is often overshadowed in research by single-family rentals and large multifamily properties, despite accounting for roughly 17% of rental properties in the U.S. The report includes findings on the characteristics of the owners and managers of these properties, the tenant screening methods and rent-setting practices they use, their responses to delinquent rent payments during the COVID-19 pandemic, and their property maintenance practices. It emphasizes the importance of small multifamily properties as a source of affordable rental housing in the U.S. and the need to invest in the preservation of these properties.

The Terner Center used a national dataset of land parcels, which included information on owners and properties, to create a random sample of 75,000 small multifamily property owners. Sampled owners were contacted by mail and invited to participate in the online survey between July and September 2022, yielding 764 responses that fit the survey criteria. The report authors weighted the resulting data by property size “to reflect the national distribution of small multifamily rental properties,” though they note that the data were not geographically representative.

The researchers found that most property owners and managers utilize an average of five different methods to screen and select tenants for their units, and that the types of methods used vary depending on property size and landlord type – findings that align with existing research. Owners and managers reported using employment verification, responses to rental applications, and/or credit checks for over two-thirds of their properties. In fact, owners with large rental portfolios (50 or more units across multiple properties) named credit checks as the most important tenant screening method for nearly 30% of properties. Criminal background checks were used in over half of properties, while online screening services like those that provide a “risk score” for tenants were used in just under a third of properties. While criminal background checks were more frequently used by owners/managers of larger properties (25 to 49 units), direct methods like interviews and personal reference checks were more frequently utilized by owners/managers of smaller properties (5 to 9 units).

Survey respondents reported that they frequently keep rents below market rate in order to minimize tenant turnover, which is difficult for small multifamily properties to absorb relative to larger multifamily properties. Most of these properties are owned by individuals (32% of properties) or limited liability corporations (LLCs) held by a small number of individuals (38% of properties), and many of these owners rely on rents from their properties as a major source of personal income. As a result, owners of 49% of properties reported that most or all their units are rented below market rate, and owners of 20% of properties reported “an even split of above and below market rate units,” primarily to keep good tenants in their units. Owners of over 40% of properties reported renting below market rate for other reasons like local rent control laws or pandemic-era rent freezes, highlighting the important role these policies play in preserving affordable rental housing.

The report authors also explored owners’ responses to delinquent rent payments. Nonpayment of rent was widely believed to be the most common reason renters are evicted in the U.S. even before COVID-19 and became an issue of greater concern during the pandemic, when unprecedented numbers of low-income renters lost income and fell behind on rent. The researchers reveal that 58% of small multifamily properties reported that rent delinquencies became more frequent during the pandemic and that the owners of three-quarters of properties (73%) experienced only minor cash flow issues as a result of these delinquencies. During the period between 2020 and 2022, owners in less than half of properties surveyed responded to delinquencies by helping tenants apply for pandemic emergency rental assistance (ERA) programs (45%) or offering tenants repayment plans (41%). Furthermore, owners of roughly a third of properties reported that they responded to delinquencies by beginning eviction procedures, and owners of over a quarter of properties initiated collection proceedings. While owners with larger rental portfolios were more likely than those with smaller portfolios to report helping tenants obtain rental assistance, they were also more likely to initiate eviction or collection procedures.

Lastly, the report investigates maintenance practices at small multifamily properties, which make up a third of all rental units rated as being of severely or moderately inadequate quality as per the 2021 American Community Survey. Nearly three-tenths (28%) of properties surveyed were reported by owners as being of fair or poor condition, with substantial work needed either immediately or within the next three years. Owners of nearly a fifth of properties experiencing serious cash flow problems reported that they postpone most maintenance required for the property. Given that small multifamily properties are typically older than larger multifamily properties, these findings raise concerns about the stability of the supply of affordable units in these structures.

Based on the survey results, the report authors emphasize that tenant protections and preservation initiatives are critical to protecting the availability and affordability of rental units in small multifamily properties for years to come. They specifically highlight the need for alternatives to credit checks and similar tenant screening practices to keep this segment of the rental market accessible to lower-income tenants. They also stress the need for increased access to capital improvement funds for owners of small multifamily properties to support proper maintenance and repair.

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