A new study published in Housing Policy Debate, “The Prevalence, Profitability, and Risks of Milking among Low-End Small Rental Properties,” finds that small rental properties (SRPs) in high-poverty neighborhoods are riskier investments than SRPs in lower-poverty neighborhoods, though they are as likely to be profitable. While other studies have found that profitability of SRPs in high-poverty neighborhoods is linked to exploitative management practices, or “milking,” this study finds no evidence to support such a connection.
The study surveyed a random sample of SRP owners from the 149 largest U.S. metro areas in 2019 and 2021. Respondents were asked about one specific randomly selected SRP in their portfolio, their portfolio as a whole, and their management practices and profitability. To assess profitability of SRPs, the researcher compared owner responses about profitability of low-end SRPs (those in high-poverty tracts) with other SRPs. To examine risks associated with low-end SRPs, such as rent delinquency, turnover, and profit decline, the researcher modeled the impact of risk on profit by poverty rate of the property’s tract. Finally, the researcher examined the relationship between exploitative management and profitability by measuring the rent level of the unit compared to others nearby, the number of routine maintenance activities performed in the past five years, and whether the owner responded to a missed rent payment by filing for eviction.
The study found no evidence that the lower end of the SRP market was more profitable than the rest of the SRP market. The study, however, found SRPs in higher-poverty neighborhoods were financially riskier than those in lower-poverty neighborhoods. Properties in high-poverty tracts were 98% more likely than those in low-poverty tracts to have reported rent delinquency in the past two years when surveyed in 2019. In addition, owners of lower-end properties reported spending more time managing those properties. Respondents also reported the typical length of a tenant’s stay in SRPs located in high-poverty neighborhoods was seven months shorter than the typical length in lower-poverty neighborhoods, suggesting higher turnover. The study also found no evidence that “milking” – indicated by neglected maintenance, aggressive rent-setting, and frequent evictions – explains the profitability of low-end SRPs. Aggressive rent setting, for example, was no more likely to generate profits in high-poverty neighborhoods than in lower-poverty neighborhoods. Instead, profitability was linked to larger portfolios, longer-term ownership, longer-term tenants, and higher rents in general.
The findings of this study run counter to prior research that suggests exploitative practices play a role in low-end SRP profitability. According to the author, the lack of a clear relationship between exploitative management practices and profit suggests a need to examine exploitative practices in their own right, independent of profit. The author, however, also points out social desirability bias and nonresponse bias as possible limitations to the study and calls for further research. The article is available at: bit.ly/45Uh40r.