Small landlords are less likely to receive rent


Owners know that being small is big work.

This is especially true as residential buildings with fewer than five units account for nearly half of all rental units in the United States, according to the Urban Institute. Small homeowners have seen the big drawbacks of this liability grow unsustainably in recent years.

In addition to providing nearly half of the rental housing in the country, independent landlords who largely own, manage and live in these small units often do not make a profit. In fact, one in five people regularly report annual losses.

These independents mom-and-pop owners manage 77% of buildings with two to four units, according to a Urban Institute analysis. Smaller units tend to offer options for modest tenants and the owners who manage them.

By the end of 2021, the typical U.S. tenant is expected to be encumbered cost – devote more than 30% of their monthly income to rent. But it is already a reality in many Californian subways.

In June 2021, the average share of revenue spent by a typical tenant was:

  • 33% in Los Angeles;
  • 33% in Sacramento;
  • 34% in Riverside; and
  • 36% in San Diego, according to Zillow.

Associated article:

More California Renters and Home Buyers Burdened With Costs Than Ever

High rents and record job losses result in inability to pay. Tenants living largest multi-family buildings were more likely to pay rent during the pandemic than renters living in smaller units owned by mom-and-pop owners.

The proof is in the payments. Between January 2020 and August 2021, the share of tenants who paid their rent in full on time was 6 to 9 percentage points higher for large multi-family buildings than for buildings with one to four units owned by independent owners, according to Urban Institute.

Here in California, a higher proportion of renters living in independent buildings with fewer units – or “small” tenants – paid their rent compared to other states, such as Texas and Georgia.

Throughout the pandemic, between 88% and 91% of small renters in California paid their rent on time in any given month, according to data from the Urban Institute.

For Los Angeles, the share is more variable than the state average. Between 84% and 92% of small renters in Los Angeles paid their rent at the end of the month in any given month between March 2020 and September 2021.

For San Francisco, the share is between 86% and 90%, although the survey contains fewer months of data, covering only between March and September 2021.

With low margins to start with, small California homeowners can’t easily afford to absorb missed rent payments like their larger counterparts would.

Associated article:

Help for homeowners who postpone maintenance during the pandemic

K-shaped recovery points to divide paths

With missed rent payments being a more common feature for small landlords than for large landlords, the hangover of the 2020 recession is shaping up to be a K-shaped recovery. With a K-shaped recovery, the economy has a very different impact on different segments of income classes.

Economists call this a K-shaped recovery since only some industries are thriving after this recession – on an upward trajectory towards recovery like the arm of the “K”. Meanwhile, other industries are sinking deeper into economic stagnation, with a downward trend like the “K” leg.

For example, strong stock market gains in 2021 have helped investors increase their wealth. Those who were able to invest in stocks and real estate grew rapidly during the hangover from recession period. This is especially true for investors betting on companies that have profited from the disruptions of the pandemic, such as those in the industrial property sector.

But for others, the descent that typically occurs during a recession was more pronounced. Many tenants, hit hard by the shutdown of service industries and job losses, have fallen behind on rent payments.

Small homeowners often made little or no profit even before the 2020 recession, and one in three homeowners in this category also reported declining income in 2020.

Associated article:

One-third of family bosses struggle with loss of rental income

Protection for mom-and-pop owners

According to Urban Institute.

Thus, tenants and owners of rental buildings with fewer units are more vulnerable to economic shocks than tenants and owners of large multi-family buildings.

However, the federal Emergency Rental Assistance (ERA) is available to help households unable to pay rent. It’s not too late for California homeowners with troubled tenants to apply. Owners may be eligible to receive a full 100% refund missed payments. To apply, visit Housing is the key.

While independent mom-and-pop owners are more likely to have difficulty during the hangover from recession that owners of large portfolios – and large buildings – many are also unaware of their ERA options.

Despite uneven gains overall, the California real estate market is enjoying better use prospects, increase in household formation and increase purchasing power of the buyer. [See RPI e-book Real Estate Economics]

For real estate professionals hoping to earn fees by helping tenants become homeowners, the next two to three years could be difficult. But with the return of jobs and with a more sustainable and comprehensive approach economic recovery, scheduled to start around 2024-2025, home sales volume and house prices will rebound again as the economy and real estate market enter the next purchase phase.

Associated article:

How and when residential evictions will resume in California

Want to know more about this topic? Click on the image below to download the RPI book cited in this article.

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