Association for Public Policy Analysis & Management

Rental affordability is a serious problem across the US. Renter cost burdens remain at historically high levels with approximately 47% of renter households paying 30% or more of their income on housing. Rent burdens have risen fastest for black and Hispanic families. While rising cost pressures on renters can be attributed to economic and demographic shifts there have also been substantial recent changes in who owns rental properties and how they are managed that might contribute to rising rents.

The upper boundaries of rents are usually determined by market forces. Lower boundaries are usually determined by the expenses of owning and managing a property. Within these boundaries owners and managers set rents, but how they do so is poorly understood, particularly in the stock of 1- to 4-unit properties. Many of these properties are owned by amateurs, with small portfolios and full time employment that is unrelated to real estate. Scholars have theorized a number of reasons, from the economic to the personal, why amateurs might sets rents lower than professionals. However there is only limited evidence that this is the case, largely due to a lack of data on rents and rental property ownership. Conversely, many of the so-called “milkers” in this market, who drastically cut expenses even as they charge market rents, have been found to be small-scale rental housing operators.

To discover how different owners set rents I designed and conducted a large survey of small rental property owners. The survey asked owners what factors they considered in setting rents and asked about current and past rents for their units. The survey provides data to show the link between the factors used in rent setting and specific rent outcomes. The survey was conducted on a stratified random sample of over 30,000 owners in the top 150 metro areas in the US.

The objective of this paper is to determine (i) whether there is a generalizable difference in the rent outcomes for professionally-owned units relative to units owned by amateurs, (ii) if there is a difference, whether the difference is attributable to the owners themselves, and (iii) whether the racial composition of neighborhoods affects rent-setting behaviors. The paper presents results examining the connection between ownership and two specific rent outcomes: whether an owner knowingly sets rent at below-market levels and the “stickiness” of rent, i.e. the decision to not change rents over a two-year period. I categorize owners using a few of the definitions that have been used to distinguish professionals from amateurs including: portfolio size, the use of corporate entities to hold property, and the proximity of the owner’s residence to their rental property.

1- to 4-unit properties collectively provide about half of the nation’s rental housing stock. Because these properties tend to have larger units than units in multifamily buildings, they are disproportionately the homes of renter families with children. Understanding how rents are set in these properties is important to understanding the drivers of cost-burdens for renter households, particularly renter households with children.