Switching Gears From a Residential For-Sale Property to a Rental: Part Two

On Friday, we touched on why some new condos are transforming into rental buildings. Can single-family homes make a similar switch?

Yes–and no. If a new single-family home doesn’t sell, turning it into a rental can be difficult. They’re just not quite as versatile, for a number of reasons:

  • It could be costly, thanks to extra fees. Single-family homeowners don’t want a large number of rental properties on their street because rentals often aren’t maintained as well as owned homes–which can drive property values down for an entire area.

Yet the foreclosure rate has caused that to happen in a number of U.S. neighborhoods.

Some cities are responding to the change. In February, Minneapolis instituted a $1,000 fee when a home is changed into a rental property, the Minneapolis Star-Tribune reports.

  • And renters may not want to live in a single-family home. Phoenix, for example, is suffering from an oversupply of single-family homes, according to MSNBC; the city received roughly twice the amount of new homes it could accommodate between 2005 and 2007, many of which were bought as investment properties.

But home values in the area are down–and those homes aren’t selling.

To cover the monthly mortgage payment, many owners are renting their investment properties out, a practice that has created a "shadow market" that is competing with the city’s apartment rentals, MSNBC said.

Yet the costs for renting a single-family home or an apartment just don’t match up.

Given today’s 5.72 percent average 30-year fixed mortgage rate, for a buyer taking out a $165,000 loan, the monthly payments would be $959.75, Bankrate says.

Or more–the National Association of Realtors’ March median single-family home price was $200,700. Depending on how much of a down payment the buyer put down, the monthly payments easily could be higher than $959.

Rents have risen, too–but they’re still at more affordable levels.

Because of bankruptcies and other issues, U.S renter households grew by almost 1 million last year–four times the pace of renter growth from 2003 to 2006, according to a recent Harvard University’s Joint Center for Housing study.

The higher demand has driven average U.S. rents up to $775 a month, the Wall Street Journal recently reported.

  • Yet condos are a slightly different story. The median existing condo price in March was $219,400, according to NAR, making condo prices more competitive with luxury apartment prices, which in most markets will rent for more than the $775 average.

    Thus renting a brand-new condo–comparable in many cases to a luxury
    rental unit in terms of amenities and appearance–for $100 or $150 more
    than the average apartment rent isn’t so unlikely. It may, in fact,
    actually be the same cost as renting a luxury apartment, depending on
    the area.

In the end, though, price may not even be the deciding factor.

The cost of renting a house in many areas will be higher than renting a condo or apartment; but in some markets where single-family home prices have fallen considerably and/or the market is really overloaded with inventory, the cost of renting a single-family home could possibly be close to the cost of renting a condo.

But that doesn’t mean people will want to. Renters have different needs–and ones looking to live in an apartment may not want the responsibility of renting a home, which involves upkeep. (Getting more space is one thing; having to mow a lawn that isn’t really yours is another.)

A condo, however, is likely to include general maintenance. It is also more likely than a house to provide a location closer to public transportation or an urban setting–which, for work or social needs, renters may prefer.

More units, more versatility: That could be one big reason for the Commerce Department’s March multifamily permit increase.

What do you think? Is the multifamily market be benefiting from its various moneymaking opportunities–ones that extend beyond basic unit sales?