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Is an Important Entry-Level Product for IROs Going Extinct?

Entry-Level Products for IROs

Digested from Axiometrics

The number of duplexes, triplexes and fourplexes being built has fallen, which could remove an entry point into the rental business for many smaller rental owners.

For many small owners, the two-to-four-unit building is the entry point into the rental market. Buy a small duplex, make some upgrades, live in one apartment and lease out the other. When you have the money, buy a couple more, upgrade them and suddenly you have a rental housing business.

But this key entry point for rental housing ownership may be dwindling, according to Real Estate Economist Chuck Ehmann.

For more than 25 years, from 1960 to 1987, the average ratio of two-to-four unit permits to residential permits was 7.3 percent. In the early 1980s, these homes comprised more than 10 percent of all permits.

But from 1998 to 2008, the average ratio of two-to-four unit permits fell to an annual average of 4.4 percent and from 2009 to July 2017, it slipped to 3.3 percent. But as we move further from the recession, Ehmann sees the percentage of two-to-four unit permits rising.

“While the two-to-four-unit housing option will not likely disappear, they comprise a shrinking share of total multifamily housing options,” he writes. “Competition from the huge increase in rental single-family properties [because of foreclosures from the housing bust] has dampened demand for attached two-to-four-unit rentals. Why rent an attached property when you can have a home and yard to yourself?”

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