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Published: Sunday, 12/22/2013 - Updated: 9 months ago

Rentals' effect on home values unclear

Real estate experts say ownership still powerful force on neighborhoods

BANKRATE.COM
Experts say the market takes into consideration too many factors other than the number of rental properties to get a hard answer whether rentals lower real estate values in an area. Experts say the market takes into consideration too many factors other than the number of rental properties to get a hard answer whether rentals lower real estate values in an area.
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The percentage of dwellings that are being rented, rather than sold, has risen over the last several years. But do rental properties decrease the value of other homes in the neighborhood? The answer isn’t clear.

“Buyers are definitely concerned about too many renters,” said Herman Chan, a real estate broker in San Francisco. “People are less inclined to make an offer on a house that is in a street filled with apartment buildings [because] they perceive [the area] to be more congested, have less parking, and consider the residents more transient.”

Although those perceptions are often true — and sometimes valid — it’s hard to quantify the effect that rental properties have on home values, said William Rohe, head of the Center for Urban and Regional Studies at the University of North Carolina at Chapel Hill.

“I think there is a stigma about renters, but the research just isn’t there to say for certain that a given amount of rental properties in a neighborhood brings values down by a specific amount,” Mr. Rohe said.

The data on the topic come from a study Mr. Rohe co-authored in 1996 that looked at homeownership. For every single percentage point increase an area saw in homeownership, Mr. Rohe and his colleagues found a corresponding increase in value, over the course of a decade, of about $1,600.

But he said that a lot of factors go into a home’s value, and those findings may not have the same weight in a post-crisis market. For now, the hard evidence remains elusive.

Mr. Rohe admits the stigma against renters often has been a stand-in for discrimination on racial, ethnic, and class lines. Although those prejudices still are present in some markets, Mr. Rohe said homeowners sometimes have valid reasons to be concerned about an abundance of renters.

In general, said Mr. Rohe, renters don’t participate in their neighborhoods the same way that homeowners do. Because they are more transient, renters are less likely to participate in neighborhood associations. Homeowners are more likely to be a political force to be reckoned with because they’re expected to remain in their neighborhoods.

“Homeowners just have a greater ability to effect the kinds of changes that make a neighborhood desirable,” Mr. Rohe said.

It’s not necessarily true that the presence of renters, even in large numbers, is a bad thing, Mr. Rohe said.

“There’s a lot of research to show that rental properties are kept up as well as homes, and when they’re not, it’s usually the landlord, not the renter, who is to blame,” Mr. Rohe said.

Kurt Wannebo, CEO of San Diego Real Estate & Investments, said he’s never met a buyer who turned up his nose at a property just because it was near rental housing.

“They tend to look more at the condition of the nearby homes and the neighborhood in general,” Mr. Wannebo said.

The local market is an important factor. In areas with rent-control laws, renters are more likely to behave like homeowners,

Mr. Rohe said, because they have an incentive to stay for the long haul. But if the rental housing market is tight, you’re also more likely to see renters acting like homeowners.

But it’s a different story when it comes to condominiums, which are subject to a tighter set of financing rules.

“With condos, if the owner occupancy rate is too high for some types of financing, then we would need to make a price adjustment to compensate,” Mr. Wannebo said.

Usually, when more than 30 percent of the units are occupied by renters, lenders tend to worry that the building’s residents don’t have enough skin in the game to keep up the property, Mr. Chan said.

“If I’m pricing a condo listing where the renter occupancy is approaching 30 percent or more, I must advise my sellers that the inventory of qualified buyers drops significantly, which can impact desirability, and in turn, value,” he said.

“Only all-cash buyers or people with specialized lenders who can look past the number of renters will be able to make an offer,” Mr. Chan said.

In both scenarios, the sale price usually falls, either because the cash buyer demands a discount or the lender who can work around the occupancy issue most likely charges higher interest.



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