Chris and Tinen Iles could have easily sold their tidy bungalow in south Minneapolis and used the profit to help pay for a more expensive house they bought nearby.
Instead, they’ve kept their starter house as a rental.
“So far it’s proven to be a pretty good investment,” Chris Iles said.
The promise of lofty rents and soaring home values has led thousands of Twin Cities homeowners to convert houses into rentals instead of offering them to other buyers.
By the end of May, nearly 20 percent of all single-family houses in Minneapolis and St. Paul were occupied by someone other than the owner, according to a Star Tribune analysis of Hennepin and Ramsey county property records. That figure has doubled in the past decade.
The trend has helped drive down the number of entry-level house listings in the Twin Cities. About three-quarters of the non-owner occupied houses in Minneapolis are valued at less than $250,000, and almost 90 percent are in St. Paul.
That’s driving up prices on the houses that become available for sale and making it more difficult for people who want to buy their first home.
Andy Harwood and Cheryllyne Vaz, sales agents with Keller Williams Realty Integrity, recently listed a 974-square-foot house in the Standish neighborhood of south Minneapolis for $240,000. Within hours they got 29 offers and sold it to a cash buyer for $275,000.
“I feel sorry for the 28 buyers who didn’t get the house,” Harwood said.
During May there were only 1,492 houses priced from $190,000 to $250,000 throughout the 13-county metro area, according to the Minneapolis Area Association of Realtors (MAAR). That’s about half as many as two years ago and only enough listings to last 1.2 months at the current sales pace.
The situation is worst in urban neighborhoods where houses are the most affordable. In Standish, for example, there were only six houses on the market at the end of May, about half as many as at the same time last year, according to MAAR.
The situation is in large part a byproduct of the housing crash and subsequent recession. In 2005, only 10 percent of all houses in Minneapolis weren’t owner occupied, but when house prices collapsed and thousands of properties went into foreclosure, investors swooped in and bought them at big discounts.
Would-be buyers got spooked and some couldn’t get a mortgage, creating a new wave of renters-by-choice.
“People no longer view rentals as your traditional apartment building,” said Jessica Martin, co-owner and broker at Tradewind Properties, a third-party property management company in Maple Grove.
The listing situation is so desperate, Martin said, that she often gets offers to buy houses that she’s trying to rent.
“I have done several deals over the past year where the renter decides they want to buy,” she said. “And they ultimately end up purchasing the very home they just rented.”
When the single-family rental market took off and national investors first started buying thousands of houses, the expectation was that they’d sell those properties once values increased.
That hasn’t happened. Instead, the most affordable house rentals have only become more popular because they’re pulling in bigger-than-average rent gains.
During May, single-family houses in the Twin Cities posted an average annual rent increase of 3.9 percent compared with a 1.3 percent gain for traditional apartments, according to Sarah Mikhitarian, senior economist with Zillow.com.
“It definitely makes it a little more lucrative if you’re a single-family rental investor, but it really makes it difficult for buyers,” said Mikhitarian. “Low inventory for the entry-level price point is just adding to the problem.”
At Renters Warehouse, a national property management company that’s based in the Twin Cities, demand for the least-expensive single-family house rentals has been stronger than any other segment of the market, according to Kevin Ortner, president and CEO of the company.
He said that prices for entry-level houses in his rental pool are increasing about 5 percent while rents on more expensive houses have leveled off.
The gains are largely driven by first-time buyers who have been shut out of the market by low inventory and end up renting instead.
“This creates a self-fulfilling prophecy,” he said.
That cycle has been interrupted somewhat by rising home prices, which have enabled many “accidental landlords” who were renting out their houses because the house was worth less than the balance on their mortgage to finally sell.
But Ortner said that with rent gains still on the rise, many accidental landlords are in it for the long haul.
When Anthony Giombetti, a marketing executive, moved to San Francisco several years ago for work, he was underwater on his four-bedroom house in Maple Grove, so he kept it as a rental.
Though he now has enough equity to justify selling the house, the house is still a lucrative rental and he’s not particularly motivated to sell it at the moment. Rents cover his costs and the house is gaining about 5 percent in value every year.
“It’s been zero headache,” he said. “And it’s probably a good diversification strategy to keep it as an investment property.”
Today, there’s a new breed of accidental landlords: millennial homeowners who are coupling and combining households and move-up buyers like Chris and Tinen Iles.
Chris Iles, who’s never been a landlord before, said that so far the endeavor has been pretty painless. When he needed to fill a vacancy, he got so many inquiries he hosted an open house rather than doing individual showings. And so far the economics make sense.
Since turning the house into a rental, its estimated market value has increased 14 percent in just a couple years.
“I’m constantly keeping an eye on the housing market because things can change so quickly,” Iles said. “If it doesn’t work out we’ll just sell it.”