With the rapid increase in property prices in major cities across the U.S. housing market in recent years, the need for affordable housing is higher than ever before. Large cities are also increasing in population as urban living is becoming more popular. In fact, according to the U.S. Census Bureau, cities and urban areas are now home to approximately 80% of Americans. This tells us that, in addition to the high costs, space is sparse. This is making finding a suitable place to live a real challenge. Experts in the real estate industry believe that micro apartments are a potential solution – for both occupants and investors.
In general, downsizing and “going small” has become a desirable option for people searching for affordable property in high-density, expensive cities. One way to go about this is to live in tiny houses and micro unit apartments. In a previous blog, we explained the tiny house movement and the investment potential this type of property offers to real estate investors. In this blog, we’ll tackle micro apartments: What are they and who is renting them? Are they really the next big thing in real estate or just a passing trend? Do they make for profitable real estate investments or are investors better off focusing on more traditional property types? To find the answer to these and other questions, just keep reading.
Related: What’s a Tiny House? Is Buying One a Good Investment?
What Is a Micro Apartment?
While there’s no standard definition for micro apartments, they’re smaller-than-average apartments with sizes no larger than 350 square feet (the size of what qualifies as a micro unit is determined by the market in which it exists). To put the size of a micro unit into perspective, a 300 square foot micro unit apartment is slightly larger than a one-car garage but considerably smaller than a two-car garage. As you can tell, these real estate properties are purposely-built and intended for a single resident.
Real estate investors should not confuse a micro apartment with a studio apartment. While they have many things in common, there’s a difference that comes down to function and ease. For example, both of them often have a single-area open floor plan and are usually less than 600 square feet. Micro apartments for rent, however, are more space efficient as well as energy efficient. They are designed in a way that creates an illusion of being bigger and more open than their actual square footage.
Micro unit apartments are also pre-furnished by the developer or landlord using space-saving solutions like Murphy beds that fold into the wall, convertible seating, extendable tables, etc. They also feature a kitchen, bathroom, and other necessities in addition to plenty of common areas and luxurious amenities where residents can relax and socialize like gyms, spas, and recreational areas. Such appealing features and the fact that they allow residents to live in pricey states at an affordable price balance out the small size of micro apartments. Many people are willing to trade in space for affordable city living and are prepared to treat the building as their living room.
Micro Apartments Are the Next Big Thing – Why?
Some might argue that living in micro units is one of those fleeting trends in real estate investing that will soon cool down. However, it seems that this isn’t the case. Many real estate professionals are calling these new type of rental properties “the next big thing.” And with the unique features micro apartments have to offer to tenants, experts also believe that they are here to stay, making them a sound option for real estate investing. The question remains: why?
An obvious answer is, as mentioned, the increasing costs of housing, but that’s not the only explanation. There’s another reason as to why these real estate properties are popular and that is – the millennial effect. The increasing number of millennials entering the workforce and the real estate market has corresponded with a rise in micro units. Some millennial data and trends shed light on why this generation is attracted to micro apartments over conventional apartments and rental properties. A recent survey conducted by the Urban Land Institute found that:
- Millennial first-time buyers choose where they want to live first before looking for a job. Many of them have demonstrated an interest in urban locations where it can be difficult to get into the real estate market without paying sky-high prices.
- The Great Recession has had a large impact on millennials. They have significantly lower incomes and much higher student loan debt loads than the previous generation. Therefore, they have less disposable income to spend on things like expensive apartments.
These two factors have led to two things: the delayed marriage and household formation among members of the millennial generation and the increasing attractiveness of micro apartments. Moreover, the survey found that 82% of micro apartment renters weren’t intentionally seeking them out. Rather, the location was the deciding factor for 97% of these renters. In addition, factors like price, proximity to work/school, neighborhood amenities, and the ability to live alone make these rental properties even more appealing to millennials.
Should You Invest in These Real Estate Properties?
We’ve covered why micro units are a good option for renters, but what makes buying a micro apartment a good investment? From a landlord or real estate investor’s point of view, there are four selling points to investing in micro apartments. Experts in real estate investing view these rental properties as money-making machines that you should capitalize on because:
#1. They Are Found in Prime Locations
As they say, “location, location, location” are the three driving factors of successful real estate investing. This holds true when investing in all types of rental properties – including tiny/micro ones. As mentioned, what micro apartments lack in space, they make up for in proximity to prime locations. This is appealing to savvy real estate investors as they always look for investments in the best location. However, the best places to buy a rental property are often major cities where prices are high. This can make it challenging for investors (especially beginners) to find an affordable property to buy and rent out for rental income.
This is where the first benefit of buying a micro apartment as an investment property comes in. Micro unit apartments enable real estate investors to buy properties in desirable locations without breaking their budget. In particular, these rental properties have a strong demand in cities where a thriving tech industry attracts a millennial workforce. This presents profitable investment opportunities for investors looking for traditional long-term rentals as these cities are known to be the best places to invest in real estate.
Note: Be sure to check out the 10 Best Places to Invest in Real Estate in 2019!
#2. They Appeal to Many Tenant Groups
While the vast majority of people who choose to live in a micro apartment for rent are millennials, there are also multiple segments of other tenant groups. Typical tenants in the micro apartment market are single young professionals who are just starting out their careers and want to live in a downtown location to avoid long commutes. College students are also a large target group of micro apartments seeing as they have not accumulated much “stuff” yet and, therefore, are comfortable with living in limited space. Finally, minor target groups include couples, seniors living alone, and single parents looking for smaller and more sustainable living spaces.
Furthermore, micro apartments have also started to gain popularity among travelers as a more affordable option than hotels. Today’s travelers prefer renting simple places to rest and refresh after spending hours exploring the city. Therefore, they appreciate the privacy, quality, flexibility, and convenience that such short-term rentals offer while on their vacation or business trip. Plus, the demand for these units and the fact that they’re found in some of the best cities for an Airbnb investment make listing one on the short-term rental site a profitable way to make money in real estate that you should definitely consider.
#3. Low Initial Investment Is Required
This benefit of buying a micro apartment for sale is especially appealing to beginner real estate investors. Are you getting into real estate investing with little money? Or do you simply have a budget that does not give you the ability to buy a traditional investment property like a single-family or a multi-family home? If that’s the case, there are multiple strategies to invest with little money that you can follow, one of which is to buy a micro unit apartment.
Given the smaller property size, the sale price of micro apartments presents a much lower entry point for investors to gain exposure to the real estate market. You’ll only need a relatively low initial investment to acquire a micro apartment making them a great way to get a foot on the property ladder. Furthermore, the lower price presents another investment option: buying multiple micro units for the price of one bigger traditional property. This is a smart decision as you’ll have multiple sources of rental income and the risk is spread across multiple units/renters.
Related: How to Invest in Real Estate on a Budget and Still Make Money
#4. You Can Achieve a High Rental Yield and Return on Investment
Of course, the main driving factor for why you should buy any rental property is its ability to make money and yield a good return on investment. According to ULI’s survey, this is something you’ll get when investing in a micro apartment. While these apartments are affordable to tenants, they are rented out at costs that are relatively high per square foot compared to an average or full-sized home. Based on research and data analysis of micro unit rental apartments, one of the key findings of ULI’s survey is that:
Smaller and micro units outperform conventional units in the marketplace – they achieve higher occupancy rates and garner significant rental-rate premiums (rent per square foot) compared with conventional units.
However, the amount of rental yield that you can earn depends on where the micro apartment is located, of course. For example, according to Realtor.com, micro apartments in Atlanta, Austin, and Denver rent for around $3 – $4 per square foot. But in New York City, it’s more like $8 – $9 per square foot. And in some popular locations like Manhattan, they can rent for even more per square foot than standard studio or one-bedroom apartments in the city! For real estate investors, the very attractive rental yields these investment properties offer is a good reason to look for micro apartments for sale. You can start your search with Mashvisor now!
Is There a Risk to Investing in These Properties?
There has been much written about micro apartments in recent years, not all of it positive. Of course, any kind of investment comes with risks that you should be aware of before spending money and time on it. For micro unit apartments, there are minimum apartment size requirements in many US cities. There are also zoning regulations, building and housing codes, and other municipal ordinances. In addition, there can be legal obstacles like minimum parking standards, inclusionary zoning requirements, rules regarding the unit-mix, and outdoor open-space and indoor common-space provisions.
While micro unit apartments have a stable tenant group in the rental market, they’re not for everyone. As mentioned, these properties are typically purposefully-built for a single resident. This means that if you choose to rent out micro units, there’s a specific niche you need to target. For example, you’ll have to cut families as potential tenants. As a result, turnover also becomes a risk especially if you’re renting out to couples who then decide to start a family and move into a bigger rental property.
Furthermore, one of the biggest challenges real estate investor may face when buying micro apartments is securing financing. While they are affordable to buy, conventional banks and lenders often enforce strict lending criteria for smaller-sized properties. Lenders will either require a much higher down payment (up to 40%) or turn down the loan application entirely. However, there are a few tips for investors to secure financing for micro rental apartments including:
- Build a good credit score and credit history
- Choose a micro apartment that is larger in size
- Try to find a micro apartment with amenities like private kitchenettes and bathrooms
- Shop around for a mortgage lender who finances this type of property
- Look into other options for financing a micro apartment besides a conventional bank loan
With careful research and due diligence, you can avoid these risks and find success with micro apartment real estate investments.
Where to Buy a Micro Unit Apartment in the US
As you already know, the location of your investment property will affect its performance and success. Micro apartment buildings are developed in major cities around the US to meet the demand of people who want to live in these areas but are short on cash. So, where should you buy one? Well, the best places to invest in these rental properties would be located in a city center with a high cost of living as well as strong job market growth. These factors attract millennials and tenants of micro apartments. Based on that, the top cities for real estate investing in a micro apartment are:
- New York City, NY
- San Francisco, CA
- Washington, DC
- Los Angeles, CA
- Seattle, WA
- Boston, Ma
- Chicago, IL
Start out your 14-day free trial with Mashvisor now to look for and analyze the best micro apartments for sale in your city of choice using data and predictive analytics!
How to Find a Micro Apartment for Investing
For tenants interested in renting micro units, a simple online search will show them where they can find these apartments for rent. But how can you, a real estate investor, find one to purchase and then rent out? An online search can help, but the best way to find micro apartments for sale is by using investment tools – like the ones Mashvisor provides! Our search tools allow you to find investment properties (of many different types) for sale in any city and neighborhood in the U.S. housing market in a matter of minutes.
To focus your property search on micro apartment rentals, simply use the “Square Feet” filter and apply the appropriate size. Immediately, you’ll be given a list of all properties for sale that match your criteria along with their address, price, and their estimated cash on cash return. Not only that but if you click on the property listing, you’ll get access to our Investment Property Calculator which comes with a Mortgage Calculator that helps you decide whether to buy the property in cash or using bank financing.
Smart real estate investors use this tool to further assess and analyze how much profit they can expect to receive from buying an investment property. In other words, this tool performs a property analysis for you and uses real estate data and analytics to give you accurate results. To help you determine whether buying micro apartments will yield a good return on investment, our calculator will run the numbers and provide you with the property’s projected comparable rental income, monthly expenses, cash flow, cap rate, cash on cash return, and occupancy rate.
To learn more about our tools and how we help real estate investors make faster and smarter real estate investment decisions, click here.
The Bottom Line
People say bigger is better, but it seems that’s not always the case in real estate. Micro apartments have great benefits to offer for both residents and investors. Residents now have the chance to live in pricey cities for a lower monthly rent compared to conventional apartment rentals. In turn, these properties have generated interest among real estate investors for the past several years as a viable option for making money in real estate investing.
It’s clear that micro units are not for everyone and that they come with certain risks to keep in mind. However, research shows that you can expect to see this trend just get bigger and bigger. So, to sum up, buying micro apartments is a sound real estate investment strategy and one that you should consider whether you’re just starting out or looking to break into the multi-family market. Do you think investing in a micro apartment rental is right for you? Let us know in the comments below.