Why Mid-tier Properties
Are the Future
B Y M I C H A E L Z A R A N S K Y
During the second quarter of 2016, the
homeownership rate in America fell to 62.9%
—the lowest it’s been since 1965.
The reasons for this decline include a mix of
factors, including the lingering effects of the
2008 financial crisis, strict lending
regulations, and expensive real estate costs
in major cities.
Other experts also cite things like high
student loan debt and delays in life changes
by young people.
While it’s debatable whether this is a good thing for
the real estate market, the trend is something real
estate investors should be analyzing.
Given this declining share of homeowners and a
pronounced decrease in buyers of property, it's clear
that the future will belong to renters.
So, what types of properties
should investors be
Contrary to what you may
think, it’s not the high-end
market. It’s the mid-tier
Here are 3 reasons why
midtier apartments are the
future of real estate.
A More Affordable
In major cities especially, rent burdens
are a serious issue. For example, in
San Francisco, a renter making the
median income for the city and paying
the median rent for the city would
have a rent-to-income ratio of 44%.
Undoubtedly, many living there would
opt for mid-tier homes over luxury
10% of all renters believe their rent is just
not affordable and 16% believe it is
36% believe their rent is just acceptably
affordable, meaning they have to give up
some things each month.
Only 39% believe their rent is truly
The cause is simple supply and demand. As
mentioned above, too many new apartments
are being built for luxury renters; supply
For the mid-tier market, not enough
apartments are being built; supply doesn’t
With so much supply, prices for high-end apartments are more likely to
grow slowly, stagnate, or even drop. For example, in New York City,
one of the most expensive markets on the planet, rent prices have
been falling since the end of 2016.
On the other hand, supply for mid-tier apartments isn’t meeting
demand for the number of middle-class and working-class people
looking for homes. This is leading to faster rises in rent—which means
investors and developers that focus on this market stand to gain a lot.
Occupancy Rates are
For luxury apartments, surplus and high costs have
pushed the average vacancy rate to 7%, while it’s under
4% for mid-tier rentals. This shows that you will have a
much easier time finding renters for the middle market.
What’s even more alarming is how long it’s taking for real
estate firms to find tenants for high-end properties.
Nationally, new units that opened in early 2015 still had an
average vacancy rate of 18% after 18 months. That means
many developers and investors in these properties have a
serious vacancy problem—and lots of money is being left
on the table.
With mid-tier apartments, you’ll not only be
able to fill a market need, you’ll also be able to
raise rents more quickly and fill up more units.
In the end, that equals a much better return
on your investment, offering the ability to
expand your real estate business and achieve
your bigger goals of long-term success.
M I C H A E L Z A R A N S K Y . C O M