Examining Rental Housing in the US: Debt & Financing Characteristics

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The Rental Housing Finance Survey (RHFS) released by the U.S. Census Bureau contains useful information on rental housing in the US. The RHFS provides measures of financial, mortgage, and property characteristics of rental properties in the US on a current and continuous basis.

This post specifically looks at the debt and financing characteristics of rental housing from the 2018 RHFS survey. A previously released post examines general characteristics, such as the number of properties and their market value. The survey was conducted in 2018, with a 2017 reference year.

Debt

The debt burden, relative to measures such as equity value, is often considered when investing in real estate. The median debt-to-equity ratio in the RHFS is 80 percent, indicating rental properties have a healthy equity position, or ownership level.

Figure 1 shows that properties with debt-to-equity ratios of 120 percent or higher vary significantly by the acquisition period [1]. For example, the share stands at 16 percent for properties acquired between 2000 and 2004 and 39 percent for properties acquired between 2005 and 2009.

The shares of properties with debt-to-equity ratios of 120 percent or higher were 29 percent and 32 percent for properties acquired between 2010 and 2012, and 2013 and 2015, respectively. The share jumps to 51 percent for properties acquired between 2016 and 2018. Newly acquired properties, however, typically have yet to benefit from a holding time, which allows for equity appreciation and debt reduction through mortgage payments.

In some cases, a measure such as the debt service coverage ratio (net income divided by debt service) may be more meaningful, as it is directly related cash flow. The RHFS reports that the median debt service coverage ratio among all rental properties is 68 percent, indicating that many properties cannot cover debts with income flow from their properties. It is important to note that the average debt service coverage ratio for properties in the RHFS is 170 percent, indicating that some properties have a large cushion in terms of meeting their debt service.

Figure 2 shows that 43 percent of properties acquired between 2000 and 2004 have a coverage ratio of less than 80 percent compared to 57 percent of properties acquired between 2005 and 2009.

The share of properties acquired between 2010 and 2015 with debt coverage ratios of less than 80 percent is in the low 40 percent range, but the share rises to 48 percent among properties acquired between 2016 and 2018.

Financing

The RHFS also looks at the financing involved in obtaining rental properties, such as down payments, mortgage types (i.e. adjustable vs. fixed rate), and interest rates. The RHFS shows that the median down payment for all rental properties is 25 percent. Lenders typically require higher down payments on investment properties because they normally carry more risk, with the minimum being around 15 to 25 percent.[2]

It is important to note that the RHFS data show a considerable share of properties with less than a 10 percent down payment: 9 percent of properties acquired between 2010 and 2012, 18 percent between 2013 and 2015, and 19 percent acquired between 2016 and 2018 (Figure 3). Lenders may view these properties as riskier and might demand higher interest rates in return.

Another important metric in the context of financing is the share of properties with refinanced loans. RHFS data show that 62 percent of all rental properties have a new mortgage, while 20 percent have a refinanced loan.[3] Sixteen percent of properties acquired between 2000 and 2004 have a refinanced loan as well as 14 percent of those acquired between 2005 and 2009 (Figure 4).

Prior to 2010, mortgage rates were generally above 5 percent, but fell to the 3 to 4 percent territory after 2010 (except for a brief period in late 2018).[4] Owners of properties acquired before 2010 most likely had more opportunities to refinance when rates fell. The share with refinanced loans is significantly lower for properties acquired between 2010 and 2018 (in the 2 percent to 6 percent range).

RHFS data show that the majority of rental properties have loans that are fully amortized (79 percent) and 6 percent have balloon payments loans[5], meaning that a significant portion of the principal and interest is due at loan maturity in exchange for lower payments on the front end of the mortgage. This structure is often considered risky as it requires a lump sum payment at a future date.

The share of properties with balloon payments varies by year of acquisition (Figure 5). The share with balloon payments is 8 percent for properties acquired between 2000 and 2004 and 6 percent for properties acquired between 2005 and 2009. Only 1 percent of properties acquired between 2010 and 2012 have balloon payment structures but the share rises to 16 percent for properties acquired between 2016 and 2018.

 

Also included in the RHFS is information on fixed versus adjustable rate mortgages. Seventy-five percent of all rental properties have a fixed rate mortgage, while 13 percent have an adjustable rate mortgage (ARM).[6] The data also show that nearly a quarter of properties (23 percent) acquired between 2005 and 2009 have an adjustable rate mortgage, higher than the share of properties acquired between 2000 and 2004 (12 percent) (Figure 6).

Typically, an ARM is fixed for an initial period then moves to a variable rate, moving up or down based a market index. As the data show, ARMs are more common among properties acquired between 2005 and 2009. ARMs appeared to be an attractive option during this time period because there was an expectation that home values would increase and low payments were promised in the initial loan period.

ARMs are not as common among properties acquired between 2010 and 2012 (only 1 percent have ARMs). However, it’s important to note that the share of rental properties acquired between 2016 and 2018 with ARMs is 10 percent.

In conclusion, the RHFS contains a wealth information on rental properties in the U.S., such as investment, debt, and financing information. To further explore the RHFS, please access the survey here.

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[1] The charts in this post examine properties acquired between 2000 and 2018.

[2] Investment and Mortgage Property Rates. [2019]. Retrieved from https://themortgagereports.com/27698/investment-property-mortgage-rates-how-much-more-will-you-pay.

[3] Other options for this survey question included “mortgage placed on a property previously owned and debt-free”, “construction loan converted to permanent financing”, “mortgage assumed from previous owner” and “did not report”.

[4] Mortgage Rates. [2020]. Retrieved from http://www.freddiemac.com/pmms/.

[5] The remaining share consists of properties that did not report loan type.

[6] The remaining share consists of properties that did not report loan type.



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