Are Micro-Apartments a Good Rental Investment?

It’s no doubt that in recent years, urban living costs have seemed to skyrocket, creating a housing crisis in certain areas. 

Everything from the cost of rent to the cost of public transportation in desirable cities across the country has gone up. 

For some, city living has become unreasonably expensive. According to Apartment Lists’s data, rents in New York City rose almost 33 percent from January 2021 to January 2022.

As the price of housing continues to rise, many renters are looking for another way, hence the tiny house movement. 

Many people enjoy the conveniences of inner-city living in tiny apartments more than a walk-in closet or built-in storage. Moving to a suburb further away can result in new expenses for renters, such as the need for a car, a parking space, and gas. 

It seems as though renters who need access to an inner city are placed in an impossible situation: they can either pay the premium for an inner city apartment or pay the associated costs of moving away from the city. 

However, there are new and exciting options for economically sensitive urban renters. 

An exciting new trend in multifamily living is micro-apartments, a new way for urban renters to reduce rental costs while still enjoying the conveniences of city living. 

What are micro-apartments?

It's probably easy to gather from the name itself what a micro-apartment is. 

Micro-apartment communities focus on offering renters a small, affordable living space in a premier location often cutting out dining space (giving up luxuries like a dining room). 

Young professionals are flocking to micro-apartment living in the hopes of reducing monthly payments while staying nearby to their workplaces and common conveniences like proximity to shops and transport.

Buildings focused on micro-apartment living often offer only small space floor plans to renters, surprisingly. In exchange, renters get to stay in their city of choice while reducing their rental payments. 

These communities often focus on an exceptional communal amenity experience to draw away from the downsides of micro-apartment living. 

For renters, micro-apartments are attractive for their relative cost savings and numerous amenity offerings. However, micro-apartments are also attractive to real estate owners and operators for a variety of reasons.

Why is now a good time to invest in micro-apartments?

Following the pandemic, many historically urban renters fled cities everywhere to find temporary accommodations in lowly populated areas or moved back into their family homes. 

Remote work made this all possible and renters could suddenly venture far from their workplaces without the fear of losing their job.

Many employers now expect their employees to come back to the office, whether it is in a full-time or hybrid capacity. 

As these employees return to cities to find housing, they're looking for better options to avoid jumping right back into the expenses of city renting. 

In part, this is what makes micro-apartments such a good investment right now. There is a palpable need for them in the general market. 

Micro-apartments are also cheaper to build and own for property owners. 

Micro-apartment communities have a lower buy-in price than traditional apartment communities, allowing investors to get started with less cash invested. 

By making apartments small, owners can accommodate more renters in a single building. Though the rents may be lower per apartment, the overall volume of renters can be much higher, resulting in a better profit.

For example, let’s say you owned an apartment building that’s average unit size was 1,000 square feet, with around 20 units. 

Let’s say each unit is rented for an average of $2,000/month. That building would generate a monthly revenue of $40,000. 

Take the same building, and cut all of the floorplans in half, resulting in 40 units at around 500 sq. ft. each. 

By adding desirable communal amenities, you’ll be able to charge a premium (yet, still below the city average) rent of $1,300/month per unit. The same building could then generate $52,000 in monthly revenue.

Data from Urban Land Institute shows that apartments 600 sq.ft. and under have the highest occupancy rate throughout the country. 

So, it goes to show that the idea of micro-living is already well adopted among renters, and owners who operate micro-living communities should have no issues with prolonged vacancy.

In short, it’s an opportune time to invest in micro-living apartments. The market has already shown a demand for it, it’s easier to maximize profits with smaller spaces, and urban living is not fading away any time soon.

Benefits of investing in micro-apartment

The draw of micro-apartment living has already piqued many renter’s interest. 

Now is a great time for investors to capitalize on the public interest in lower-cost, minimalist units that allow renters to stay in their city of choice with less associated living expenses. 

There are several benefits enjoyed by investing in micro-apartment living communities.

Lower initial costs to invest

Micro-apartment communities tend to be smaller buildings overall, therefore making their sale price much lower than a conventional apartment building. 

Plus, investors can generate more revenue with a smaller space when investing in micro-apartments, so the return on investment happens much quicker.

Micro-apartment communities are usually located in hot urban spots that typically come with a higher buy-in price point. 

Micro-apartment communities are a great way for investors to build portfolios in high-value cities for less money.

Healthy demand from several renter demographics 

As touched on earlier, there is certainly a demand in the market for micro-housing right now. Micro apartment living can appeal to a variety of tenant types, including:

• Young professionals looking to stay close to the office, but save money.
• College students looking to live off campus in a cost-effective manner.
• Older renters and retirees looking to live in a convenient urban area and downsize their living expenses.
• And more!

There are also opportunities to open your micro-apartment living community up for short-term vacation rentals. Micro-units allow travelers to find an affordable and optimally located apartment for their short stay. 

Owners of micro-living apartment communities may set aside a group of apartment units just for short-term rentals. Or they may allow their long-term tenants to use websites like Airbnb to sublet their rentals to travelers. 

By allowing tenants to rent their micro-unit out to short-term travelers, owners may be able to charge a premium on the rent.

However, allowing short-term rentals come with inherent risks, like ensuring accountability for damages to the unit and security concerns. 

One of the biggest security items landlords will need to figure out if they allow short-term rentals is how and when to quickly change locks between tenants.

Landlords and property owners are allowed (and expected) to change the locks between each tenant. If you plan on allowing short-term rentals, this is a commitment that will need to happen often with each new visitor. 

Luckily, landlords can take advantage of smart locks and keyless entry systems, some of which allow them to change the lock codes remotely.

Tenants are rarely allowed to change their own locks. This is important to consider if you plan on allowing your tenants to sublet their micro-unit. 

A tenant may only change the locks themselves if they have asked the landlord to do it several times and received no response or solution. 

Understanding the rules of when a landlord should change the locks is helpful if you plan on allowing short-term apartment rentals.

Higher ROI than conventional apartment communities

Since micro-apartments cost less to rent, it’s reasonable to assume the owner will make less money as a result. However, data shows this isn’t true. 

According to the Urban Land Institute's data, micro-apartments have higher occupancy stabilization and generate a higher rent-per-square-foot ratio than most conventional apartments.

Micro-apartments can be capitalized upon because they are a commodity, and an experience many renters are eager to get. 

Micro-apartment communities tend to be fully equipped with several on-site amenities, including pools, fitness centers, yoga studios, cafes, workspaces, game rooms, and more. By offering several eye-catching amenities, these communities can rent units for a higher rate despite their tiny sizes. 

Risks of investing in micro-apartments

Like any other investment, the act of investing in micro-apartment communities comes with inherent risk. 

No investment is ever “risk-free”, but relatively, the risks associated with investing in micro-apartment buildings are easily managed. 

Not getting the location right 

If you are going to invest in micro-apartments, you need to make sure you are doing so in the right area. 

Micro-apartment communities that pop up in suburban or rural areas are unlikely to turn many heads. 

People in these areas are used to having a lot of space for a relatively low price point, so the idea of moving to a smaller place to save money isn’t as appealing.

Micro-apartments work when they are located in desirable and otherwise expensive urban areas. 

A micro-apartment community will do best when it is conveniently located near shops, public transportation, event venues, and office buildings. They will also already have amenities or have room to add on-site amenities to the building.

If you invest in micro-apartments in an area that isn’t set up to cater to downsized living, it could result in lower-than-expected ROI.

Zoning troubles

Micro-apartments are a fairly new concept that started gaining real traction after the economic shifts of the pandemic. 

Since these communities are still a fairly young concept, there are still growing pains that come with them. One of the most considerable challenges is zoning laws and regulations.

Each state has its own zoning laws and regulations dictating where and how these buildings can be developed. 

Residential laws often have a minimum square foot requirement. For example, it took New York City almost 20 years to revise their law that stated residential rental units must be a minimum of 400 sq. ft.

Though many states are opening up to the idea of revising their zoning and residential law, it is a slow process. 

You will want to research the state and city you plan on investing in to see if there are any potential legal roadblocks.

Some states have laws that go beyond the buildings and units themselves, such as laws that dictate required parking space or required outdoor space.

These laws can be tricky to work with when looking to develop a micro-apartment community. So, be sure to research the current laws in your area before investing to determine which areas are most conducive to a micro-apartment investment. 

Conclusion

Data shows that micro-apartment units have higher occupancy rates and overall higher ROI than conventional apartment communities. 

Micro-apartments offer a win-win for owners and renters. As prospective renters return to big cities, investors can strike gold by offering micro-apartment communities in high value areas.