Of the nation’s rental housing stock, nearly 1-in-5 (18%) is comprised of homes in two- to four-unit properties. These small apartment houses come in many forms and shapes - duplexes, triplexes, fourplexes, townhouses, rowhouses, or garden apartments – and can be found in urban areas and city blocks, as well as traditional and suburban neighborhoods across the country.
Primarily purchased for investment purpose – although owners frequently occupy one unit as their primary residence - these small multi-unit houses make up one-third (34%) of the single-family rental (SFR) market (Figure 1).
There are significant geographic variations in their market size, however. Consider the 10 major metros that make up the CoreLogic Case-Shiller Composite-10 Home Price Index, for example (Figure 2).
When sized by the entire rental housing stock (i.e., single-family and multi-family combined), 2- to 4-unit rental homes range from 36.1% in the greater Boston metropolitan area to a mere 6.7% in Washington DC metro. But within the SFR housing market, 2- to 4-unit rentals commonly make up a significant portion, particularly in many urban areas in the Northeast and Midwest. In Boston and New York, for example, over 70% of the SFR stock consists of 2- to 4-unit dwellings. On the opposite end is the Denver and Washington DC metropolitan areas where 2- to 4-unit rentals represent only about one-fifth of the city’s SFR (21.2% and 19.1%, respectively).
However, whether they dominate the landscape of the SFR market or not, 2- to 4-unit properties provide important affordable housing to low- to moderate-income households, particularly in high-cost markets. For owner-occupants and investors, 2- to 4-unit properties offer a number of advantages as income and investment property. When used as a principal residence, purchasing or refinancing is eligible for FHA financing and often for more favorable mortgage rates and possibly greater leverage from lenders offering conventional loans. Second, the monthly rental income provides short-term cash flow that can be used to pay some of the property expenses. And in the long term, the investment offers potential capital appreciation from rising property value.
Figure 3 provides a snapshot of 2019 total gross return for the same 10 cities discussed above. The total gross return has two components - short-term return from rental income and long-term return from property appreciation.  Gross rental yield is annual rental income (current monthly rent multiplied by 12) divided by the property’s market value. The rate of property appreciation is measured as one-year change in the property value, proxied by the 12-month year-over-year change in single-family attached home price index. In the chart, property appreciation is stacked atop gross rental yield, labelled with the total gross return. Both the yield and property appreciation are five-month averages of January to May 2019.
Despite based on a very small sample, it is nevertheless quite noticeable that high-cost cities such as San Francisco, San Diego, Los Angeles, and New York tend to have lower gross rental yield – largely depressed by high property value amid moderate rent growth. Less-expensive cities such as Miami, Chicago, and Las Vegas generally show above-average gross rental yield (9.3%, 9.2%, and 9.0% respectively). The national average of annual gross rental yield was 8.4% during the first five months of 2019.
During the same period, annual long-term return from capital appreciation averaged 2.7% across the country. In Las Vegas, average capital appreciation for single-family attached reached double-digits: 11.7%. Denver and Washington DC metros also had above-average long-term return from capital appreciation. San Francisco, on the other hand, showed a small negative return in capital appreciation which contributed negatively to the total gross return. With the exceptions of Denver and Las Vegas, eight of the 10 metros recorded a small to moderate total gross return underperformance relative to the national average (11.1%). In Las Vegas, average yearly total gross return topped an impressive 20% in the first five months of 2019.
 Total net return is less than total gross return after subtracting operating expenses and capital expenditures.
 Properties in the CoreLogic home price index for attached homes include 2- to 4-unit, townhouses, condos, co-ops, rowhouses, duplexes, triplexes, quadplexes.
 According to the CoreLogic Single-Family Rent Index (SFRI), gross rent nationwide rose 3.1% year-over-year during the same period.
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