Why Millennials Are Long-Term Renters and How that Impacts Your Investment Choices

Written by Nathan Kuhn February 27, 2020

$1.5 Trillion¹. That’s the amount of outstanding student debt being carried today in the U.S., and most of that burden rests on the shoulders of millennials. The impact this financial obligation has on their housing choices, including their ability to move from renter to homeowner, can’t be overstated.

According to a recent survey of 10,000 renters by Apartment List, an online real estate company:

• 12.3% of millennial renters say they plan to “always rent,” up from 10.7% just one year ago
• Almost 1 in 2 millennial renters have zero dollars saved for a down payment
• Just 1 in 8 have saved more than $10,000
• Just 1 in 8 millennial renters will be able to afford a 20% down payment on a modest condo within the next five years
• Roughly 20% of the decline in the homeownership rate among young adults can be attributed to student debt, according to a recent study from the Federal Reserve

There are several factors at play here, but the two primary culprits are college debt and the high cost of homes. Together, many may simply feel the hurdles are too difficult to overcome, and they resign themselves to being part of a larger pool of long-term renters.

Why the Trend of Long-Term Renters is Important to an Investor

Because millennials make up the largest segment of renters, they are prime, long-term candidates to rent within an apartment complex. As an investor, a DST 1031 exchange may help you tap into the potential of this housing market trend. Multi-family properties⸺residential housing with multiple separate housing units⸺are a property type available with the Delaware Statutory Trust (DST) ownership structure, and they commonly include apartment complexes.

If millennials continue to opt-out of buying a home and long-term renters remain a trend, investing in multi-family real estate structured as a DST may provide a number of potential benefits, including:

• A flexible investment amount. Choose the proportion of ownership that makes sense for your unique situation.
• A simple investment and ownership process.
• Potential for recurring, long-term income without management responsibility or landlord duties.

But in order to objectively evaluate before relying too much on the long-term renter trend, it’s important to recognize there are strategies millennials can consider utilizing in order to purchase a home.

Is Delaying a Home Purchase a Choice or a Financial Constraint?

Home Buying Options Are Available

There is a misconception among this younger demographic that a home purchase requires a minimum down payment of 20%. That’s not necessarily the case. In fact, according to a recent article in Fortune:

“Mortgages backed by Fannie Mae and Freddie Mac offer loans with down
payments as low as 3%. The Federal Housing Administration secures home
loans that require only 3.5% down.”

The article also notes that these loans often come with higher interest rates and in some cases the additional cost of mortgage insurance. While that might result in heftier monthly mortgage payments, ownership is still within reach.

Fannie Mae’s research indicates student debt obligations might have delayed homeownership among a significant percentage of millennials, but it has not completely locked them out. Also, it’s worth remembering, as college graduates, they generally have higher earning power, which increases their chances of owning a home (when compared to those without a degree).

So Why Aren’t They Buying?

According to the Apartment Lists study, among renters who indicated they plan to buy a home at some point, affordability is without question, the largest deterrent. A full 77% state they can’t afford to buy at this time.

But there are other personal desires influencing this generation’s anemic effort toward ownership. 33% of renters in this category identified as “not ready to settle down yet,” and 24% indicated they are “waiting to be married or with a long-term partner.” Obviously, the percentages add up to more than 100% so the survey results would indicate that, for most millennials, there is more than one reason why they don’t own homes yet.

The Millennial Challenge May Be an Investor Opportunity

Whether millennials are remaining renters by choice or by financial constraint, we believe the trend overall bodes well for growth in the multi-family housing market. We consider many factors when evaluating DST (Delaware Statutory Trust) investments; certainly economic and lifestyle trends are among them. While no asset class is without risk, we feel confident in well underwritten multi-family opportunities, especially in markets with strong growth fundamentals such as Denver, Austin, Dallas, and Atlanta.

As we have discussed in previous blog posts, one benefit of exchanging into DSTs is it allows investors the opportunity to diversify their real estate holdings. With minimum investment amounts as low as $100K and DSTs available in a variety of asset classes and locations, we’re able to help a majority of our investors /exchangers invest into a diversified allocation or replacement properties.

Explore Your Investment Property Options

If you’re considering a 1031 exchange using a DST, give us a call. We’d be happy to share our deeper perspectives and help you evaluate the investment options that make the most sense for you.

¹ Ben Miller, “Addressing the $1.5 Trillion in Federal Student Loan Debt” www.americanprogress.org