Mom-And-Pop Landlords and Rental Income
As discussed in previous posts in this series, the role of institutional investors in the housing market has attracted increasing attention in both academic research and policy discussions. However, relatively little is known about smaller, individual "mom-and-pop" investors who own and manage rental properties. This is despite anecdotal evidence suggesting that rental properties are a popular investment choice among households, and survey results showing that a non-negligible portion of household wealth is invested in non-owner-occupied housing.[1] Even in the United States, where institutional investors have been most active in the housing market, small and medium size real estate investors have experienced the largest growth across all cities in the period following the Great Recession.[2]
In this post, we examine findings from a recent study investigating the use of rental properties as retirement investments and the motivations behind retirees becoming landlords. Drawing on Australian tax filings data, the study documents a large increase in the share of retirees owning rental properties, taking place over the period between 2006 and 2019. Over this period, the share of middle-income retirees earning rental income increased from 12% to 20%. To uncover the motivations for this trend, the study employs analyses based on fiscal and transaction data, complemented by insights from two surveys targeting landlords who purchased properties between 2006 and 2019.
The key explanation that emerges from the analysis is that retirees depend on investment income to support their consumption needs, and favor assets paying regular income streams over realized capital gains. Rental properties are appealing because they offer recurring income payments. This appeal is amplified when bond yields and interest rates are historically low or declining, as during the period covered by the study.
The survey evidence presented in the paper is particularly striking. The first survey was distributed to members of the Australian Landlords Association (ALA), a group representing small, individual landlords who are Australian residents. An open-ended question at the beginning of the survey invited respondents to describe the motivations behind their decision to purchase a rental property.
The figure below summarizes keywords from survey responses using word clouds, where font size and color represent word frequency. The word cloud on the left displays keywords for individuals of retirement age (60 or older), while the word cloud on the right represents keywords for younger individuals. Among individuals of retirement age, “income” and “retirement” are the most frequent terms, appearing three times more frequently than the third most frequent word, “rental”. In contrast, for non-retirees, “income” is overshadowed by several other terms, including “capital” and “growth.”
These patterns are confirmed by responses to close-ended questions, in which participants are asked to assign scores to various motivations for purchasing their rental properties. For retirees, the prospect of earning recurring rental income ranks highest among the competing motivations, including capital gains. Interestingly, the second highest ranked motivation for retirees is the perception that returns on saving accounts are too low.
The second survey delves deeper into how retirees utilize rental income to support their consumption. It was conducted through Qualtrics and targeted a proprietary panel of landlords in retirement age (60 or older) who purchased rental properties between 2006 and 2019. The figure below presents the distribution of responses to the main survey questions.
The first question asks if rental income is a convenient way to pay for consumption in retirement. Respondents rated their agreement on a scale from 1 to 5, with 65% selecting 4 or 5. The second question asks what is most appealing about rental income. Participants are allowed to choose up to two options. The top responses are “Monthly frequency of payments” and “Safety and reliability of payments.”
The survey also asks about sources of investment income before purchasing the rental property. The most frequently selected option is “Savings accounts”. Lastly, respondents are asked how they funded the down payment for the property. The predominant answer is “Cash from saving accounts,” selected by 48% of participants, while all other options received less than 10% of responses each.
In summary, retirees are drawn to rental property investments primarily for the steady income they provide. Rental income is used to support consumption needs, and its monthly frequency is a convenient fit for budgeting. Before becoming landlords, retirees typically relied on saving accounts as their main source of investment income. They then used the funds in their saving accounts to finance the down payments on their rental properties.
Thus, retirees view rental properties as a form of annuity or bond, generating periodic income payments that help cover their consumption expenses. This is consistent with common perceptions of rental property investments and with narratives about “passive income.”
However, it remains unclear whether this common wisdom holds up from a portfolio or money management perspective. Rental property investments come with risks and frictions that do not affect more liquid assets like annuities and bonds. For one, rental properties are lumpy (meaning that a significant amount of capital is tied up in a single property), and they are also illiquid, as they are not easy to trade.
Moreover, rental income is not a risk-free cashflow. Owning and renting a property is similar to running a business; it requires ongoing monitoring, significant time, and further capital investments. For example, dealing with a problematic tenant could disrupt income collection, and issues like corrosion in the plumbing system might necessitate costly repairs. While experienced and skilled landlords may be able to manage their properties effectively and minimize risks, inexperienced landlords are more likely to encounter losses or even legal disputes.
In conclusion, while small investors are common in rental markets, we still have limited understanding of the motivations driving the decision to become landlords and of the role that rental properties play in household portfolios. This paper sheds light on some of the key factors that drive mom-and-pop investors to turn to real estate.
[1] Badarinza, C., J. Y. Campbell, and T. Ramadorai, 2016, “International comparative household finance’’, Annual Review of Economics, 8, pages 111–144.
[2] Garriga, C., P. Gete, and A. Tsouderou, 2023, “The Economic Effects of Real Estate Investors”, Real Estate Economics, 51(3), pages 655-685.