With 80% of Americans living in urban areas, the demand for affordable housing continues to rise. Micro-apartments—small living spaces with a floor area of less than 350 square feet—could be a solution to this housing crisis.
But even if more renters and investors find smaller apartments attractive and affordable, some hesitate because of certain misconceptions.
In this post, we’ll dispel some of the most common myths about micro-apartments.
Let's get started!
Myth 1: All Micro-Apartments and Tiny Houses are the Same
Tiny homes and micro-apartments similar characteristics—both are smaller versions of a house and an apartment. On average, the floor area of these units is between 100-400 square feet.
Unlike tiny homes that are built on trailers, most micro-apartments exist in a residential building. And some properties have a mix of regular apartments and micro-units.
Yes, both tiny homes and micro-apartments are most popular among millennials who are looking for a starter home. But their target market is a bit different.
Tiny homes are more attractive to baby boomers looking to downsize after retirement. Meanwhile, micro-apartments are more appealing to young people in their 20s because rent is cheaper.
Micro-apartments come in different styles.
In general, micro-apartments fall under two categories: micros or congregate housing and small efficiency dwelling units or SEDUs. Micros/congregate housing usually have shared kitchens, and the main market is tenants who want the most affordable price. Rent for these units is often less than $1,000.
If your goal is to attract tenants who would stay longer, SEDUs would be the better investment. Rent for these units is often close to $1,200. And these small studio units include everything from a cooktop to dryers and washers.
Of course, actual rent for these units would vary, depending on location.
Myth 2: Investing in Micro-apartments is More Expensive
The cost of investment depends on the housing market, the purchase price, contractor design, and location.
Building micro-apartments on a per square foot basis tends to be more expensive, although the overall cost per unit is often lower than for conventional housing. And the standardized design of these microunits makes it possible to prefab.
Through prefab development, you could finish an entire building in six months. And this is the only way to build affordable units in expensive locations like the Bay Area, where costs have skyrocketed from $272 per square foot in 2001 to $833 in 2019.
While it’s true that operating and developing micro units require more money, you will have more rentable square feet in return. And the premium rent more than makes up for the additional cost.
Here’s how that works in action.
A 276 square feet micro-apartment building in Seattle, for instance, fetches a monthly rent of $1,850. In the same complex, a tenant pays $2,750 per month for a 550 square feet two-bedroom unit.
Based on this example, you could earn $3,700 (that’s $950 more) by renting out two micro-apartments. And these units will have a combined area of 552 square feet—that’s only 2 square feet more than a two-bedroom apartment.
And here’s another thing.
Although renters choose micro-apartments if it is 20% to 30% cheaper than a regular unit, rent for micro-apartments is not cheap in big cities.
In New York, rent for micro-apartments ranges from $8 to $9 per square foot. But in Manhattan, these small living spaces could cost more than a regular apartment depending on the location. Rent is cheaper in cities like Denver, Atlanta, and Austin at $3 to $4.
While renters appear to be saving money with these efficient units, that may not always be the case. And this is favorable to any rental business.
Myth 3: Micro-apartments Expose Landlords to More Risk
Most micro-apartment developments are in urban cities like Chicago, New York, Washington, Seattle, Denver, and Boston.
And, if your rental is close to schools and offices, you are more likely to find a new tenant faster. This reduces the risk of having an empty apartment.
For real estate investors, especially new investors, micro-apartments are more affordable compared to regular apartments. In cities where the cost per square foot is high, smaller units may be the only affordable option.
And it doesn't end there.
Units with less than 600 square feet tend to have the highest occupancy rates. Although micro-apartment renters are less likely to stay long term, it’s easier to find new tenants in urban areas where small living spaces are popular.
Now, what if you’re buying multiple units?
Again, the overall purchase price of two micro-apartments may be higher than an apartment with almost the same square footage.
Say you chose three micro-units instead of a conventional 800 square feet apartment. You may have to spend more to buy the apartments, but you will have multiple rental income sources.
With three tenants, the risk is much lower than relying on one tenant.
Myth 4: Living in Micro Apartments is Unhealthy
While micro-apartments are efficient living spaces of only about 250 to 370 feet, it could be risky for a tenant’s mental health.
These micro-units received criticism because they may cause stress, aggression, and social withdrawal in adults.
Yes, there could be some truth in these studies. But it all depends on the person living in these micro-units and the environment.
Young professionals in their 20s, the main target of these affordable units, are best suited for living in tight conditions. But older adults in their 30s and 40s who face different stressors may not be suitable for micro-apartment living.
In a survey by the Urban Land Institute Multifamily Housing Councils, 34% of responders under 25 years old expressed interest in micro-apartments. Meanwhile, 47% of respondents under 34 years old with roommates expressed interest in micro-units.
Design, amenities, and location also affect one’s well-being in a micro-unit. Public green spaces and aesthetics also play a role in overall satisfaction in a tight space.
High ceilings (9 feet or greater), oversized windows, built-in closets, and drawers could create an illusion of more space. Most micro-apartments designers consider things like this since renters focus on these features when searching for a rental.
Proper ventilation is also crucial for these micro-units. And as a landlord, you want to rent out a habitable unit or you’ll get in legal trouble.
It’s always a bad idea to split condominiums to build micro-units illegally to earn more income.
Living small becomes a safety hazard when you circumvent building regulations. And one landlord in New York had to pay fines of around $145,000 for subdividing one unit into nine micro-apartments while charging each tenant $600 per month.
Micro-apartments are as safe as any other housing if you follow building occupancy regulations like required windows and emergency exits.
Speaking of regulations, don’t forget to check local building regulations in your area as this could vary from city to city.
Myth 5: Micro-apartments Only Appeal to Millennials
Location is the main selling point of these micro-units. About 97% of micro-unit renters consider location first before the price.
So it's not surprising why these units are attractive to millennials, first-time renters, and single young professionals.
Most renters want to avoid long commutes. Some are even willing to get rid of their cars since many micro-apartments have limited parking and nearby access to almost everything they want.
These micro-apartments are attractive to college students who own less stuff and are used to living in limited space. But that’s not all.
Micro-apartment owners could also target baby boomers. Like millennials, individuals in their 50s are looking to downsize after retirement. And micro-apartments with the right amenities and a central location also appeals to these renters.
With seniors accounting for 25% of renters, landlords should consider this market for micro-apartments.
Aside from seniors, single parents, and couples looking for sustainable spaces also find smaller apartments attractive. Another opportunity for these units lies with travelers.
Micro-apartments that are common in cities where Airbnbs are in demand could also find a market among travelers. Short term rentals also provide a way for investors in residential real estate if occupancy rates become a problem.
What’s the future for micro-apartments?
Investing in micro-apartments is a lucrative venture in the right location. But like any other investment, it comes with risks.
Many US cities require a minimum square foot for each micro-unit, and building codes vary.
In New York City, for instance, each room should be at least 150 square feet, but requirements are bigger in other cities. There may be similar building codes and zoning regulations where you live.
City ordinances also affect micro-apartment developments. In Santa Monica, for instance, the local government placed a permanent ban on micro-apartments.
Another risk for any apartment owner is financing. Lenders are often stricter with small-sized properties, and the down payment can be as high as 40%.
If you're looking to finance micro-apartments, the best choice would be slightly bigger units. And look for lenders known for financing micro-apartments.
At the end of the day, micro-apartments are similar to any other investment. You need to do due diligence and dig around to mitigate risks to succeed.