What is an SRO: How You Can Earn From Single Room Occupancy

Quick Answer

An SRO is a type of affordable housing where tenants rent individual rooms in a multi-unit building with shared facilities. Investors can earn rental income from SROs but must navigate unique challenges like regulations, tenant management, and community stigma to successfully profit from this niche real estate strategy.

Introduction

Single-room occupancy (SRO) housing has a long history in the United States as a source of affordable housing for low-income individuals. SROs first emerged in the early 1900s as a response to the need for cheap, flexible housing for single men in urban areas. These early SROs were often converted hotels or rooming houses that rented out small, furnished rooms with shared bathrooms and common spaces.

This guide will provide a comprehensive overview of what SRO housing is, how the market for SROs has evolved, and what investors need to know to successfully acquire, manage, and profit from SRO properties. Whether you are a seasoned real estate investor or an Airbnb host looking to expand your rental business, understanding the basics of SRO housing is an important first step.

The Basics of Single Room Occupancy (SRO) Housing

What is an SRO?

A single-room occupancy (SRO) is a type of residential hotel or multi-tenant building that rents individual rooms to tenants. SRO units are typically small, ranging from 70-350 square feet, and consist of a single combined living and sleeping room. SRO tenants usually share bathrooms and kitchens with other residents in the building.

Characteristics of SRO Units

The defining characteristic of SRO housing is that each unit is designed for occupancy by a single individual. The rooms generally include basic furnishings like a bed, dresser, sink, small refrigerator, and microwave. Bathrooms, kitchens, and other common areas are located in the hallway and shared among tenants on each floor.

Types of SRO Buildings

SROs are found in various types of buildings including old hotels, apartment buildings, and rooming or lodging houses. Many SROs are older buildings that may not have been originally designed for multi-tenant occupancy. Some SROs are owned and operated by nonprofit organizations as a form of supportive or transitional housing.

Who Lives in SROs?

SRO housing is typically occupied by low-income single adults including the elderly, disabled, and formerly homeless individuals. Students, transient workers, and recent immigrants also often reside in SROs. For many tenants, SROs are the only alternative to homelessness and provide a critical source of affordable housing in expensive urban areas.

Are SROs Similar to Airbnb Rentals?

While there are some similarities between SROs and Airbnb rentals, there are important differences. Like SROs, Airbnb involves renting out individual rooms to short-term guests. However, Airbnb rentals are typically in an owner-occupied home and guests have access to the entire residence. SROs are multi-unit buildings where tenants only rent a single room and share facilities with other permanent residents, and stays are longer-term.

The Current State of the SRO Market

The Decline of SROs in the Late 20th Century

SRO housing was once a common and widely available form of affordable housing in American cities. However, in the latter half of the 20th century, many SRO buildings were demolished or converted to other uses. This decline was driven by a combination of factors, including gentrification, urban renewal efforts, and rising property values that made SROs less profitable to operate compared to other types of housing.

Many cities also enacted zoning changes and building codes that discouraged SRO construction and made it easier to convert existing SROs to condos, apartments, or hotels. As a result, the number of SRO units in the US decreased dramatically from the 1960s to the 1990s.

The Resurgence of Interest in SROs

In recent years, there has been a growing recognition of the importance of SRO housing as a source of affordable housing and a tool to address homelessness. With rising housing costs and a shortage of affordable rentals in many cities, SROs have attracted renewed interest from policymakers, affordable housing advocates, and private investors.

Some local governments have launched initiatives to preserve existing SROs and incentivize the creation of new ones through zoning changes, tax incentives, and subsidies. These efforts aim to counter the loss of SRO units and ensure an adequate supply of affordable housing for vulnerable populations.

The Legal Landscape for SROs

The legal status of SROs varies widely depending on the city and state. Some jurisdictions have laws that specifically regulate the operation and maintenance of SROs, while others treat them like any other type of rental housing.

Many cities have enacted zoning and building codes that restrict the construction of new SROs or the conversion of existing ones to other uses. Some also have rent control laws that limit the ability of SRO owners to raise rents or evict tenants.

Navigating this complex legal landscape is crucial for anyone considering investing in an SRO. It's important to carefully research the specific local laws and regulations that apply to SROs in your target market.

How Does This Compare to Airbnb Regulations?

Like SROs, Airbnb and other short-term rentals are subject to a patchwork of local laws and regulations. Many cities have passed ordinances restricting or regulating Airbnb rentals in various ways, such as limiting the number of days per year a property can be rented, requiring hosts to register or obtain a permit, or banning certain types of short-term rentals altogether.

However, the specific legal issues facing SROs and Airbnb rentals are quite different. SROs are a distinct type of affordable housing that is often subject to its own set of rules and regulations, while Airbnb rentals are typically governed by laws that apply to short-term rentals more broadly. Nonetheless, for property owners considering either type of rental, it's essential to carefully research and comply with all applicable laws and regulations.

Investing in SRO Properties

How to Find SRO Investment Opportunities

Finding SRO properties to invest in requires a targeted approach. One of the best ways to find SRO investment opportunities is to work with a real estate agent or broker who specializes in this niche. They will be familiar with the local SRO market and can help identify properties that fit your investment criteria.

Online listing sites like Loopnet, Crexi, and Apartments.com sometimes have SRO buildings for sale. However, many SRO investment opportunities are off-market deals that are not publicly advertised. Networking with other SRO investors, property managers, and affordable housing advocates can help you find these deals.

Contacting local housing authorities and affordable housing nonprofits can also be a good way to learn about SRO investment opportunities. Some of these organizations may have SRO properties that they are looking to sell or partner with private investors on.

Evaluating an SRO Investment Opportunity

When evaluating an SRO investment, there are several key factors to consider:

• Location and neighborhood: Is the property located in an area with strong demand for affordable housing? Is it close to public transit, jobs, and amenities?
• Building condition: What is the overall condition of the property? Are there deferred maintenance issues or major repairs needed? Getting a professional home inspection is crucial.
• Occupancy and rental income: How many of the units are currently occupied? What are the current rents, and is there potential to increase them? Reviewing the rent roll and historical financial statements can provide valuable insights.
• Expenses and operating costs: What are the property's operating expenses, including utilities, maintenance, property management, insurance, and property taxes? Underestimating expenses is a common mistake when evaluating rental properties.

Financing an SRO Purchase

Financing an SRO acquisition can be challenging, as many traditional lenders are hesitant to lend on these properties. However, there are several financing options available:

1. Conventional mortgages: Some banks and credit unions will finance SRO purchases, particularly if the property is in good condition and has strong financials. However, expect to put down a larger down payment and pay a higher interest rate compared to a conventional apartment building.
2. Government-backed loans: The Federal Housing Administration (FHA) and Fannie Mae offer loan programs for the purchase and rehabilitation of SRO properties. These loans typically have more favorable terms than conventional financing.
3. Partnership with investors or nonprofits: Partnering with other investors or affordable housing nonprofits can be a good way to finance an SRO purchase. Some nonprofits have access to grant funding or low-interest loans that can be used to acquire and rehabilitate SRO properties.

Managing an SRO Property

Managing an SRO property requires a hands-on approach and a deep understanding of the unique needs of SRO tenants. Key aspects of SRO property management include:

1. Setting rents and lease terms: Rents for SRO units are typically lower than for traditional apartments, and leases are often month-to-month rather than annual. It's important to set rents that are affordable for your target tenants while still covering your operating costs and generating a profit.
2. Tenant screening and selection: Thoroughly screening prospective tenants is crucial to minimize turnover and ensure a safe and stable community. However, it's important to have realistic expectations and not screen out good tenants who may have limited income or credit.
3. Maintenance and cleaning: SROs require frequent cleaning and maintenance of shared spaces like kitchens, bathrooms, and common areas. Having a reliable and responsive maintenance team is essential.
4. Tenant relations: Building positive relationships with tenants and addressing their concerns promptly can help minimize conflicts and turnover. Providing access to supportive services like job training, healthcare, and case management can also help stabilize tenants.

How Does SRO Management Differ from Managing Airbnb Properties?

Managing an SRO is quite different from managing an Airbnb rental. With Airbnb, you are dealing with short-term guests who are typically tourists or business travelers. Turnover is high, and guests expect hotel-like amenities and service.

In contrast, SRO tenants are typically long-term residents who are looking for affordable, permanent housing. Turnover is lower, but tenants may have more complex needs and require a higher level of support and communication. SRO property management is more focused on creating a stable and supportive community rather than providing a hotel-like experience.

However, there are some similarities in terms of the importance of regular cleaning and maintenance, clear communication with tenants/guests, and the need to comply with local regulations and safety standards. Ultimately, both SROs and Airbnbs require a proactive and hands-on management approach to be successful.

Earning Money from SRO Investments

Rental Income from SROs

The primary way to earn money from an SRO investment is through rental income. Because SRO units are typically rented at a lower price point than traditional apartments, it's important to have a clear understanding of the local rental market and set rents accordingly.

To maximize rental income, investors should aim to minimize vacancies by marketing units effectively, screening tenants thoroughly, and maintaining the property well. Having a waitlist of pre-qualified tenants can help fill vacancies quickly. Investors should also have a clear and consistent rent collection policy and be proactive in addressing delinquencies to avoid losses.

Government Subsidies and Incentives for SRO Housing

Another way to increase the financial returns of an SRO investment is to take advantage of government subsidies and incentives for affordable housing. The Section 8 Housing Choice Voucher program provides rental assistance to low-income tenants, and many SRO properties are eligible to accept these vouchers.

The Low-Income Housing Tax Credit (LIHTC) program provides tax credits to investors who develop or rehabilitate affordable housing properties, including SROs. These credits can significantly reduce the overall cost of the investment and improve returns.

For SRO properties located in historic buildings, the Federal Historic Preservation Tax Incentives program offers a 20% tax credit for the rehabilitation of certified historic structures. This can be a valuable incentive for investors looking to acquire and rehabilitate older SRO properties.

Appreciation and Resale of SRO Properties

While not the primary focus for most SRO investors, appreciation and resale can also be a source of long-term financial returns. By making strategic improvements to the property and increasing rents over time, investors can potentially increase the value of the property and sell it for a profit down the line.

However, it's important to have realistic expectations about appreciation potential, as SRO properties may not appreciate at the same rate as traditional multifamily properties. The resale market for SROs is also typically more limited, as these properties are a niche asset class.

Some investors may also consider converting an SRO property to another use, such as traditional apartments, if market conditions and zoning allow. This can be a way to unlock additional value, but it also comes with significant costs and risks.

How Does This Compare to Earning Money on Airbnb?

Earning money from an SRO investment is quite different from earning money on Airbnb. With Airbnb, hosts can typically charge higher nightly rates and have more flexibility in setting prices based on demand. Airbnb also provides a platform for marketing and booking, which can help minimize vacancies.

However, Airbnb income can be more unpredictable and seasonal, whereas SRO rental income is typically more stable and consistent. SRO investors also have the potential to benefit from government subsidies and tax incentives that are not available to Airbnb hosts.

Ultimately, both SROs and Airbnb can be profitable ventures for property owners, but they require different strategies and come with different risks and rewards. It's important to carefully evaluate your goals, resources, and local market conditions before deciding which path to pursue.

Risks and Challenges of SRO Investments

Higher Tenant Turnover and Vacancies

One of the biggest challenges of owning an SRO property is the higher tenant turnover and vacancy rates compared to traditional rental properties. Because SRO tenants are typically lower-income and may face more housing instability, they are more likely to move out unexpectedly or be unable to pay rent. This can lead to more frequent vacancies and higher turnover costs for investors.

Rent Control and Tenant Protections

Many cities with SRO housing also have rent control laws that limit the ability of landlords to raise rents or evict tenants. While these protections are important for preserving affordable housing, they can also make it more difficult for investors to increase revenue or remove problem tenants. It's important to carefully understand the local rent control and tenant protection laws before investing in an SRO property.

Maintenance and Repair Costs

SRO properties often have higher maintenance and repair costs compared to traditional rentals due to the shared facilities and the age of many SRO buildings. Investors should budget accordingly and have a reliable maintenance team in place to handle repairs quickly and efficiently.

Crime and Safety Concerns

Some SRO properties are located in higher-crime areas, which can create safety concerns for tenants and make it more difficult to attract and retain residents. Investing in security measures like cameras, lighting, and secure entry systems can help mitigate these risks, but it's important to carefully evaluate the neighborhood and the property's history before investing.

Zoning and Regulatory Risks

SRO housing is subject to a complex web of zoning and regulatory requirements that can vary widely by city and state. Changes to these laws can have a significant impact on the viability and profitability of an SRO investment. For example, a city might pass a law requiring SRO owners to provide additional services or amenities, which could increase costs and reduce returns. Investors should stay informed about any proposed changes to SRO regulations in their target markets.

How Do These Risks Compare to Airbnb Investments?

While Airbnb investments come with their own set of risks and challenges, they are generally quite different from those facing SRO investors. Airbnb hosts typically don't have to worry about issues like rent control, tenant protections, or zoning changes that are specific to SRO housing.

However, Airbnb hosts do face risks related to property damage, liability issues, and the unpredictability of short-term rental demand. They also must navigate an ever-changing regulatory landscape as more cities pass laws restricting or regulating short-term rentals.

Ultimately, both SRO and Airbnb investments require careful risk assessment and management. Investors should weigh the potential rewards against the specific risks and challenges of each investment type before deciding which path to pursue.

Conclusion

In conclusion, investing in SRO properties can be a unique and rewarding way to earn rental income while also providing much-needed affordable housing. However, it's not a simple or risk-free endeavor.

Ultimately, the decision to invest in SRO housing should be based on a clear understanding of the risks and rewards, as well as a genuine commitment to providing safe and affordable housing for vulnerable populations. With the right strategy and mindset, SRO investments have the potential to generate both financial and social returns for years to come.

FAQS

What Are the Key Differences Between Managing an SRO and an Airbnb Rental?

Managing an SRO involves overseeing long-term tenants in a multi-unit building with shared facilities, while Airbnb hosting focuses on short-term guests in a furnished private space. SROs require more intensive tenant screening, rent collection, and maintenance of common areas, while Airbnb involves frequent turnover, cleaning, and guest communication.

Can I Convert My Airbnb Property Into an SRO?

Converting an Airbnb property into an SRO is possible but requires navigating zoning laws, building codes, and licensing requirements specific to SROs. You may need to modify the layout to create individual units with shared kitchens and bathrooms. Consult with local housing authorities and experienced SRO investors before attempting a conversion.

How Do I Find Quality Tenants for My SRO Property?

Screening tenants is crucial for successful SRO management. Partner with local housing agencies and nonprofits that provide referrals for low-income individuals. Conduct thorough background and credit checks, and consider offering move-in incentives for qualified tenants. Building positive relationships with tenants can also help attract referrals.

What Are the Typical Returns on SRO Investments Compared to Airbnb?

Returns on SRO investments vary based on factors like location, building condition, and management efficiency. Generally, SROs offer lower but more stable monthly cash flow compared to Airbnb, with less volatility in occupancy rates. However, SROs may appreciate more slowly and have a more limited resale market. Carefully assess your financing options and revenue potential before investing.