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Amid the glut of shiny new amenity-filled rental communities, one type of home is disappearing from the investment landscape: the starter rental. However, savvy small investors are uniquely positioned to capitalize on the shortfall and bring them back, boosting their cash flow in the process.
Modest one-to-three-bedroom ranch houses, SROs, studio apartments, or the top floors of owner-occupied duplexes have long served as affordable landing pads for college grads, new immigrants, or arrivals to a city starting their first job. Those days appear to be over.
As rents have increased, the entry-level house that was often shared amongst roommates and cost under $1,500 per month has been priced out of reach.
The Quiet Demise of the Starter Rental
Although the death of the starter home has been much discussed of late as the affordability crisis has taken hold, the death of the starter rental has made fewer headlines. Low-cost rentals have become something of an oxymoron amid steadily rising rents.
According to a 2026 report from Harvard’s Joint Center for Housing Studies, as quoted by Realtor.com, the number of rentals priced under $1,400 fell by 9.3 million units between 2014 and 2024, while units priced at $1,400 or above increased by 11.8 million, suggesting that affordable entry-level rentals were replaced by more expensive residences.
“Entry-level rentals are the first rung of the housing ladder,” Jiayi Xu, economist at Realtor.com, said in the Realtor.com press release. “An affordable entry-level rental gives a young household the financial breathing room to build savings, establish credit, and accumulate the down payment that makes homeownership possible.”
Nearly 60% of Young Adults Have Moved Back in With Their Parents
The Harvard report found that in 1990, nearly half of U.S. rental units cost under $600 a month, adjusted for inflation. By 2017, that share had dropped to about 25%, and it has steadily fallen since.
Realtor.com quoted a survey from storage solution company SpareFoot showing that 58% of adults who moved out of their parents’ home have since moved back in, with most citing affordability as the main reason.
“The under-30s is facing an uphill battle in terms of homeownership, in terms of saving, in terms of the labor market, in terms of inflation, in terms of a global pandemic disrupting a lot of young adulthood. So, I think it’s been challenging,” Kyla Scanlon, an economics writer and founder of personal financial education company Bread, told the BBC.
The Pendulum Swings Back to Affordability
The movement against bottom-rung affordable housing has not been recent. Pew Research found that 1 million SROs were destroyed or converted between 1970 and 1980 due to shoddy upkeep and substandard living conditions in major cities. Couple this with Wall Street-funded upscale rental housing communities aimed at high earners, and an essential stepping stone in the rental journey was lost.
As the housing crisis deepens, many states are looking to legalize SRO development, ADUs, basement conversions, workforce housing, and co-living set-ups. It could serve as a boon to small landlords.
Mom-and-Pop Landlords: Still the Backbone
Despite the hype around new, expansive rental developments—both built-to-rent master-planned communities and apartment buildings—mom-and-pop landlords still dominate the rental landscape, with about 90% of single-family rentals owned by landlords with under 10 units in their portfolio. As such, these landlords have the most sway in providing starter rental units.
Las Vegas real estate broker Brandon Roberts, co-owner of Signature Real Estate Group and past president of Nevada Realtors, wrote in a recent op-ed in the Las Vegas Review:
“The vast majority of rental housing in this country isn’t owned by large institutions. It’s owned by individuals, our friends, family, and neighbors. These landlords, commonly referred to as ‘mom-and-pop’ landlords, who hold anywhere between one and five properties, own 89.6% of single-family rentals. Collectively, these small-scale owners provide roughly 40% of all U.S. rental housing and disproportionately supply the most affordable options available on the private market.”
How Mom-and-Pop Landlords Can Profitably Fill the Gap
Mom-and-pop investors have an arsenal of strategies to offer lower rents while still cash-flowing investment properties.
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Rent by the room
The most obvious way for mom-and-pop landlords to fill the affordable rent gap is to rent their homes by the room. This can take many forms—whether as an “official” co-living space, often marketed as workforce housing, or as student rentals.
The basic setup is that tenants pay for their own bedrooms and usually share bathroom and kitchen facilities. For landlords, it means a more labor-intensive management role, but, equally, it usually results in greater cash flow than with a whole-house 12-month lease.
Rent ADUs
ADUs come in all shapes and sizes—from luxury setups to tiny-house-like glorified backyard sheds. They require start-up costs, which, if your ADU is on the lower-cost end, can be quickly recouped.
For landlords, it can be a winning strategy—boosting cash flow from your rental while leaving the main house structure untouched. Special mortgages are available for many of these projects.
Convert basements, attics, and garages
Taking in a “lodger” doesn’t necessarily mean having to pass them in the hallway in your bathrobe every morning. Sectioning them to rarely used parts of the house, with their own entry, could add cash flow while maintaining privacy.
Take advantage of zoning changes
Zoning reform is sweeping the U.S., enabling investors to convert former commercial spaces into residential use. Though this is not applicable to every city, finding a poorly used commercial space and converting it to residential—often as SROs, micro-units, and co-living set-ups—could be a cash flow windfall while securing a rental in a bustling part of the city.
Final Thoughts
Demand for affordable housing is so high that incentives to fund it make this an ideal time for both homeowners who have never considered being landlords and professional landlords with rental portfolios to tweak their holdings to offer lower-cost housing in smaller spaces. There is a wealth of resources out there for you to tap into to help ease the housing crisis while turning a profit in the process.
