Why more triplexes is very, very good

Triplexes increase housing affordability, foster socio-economic and racial integration, and expand home ownership opportunities for people with lower rather than higher incomes.

I believe these are all good things we urgently need in Seattle.

The Queen Anne Community Council (QACC), its land use committee chair Martin Kaplan, and Seattle Mayor Jenny Durkan have been talking about triplexes as if more of them would be bad.

Here’s why “more is better” — and why critics of triplexes are so badly, harmfully wrong.

So, what’s the problem?

The City Council is considering land use policy changes that would make it easier to build what are commonly called granny flats, mother-in-law apartments, and backyard cottages.

In the City’s lexicon, the former two are called “Accessory Dwelling Units” or “ADUs,” while the latter is called a “Detached Accessory Dwelling Unit,” or “DADU.”

Among the changes are options that aren’t allowed today: this includes two rather than just one ADU, or a combination of one ADU plus one DADU rather than solely one or the other.

This isn’t actually the same as allowing triplexes in the City’s zoning code — ADUs and DADUs are governed by their own special set of rules. But because the upshot is the potential for three households to share one lot, some people have chosen to use the word “triplex.”

Kaplan and the QACC object to “3 residential units in one building (Tri-plex)” [sic] and the Mayor stated “we don’t want to create an incentive to basically transform [a property] into a rented-out triplex.”

The problem is that whatever we call it, and whatever policies get us there, any opportunity for three households to share the cost of an expensive urban lot is pro-affordability, pro-equity, and pro-access to ownership. Triplexes, two ADUs, or an ADU plus a DADU all fit the bill.

Pro-affordability

The median rent for a home in a duplex or triplex in Seattle is $1,575 per month, more than a thousand dollars less than the median rent of $2,800 per month for single family homes. (Source: Zillow data for Seattle city, September 2018; link)

Even small detached houses are more expensive: the City estimates the monthly cost of rent and tenant-paid utilities for two bedroom rented single family houses in 2016 was $2,163. (Source: Accessory Dwelling Units Final Environmental Impact Statement (“ADU FEIS”), City of Seattle; link)

And homes in ‘plexes aren’t too small for families. Among Seattle triplexes sold in the last twelve months, 81% have more than 2,500 square feet of total living space. The average individual unit size (assuming each triplex was divided equally) would be just over 1,000 square feet — easily big enough for two or more bedrooms. (Source: Sound Realty Group, referenced November 22, 2018; I counted cases where there was clearly one sound building, described as a triplex, with square footage provided; link)

One reason triplexes deliver affordability for families is the fact that urban land is expensive. (A new study says Seattle is one of the most expensive cities for cost per acre; link) Sharing the cost of a single-family-sized lot among three households rather than just one hits a sweet spot for homes more people can afford. (While big concrete and steel buildings concentrate more homes per acre, they are so much more expensive to construct than small wooden buildings that they aren’t necessarily more affordable.)

As reported in the ADU FEIS, the median annual income of households living in two-to-four unit homes in the Seattle area in 2015 was $49,000. That’s half what those living in single-family detached houses made ($98,000) and below the overall median of $75,000. According to the latest data, this ratio has held true: in 2017, median income in single-family detached houses was $100,000, while in two-to-four unit homes it was $50,000. (Sources: ADU FEIS, American Housing Survey (ACS), via census.gov; link)

Transforming a single family property into a rental triplex is a big win for affordability.

Doing so in an area of exclusively single family homes, where six-figure incomes predominate — eight in ten single family detached homes are owner occupied, and in 2017, the median household income for owner-occupied housing units in Seattle was $124,016 — would contribute to socio-economic integration. (Source: ACS; link and link) Reducing segregation by age, immigrant or refugee status, and race all come part-and-parcel of lowering the price of entry to make one’s home in those areas.

Pro-equity

Because African-American households have, on average, less wealth and lower incomes, they are both more likely than White households to rent rather than own, and also more likely to live in multi-family homes rather than single family detached houses:

• Just 24 percent of African-American households are owners versus 51 percent of White, non-Hispanic households;
• Less than than one third (30 percent) of African-American households live in single-family detached houses versus nearly half (48 percent) of White, non-Hispanic households. (Source: ADU FEIS)

Seattle’s current zoning bans multi-family homes on most residential land, allowing them almost exclusively along major arterials and in central business districts. This contributes to both racial segregation and greater exposure of people of color, including African-Americans, to negative environmental impacts:

• The dissimilarity index is one of the most commonly used tools for measuring residential segregation. Specifically, the dissimilarity index measures how unevenly distributed two different groups are within an overall area (such as a city or metropolitan area) based on the degree to which their percentage share in the overall area…The Black/White dissimilarity index measures 58 within the city of Seattle — within the high range.
• [W]ith some exceptions, persons of color disproportionately live in areas of the city with zoning for multifamily housing or “commercial” zoning (which allows a combination of multifamily housing and commercial uses). In Seattle, this housing is primarily located along, or otherwise in proximity to, major roadways
• Within a 200-meter radius of T-1 and T-2 roadways, roadways that carry an average annual gross tonnage of more than 4 million, the noise and air pollution impacts are most acute. Despite representing only 21% of Seattle land area and 19% of the total population, 40% of the miles of T-1 and T-2 roadways are in the areas with the highest population of our most affected classes. This means that people in protected classes are more likely to be living with exposure to acute noise and air pollution coming from high truck traffic roadways.

(Source: 2017 City of Seattle and Seattle Housing Authority Joint Assessment of Fair Housing; link)

Triplexes or multiple ADUs on properties currently limited to one house (or, under the current ADU/DADU rules, a house with only one ADU or one DADU) can help reduce both racial segregation and racially disparate impacts of pollution by creating more homes in more places that more African-Americans can afford.

By the City’s standard, you are “housing cost burdened” if you’re spending more than 30 percent of your income on housing.

Lots of people do spend more than this, and that can be a very bad thing if it is a hardship and not by choice. It can also be a reasonable thing: for example, if paying a lot for the right location enables you to come out ahead by slashing your transportation costs, or if you can afford to indulge in a view or extra space.

For the sake of discussion here, let’s assume most people either need or at the least prefer to meet their housing needs under this 30 percent of income threshold.

By that standard, here’s what’s within reach of Seattle’s African-American residents:

(Sources: Zillow.com; Seattle Times on median home price; link; ACS; link)

The transition from buying or renting one house per lot to one of three homes essentially doubles the number of Seattle’s African-American households who can afford it without being cost-burdened. The delta would be even more extreme if we were to look at incomes nationally among African-Americans who might want to relocate to one of the best places to get good jobs in the country.

Pro-ownership opportunity

“Speculation,” “outside investor interest,” and “developer profiteering” have been tossed around as things triplexes might attract that would in turn result in more being built.

If anyone — a homeowner, a non-profit organization, or an individual or company looking to profit — wants to “do well by doing good” by creating pro-affordability, pro-equity housing, I say the more the better.

The ostensible downside is that for-profit activity might make homeownership harder by increasing single family property prices. In 2016, QACC and Kaplan rolled out an economist who argued that the ability add two accessory dwelling units to a property could raise single-family property prices 20 percent or more. (Source: Findings and Decision of the Hearing Examiner for the City of Seattle, W-16–004; link)

We’ll work through why critics’ worst-case scenario is unlikely, but let’s cut to the chase by assuming it could happen.

If you’re a homeowner, consider this: if I tell you your mortgage payment is going to rise by 30 percent, but as part of the deal you are also going to get rent checks from two apartments every month, will you be better or worse off financially?

It’s close to mathematically certain the answer is “better.” The trade-off would be giving up some square footage of living space (or, for a DADU, yard) in exchange for rent.

From taking a boarder to New England’s triple deckers, trading some space for rent with which to subsidize the mortgage has been a way for people with less rather than more income to achieve ownership (including, in the latter case, my grandparents).

The triple decker never won any architectural awards, but it enjoyed enormous popularity. It gave working- and middle-class families a chance to own a home. They could live in one unit and rent out the other two. (Source: The Rise, Fall and Rebirth of the Triple Decker, New England Historical Society; link)

Renting out two apartments rather than one expands the number of households with the income to carry a mortgage on Seattle’s expensive single-family properties. And here’s the kicker: someone who simply wants to live on the property without making a profit will likely be willing to outbid a for-profit buyer, if it’s the place they really want.

Let’s make it real with an example.

To keep it simple, I am going to focus solely on the income needed to pay a monthly mortgage payment at the City’s “cost burdened” threshold. The idea being that if you can’t do that, you have a big problem. (Clearly, coming up with a down payment may also be a big problem for lots of folks, but those who can’t will carry on renting — and we already shown why “more triplexes” is good for renters.)

The monthly mortgage payment at today’s market value and interest rates for our North Seattle single family house with 2,450 square feet of living space would be $5,659. (Unless otherwise noted the rent and mortgage data are Zillow.com defaults and the income figures are from 2017 ACS data.)

Here’s the harsh reality of the cost of single-family detached houses in Seattle today. Staying under that 30 percent threshold with a $5,659 monthly mortgage payment requires an annual household income of $226,360. Here’s who can manage that:

Now let’s look at trading one-third of the living space (816 square feet) in order to collect rent from a two-bedroom, one bath apartment. Based on Zillow’s median rent per square foot in a duplex or triplex, that would be $1,891 monthly. (This may seem low to you, especially if you’ve been hunting for a two-bedroom apartment in Seattle lately. It actually lines up well with nearby rental listings; I’ll come back to the implications of different assumptions for the rent after working through this as a stake-in-the-ground.)

We’ve taken the residual mortgage payment down to $3,768, with a cost-burdened threshold of $150,736. Our apartment has a cost-burdened threshold of $75,112.

We’ve expanded both ownership and created a good-sized home where a family making less than six figures can afford living along with one that does.

But things get a lot better for ownership if we divide the house evenly into two rentals and an owner’s suite. The residual mortgage payment after rent drops to $,1878.

We’ve just arrived at something that should be intuitively obvious: if three households making, say, $75,000 each wanted to band together and combine their purchasing power, they could compete with one household making three times as much for the same property. Three families could do that today if our house were on the market as-is.

If independent apartments aren’t allowed, however, and their circumstances changed, one or two remaining families might face the tough task of finding new people to live with communally rather than the mundane one of advertising for some tenants.

Allowing three homes does enable a non-resident owner to make money by renting out three rather than one or two apartments. So let’s look at the impact on property value.

The third apartment, formerly the owner’s suite, also has a market value to rent of $1,891, just like the other two. That brings us to total monthly rental income of $5,762.

With a mortgage for this amount, the owner would be operating at exactly zero operating profit. That implies a potential sale price to a profit-seeking buyer of no more than $1.4M — a one percent increase over its market value of $1,386,649 now.

Anyone who just wants to live in the owner’s suite would be willing to bid more than $1.4M, without regard for the $5,762 profitability threshold if it were the home they really want. That’s an option — without being cost-burdened — for any household making more than $80,000 per year.

We can tinker with numbers and expectations for property appreciation and rates of return endlessly, but this ought to be intuitive too. In areas where both triplexes and single-family houses are or have been allowed they co-exist side by side. Neither “drove out” the other because one was a were slam-dunk a better business proposition. (The Sightline Institute published a map (link) of of triplexes and other multi-family homes built alongside single family homes prior to downzoning explained in this article (link).)

The choice to build or invest in a single family house versus a triplex is a choice about what market segment to address. It’s possible to make money by catering to the needs of people with relatively less just as well as the needs of people with relatively more.

Much like selling a Toyota rather than a Lexus, the “product” just needs to be different. (Coincidentally, the starting price of a Camry is about one-third that of a Lexus LS).

On this note, let’s come back to my stake-in-the-ground for market rent. Median rent for two-bedroom apartments is $2,707. That’s more than the median for duplexes and triplexes ($1,575), my $1,878 assumption for ADUs in my home based on median rent per square foot, and within spitting distance of single family houses ($2,800)

A key reason is that many are in large apartment buildings with some combination of newness, concrete construction, amenities, or views. My property has none of these things. That’s a clear-cut reason why ADUs in it or any like it won’t command that rent.

If they could, the methodology above would imply an 44 percent increase in the value of my property — to just under $2M. But if my property had (say) views that would enable me to demand that much for an ADU, guess what — it would be worth $2M already.

But to lay the speculation bogeyman to rest, we can quickly use real comparable listings — aka the competition — to show that people with less come out ahead with three homes per lot even with higher (but actually feasible) rents.

Here’s a rundown of two bedroom rental listings in my neighborhood. (Source: Zillow, search term “Wallingford,” filter = 2 bedrooms, apartment (I excluded a floating home and a sponsored ad that was not in Wallingford); link referenced 11/25/2018)

The median and the mean (excluding our $4,000-plus luxury outlier) are nearly identical — $2,095 and $2,098, respectively. Every home materially above them is in a large apartment building. If we run the highest rent commanded by a ‘plex or ADU in this area — $2,100 — through the methodology above, here’s what we get:

• The “break even on rental income” property value rises 11% from today’s market value (from $1,386,649 to $1,543,715). This bumps the annual income needed to afford outright ownership from $226,360 to $252,000. So — let’s take a moment to play the world’s tiniest violin for the stress that might place placed on households who earn between $227,000 and $251,000 who want to own one big house with no tenants plus a mortgage payment under 30% of their income.
• On balance we still lower the income needed to own with one ADU ($168,000) and lower it a lot with two ADUs ( $84,000). People with lower incomes willing to subsidize the mortgage with rent still come out ahead of the status quo.

Postscript: win-win is within reach…

If you’re with me so far on “more triplexes” (or two-ADU properties) increasing housing affordability, fostering socio-economic and racial integration, and expanding home ownership opportunities for people with lower rather than higher incomes, I can imagine one concern.

If you feel like you have a shot at buying a single family detached home and don’t want to be in the business of renting out some part of your property, you might worry that more single family properties converted to three homes means fewer that are “move in ready” available to you.

Here’s the crux of the matter: a massive constraint on the supply of more single family homes is today’s large lot size requirement. There are thousands of perfectly fine houses on lot sizes of 3,000, 2,500, or even 1,500 square feet grandfathered in before the current rules.

But no more like these can be built, because single family lot sizes by law must be at least 5,000 square feet (with some areas requiring 7,200 or 9,600 square feet). Yet more than one in three single-family lots are 6,000 or more square feet: easily home to two (or three, or more) detached houses if subdivision were allowed. (Source: ADU FEIS)

If you believe in more affordability, stand up for triplexes. If you want more single family detached homes (that also happen to be more affordable than those allowed under the status quo) fight to (re) legalize small lots, everywhere, as well.

It’s a win-win that’s within reach, Seattle.