Do Landlords Have The Right To Maximize Rental Profits?

Rent Control Causes A Shortage

Rent control leads to a shortage

One of the key income streams to obtain for financial independence is rental income. Not only will rent increase over time in good locations, your asset value will also increase as well. One day the mortgage will be gone and you’ll have this wonderful asset producing a stable income to take care of you and your family. But before you get to glory, a lot of hard work and soul-searching must be committed along the way.

The other day I received a lovely comment on my post, “How To Raise The Rent, Extend A Lease, And Get Rich As A Landlord“. We all know by now that landlords are greedy and evil people, especially those of us who own property in San Francisco. So this comment below simply reinforces the notion that you should never let your son or daughter marry a property owner.

YOU SHOULD ALL BE ASHAMED OF YOURSELVES!!!!! Conniving to use your power over your tenants to manipulate them into a situation that forces them to choose between the stress and hassle of uprooting their lives, and coughing up some amount you designate oh so carefully and gently deliver to line your own pockets.

I know you own it and you deserve to make a profit. BUT COME ON….The mortgage DECREASED by 23% but you still jack up the rent? You expect us to think that maintenance costs jumped up THAT MUCH that a 23% decrease in your mortgage doesn’t offset it???? That’s just a lie you tell yourself to ease your conscience. And the despicable lies you tell them to make them feel like they’re getting a deal and that you “probably” won’t increase it next time when you’re publishing articles on how to beguile them so you can do just that??? Wow.

It’s your property and it’s a business, granted, but you are absolutely heartless for sticking it to those who make their home in your “business”. Renters already have NO RIGHTS in this city so thanks a lot for publishing the tools for those in power to continue to stick it to us. I honestly don’t know how you sleep at night…oh wait….on the Egyptian cotton sheets the brand new parents who are probably doing their best to save for their kids college funds are buying you. Sweet Dreams Samurai.

That’s it! I’m giving away all my property now. Who wants some? The commenter makes some good points. However, if you know how to negotiate well by understanding one’s Best Alternative To A Negotiated Agreement (BATNA), you can increase your returns – and that goes for both sides. Besides arguing why landlords have the right to maximize profits, I’ll also share with renters how they can keep rents down in this post. Call me an equal opportunity advisor.

The only beef I have with this commenter is that she missed one thing: I only sleep on the finest Moroccan cotton sheets after I bathe myself in Evian water. Where’s my baby giraffe? Come on now!

Exploit Online Data To Lower Your Property Taxes

Victorian Mansion In San FranciscoEver since 2008 I’ve been fighting to lower my property taxes every year. If I didn’t fight, the SF Property Assessor’s office would undoubtedly keep raising my assessed value all throughout the financial crisis because they need to extract as much money from homeowners as possible. Renters certainly aren’t going to volunteer to pitch in if they can simply vote to raise property taxes. Too bad everything just comes around in the form of higher rents. In other words, together we must stand united against the government.

Your main mission as a homeowner is to convince the assessor’s office your property is worth as close to $0 as possible. Anybody who is proud their assessed home value is higher is being silly because the government will take advantage of you. The same goes for people who make a lot of money telling everybody exactly how much they make. Practice the mantra of Stealth Wealth and believe your primary home is a dump in order to build your net worth further.

Two Ways To Live In Your House For Free: Cash Flow And Principal Appreciation

National Home Price Index ForecastThe only reason why I open up my primary monthly mortgage statement is to check the split between principal and interest. My payment is fixed for three and a half more years at 2.625% so there’s never a change in absolute payment. It’s just fun to see the principal portion as a percentage of total payment go up over time. Progress is happiness.

The flip side to less interest payments is less deductions. I’ve calculated that mortgage interest payments are only truly worthwhile if you’re in the 28% tax bracket or higher. In other words, if your income is less than around $100,000 for singles or $200,000 for joint you’re not getting that much bang for your mortgage interest buck due to the standard deduction (~$11,900 for married couple, $5,950 for single) and the Alternative Minimum Tax. You’ll still be able to itemize and save on taxes, just not an optimal amount.

In this post I’d like to share with you how every potential homeowner or existing homeowner can live in their house for free using two main strategies that occur over the long run.

Should I Sell My Rental Property And Simplify Life?

Median Sales Price San Francisco. Source: Trulia

Source: Trulia. Median Sales Price San Francisco.

There are two reasons why I’ve been thinking about selling my main rental property. Real estate is on fire here in San Francisco and it’s always better to sell higher than sell lower. We’ve clearly passed through the worst of the property market and sales prices are up anywhere from 15-25% in the last 12 months alone. Meanwhile, the median asking rent is commensurately up 21% YoY to $3,398. Spending $41,000 a year after tax on rent seems hard to sustain, even if you are making over $150,000 gross a year and working for Google.

The second reason for wanting to sell has to do with hassle. The older I get, the less I want to deal with conflict. I’m currently writing this post during a moment of frustration so my thoughts may be biased. However, it is my hope by writing things out we can come to a rational decision for those who are also thinking about selling their rentals.

At about 2pm the other day I get a blast e-mail from our HOA management company saying,

“I have seen a number of complaints regarding tenant occupied units which needs to be addressed by the Unit Owners. In particular are the following issues:

1. Parking without authorization in someone else’s parking stall.
2. Parking beyond the confines of the parking stall’s floor marking.
3. Not breaking down and bundling their cardboard boxes in the garbage area.

The lack of compliance by tenants places the Unit Owner in serious jeopardy as the Board will be meeting next month to discuss in conjunction with other business matters, solutions and punitive assessments. You are required to have your tenants sign off acknowledging receipt of these documents.”

I’m accustomed to receiving such e-mails because it’s always the same three issues over and over again when a new tenant moves into the complex. No matter how much the landlord stresses these three issues to our tenants, an owner will inevitably complain to the HOA or the property management company about new tenants. The older the owner, the more they will complain, especially if the tenant is younger.

Owners feel they own more of the place than their condo dictates. The longer the inhabitant, the more rights they think they have. Furthermore, there is a bias against younger people because they are viewed as more inconsiderate, entitled, rude, and lazy. The funny thing is an older generation’s bias against a younger generation has held true even during the times of Socrates.

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households. They no longer rise when elders enter the room. They contradict their parents, chatter before company, gobble up dainties at the table, cross their legs, and tyrannize their teachers.” – Socrates, 470 BCE.

A PHONE CALL SOME TIME PAST MIDNIGHT

One Very Important Attribute To Look For Before Buying A Property

Peas Thermo Advil BottleEver since writing Obamacare Is A Net Positive For America I’ve been sick as a dog. My throat hurt so much I could barely swallow. Because my throat was also swollen, it was hard to breathe and sleep as well. I called my primary care physician on Wednesday to see if he could check my throat for strep and of course he was closed until Thursday. Seriously, why would a doctor’s office be closed on a Wednesday? Perhaps to get his existing patients to enlist in his $1,500 a year Concierge Service! Smart man.

No problem. I went to a newly opened Urgent Care Unit eight blocks away instead. I had no idea such a facility existed until a good friend of mine pointed it out. The Urgent Care Unit saw me right away and my co-pay was only $5 more at $25. The nurse checked me out, took a sample of the back of my throat and ran tests. It turns out I don’t have strep but a viral infection instead. Hurray! The doctor said it’s actually better to have a viral infection for a sore throat because we’ll almost always heal ourselves within 5-7 days. A bacterial infection needs to be treated with antibiotics and could get more complicated.

The doctor prescribed antibiotics and hydrocodone anyway since he said the strep test is only 80% accurate. He’ll run some more tests and let me know whether I should continue with the antibiotics in several days. It’s interesting to note that the doctor didn’t have to send in the prescriptions to my local pharmacy. I could use the print out and get the drugs anywhere I liked. Another plus for going to an Urgent Care facility.

The office clerk mentioned the Urgent Care facility is open every day of the week from 8am-8pm M-F and 9am-4pm S-S. All the doctors are board certified and emergency physician trained. Suddenly, I’m feeling much more secure as a resident and also a little wealthier as a home owner.

WHEN WE ARE YOUNG WE DON’T CARE FOR HEALTH AS MUCH

A Refinance Opportunity Has Emerged Now That Mortgage Rates Have Declined

5 Year History Of The Treasury Yields

The last time I refinanced my oldest rental property was in the Fall of 2011 (see red oval). I locked in a 3.375% rate for a 5/1 conforming ARM, which means I have until 2016 before my interest rate adjusts upwards or downwards. With a payment of $1,300 a month – $550 of which goes to principal -I’m not too worried about rising rates because the property generates $3,800 a month in rent.

I had the opportunity to refinance again in May 2012, but felt it was too much of a hassle to save $1,070 in interest a year so I didn’t. In retrospect, I should have just gone through the estimated three month long refinance process because the savings would be $1,070 X 5 years = $5,350 and I would have a year longer fixed interest period. Every dollar counts when you are no longer working.

WHY INTEREST RATES ARE MOVING

Real Estate Investment Mistakes To Avoid

Squaw Valley, Lake Tahoe California

Unless you are really rich or don’t care about financial returns, you probably shouldn’t own any vacation property. In the Spring of 2008, I bought a vacation property at my favorite resort up in Lake Tahoe. The property is in a secluded place with ski-in/ski-out during the winter and golf, hiking, and fishing on the premises during the summer. Ah, the good life!

Although Bear Sterns had gone under, I was still hopeful things wouldn’t get too bad. Our government consistently bails everybody out after all. Unfortunately, I was wrong as there was no amount of money the government could inject into the system at the time that could stop the wave of defaults. Instead of making a lot of money from my job that year, my income got whacked and I lost over $200,000 in my vacation property the subsequent year.

I thought I was getting a deal for $700,000 because the owner had just bought the place a year ago for $815,000. Surely, a property with over $80,000 in gross annual rental revenue could not go much lower. Of course I was wrong because the condotel secondary mortgage market shut down as no banks were willing to lend for vacation properties anymore. The only people who could buy were those with enough cash. This was a great reminder why cash really is king.

As the financial crisis worsened in 2009, fellow resort owners started going into foreclosure, bringing values of adjacent properties down as well. This is a big problem with owning a condo. You are at the mercy of your neighbor down the hall. In a real estate downturn, the first properties to get hit are vacation properties because they are non essential. Meanwhile, you have tons of people shirking on their loans in California because we are a non-recourse state. If you stop paying your mortgage and hand back the keys, the banks cannot go after your other assets!

I’d like to go over some real estate mistake one should avoid making. It’s good to relive financial errors in order to make better choices in the future!

SIX REAL ESTATE MISTAKES TO AVOID

Should I Include My Primary Residence When Calculating Net Worth? The Case For Yes

House on cliff in SantoriniThere’s a debate raging whether one should include their primary residence or not as part of their net worth calculations. In my post, “The First Million Might Be The Easiest,” I exclude my primary residence in calculating my net worth figure at 28 because it is the conservative and most accepted way of calculating net worth.

The way to calculate your net worth is a personal preference where so long as you are netting out your liabilities from your assets you’re on the right path. Calculating the proper net worth is all about creating different scenarios that match your risk tolerance and financial goals as we’ve discussed in “How To Better Manage Your 401(k) For Retirement Success.”

It does seem strange to exclude what is likely our most valuable asset from our balance sheet. This post will argue why it’s absolutely fine to include our primary residence when figuring out how much we are worth.

A RENTER’S PERSPECTIVE TO NET WORTH CALCULATION

How Hot Is The Real Estate Market? Example Of A 30% Overbid

how hot is the real estate market

Remember the $1.69 million three bedroom, two bathroom condo I used as an example in “How To Correctly Value And Analyze Property“? I forecast it would go for $1.85 million. 2553 Greenwich has a fantastic view of the Bay, but it doesn’t have a dedicated entrance, and it’s on three floors after walking up a flight of stairs.

I figured the property could easily reach $1,000/sqft in several years, or $2 million due to the view and upward trajectory of the SF real estate market. It turns out my estimate of $1.85 million was just wishful thinking of what I’d like to pay. A friend’s friend bid $2 million for the place cash and LOST! Just think about that for a minute. Someone was willing to pony up $300,000 above asking and still got a big fat rejection!

The only people who have $2 million cash liquid are those with net worths of at least $5 million if not much, much more. Of course someone with “only” a $2-3 million net worth fully invested in the stock market could just liquidate instead, but that’s highly unlikely. The multi-millionaires I know coincidentally follow two main Financial Samurai rules: 1) They don’t spend more than 1/10th of their gross income on cars, and 2) No one asset class makes up more than 50% of their net worth. They are highly diversified.

Lessons Learned From Not Selling My House

San Francisco Bay Area Home Price ChartsBack in the summer of 2012 I decided to test my house on the market to coincide with the Facebook IPO. (Should I Sell My House As Facebook Goes Public?) Although I didn’t want to sell my house, I was in a peculiar stage in my life where I was just coming off my WARN Act income after leaving my job of 11 years. With the great unknown ahead and a recovery in the housing market, maybe, just maybe I could entice a newly minted Facebook millionaire to buy my house for top dollar. With the cash proceeds I’d immediately fly to Vegas and bet it all on black to double my money! Just kidding.

My realtor was a tennis friend of mine who hounded me for literally a year to give him the listing. Because I was so reluctant to sell, I basically told him to list 5%-8% above the market hoping that my house would either not sell or I’d find an avid buyer and have no choice but to sell. It’s always a good idea to underprice your house in a hot market to create a bidding war. Overpricing is a buzz kill. The listing also gave me an excuse to finally paint my living and dining rooms I’d been putting off for years.

After about three and a half weeks on the market with several serious inquiries but no silly money I decided to pull the listing. My realtor begged me to keep the house up for a couple more weeks but I was sick and tired of the private showings. Deep down I continued to feel like selling at that time was a mistake given the recovering markets. But I also felt a little bad for my realtor given he spent so much time decorating and working on the marketing material. However, as soon as I thought about the six figure commission I’d have to pay, the guilt was replaced with disgust at the collusive pricing structure in the real estate industry.

Now that a year has passed, I can honestly say that I’m ecstatic to have kept my home. For starters, my house is my home where I plan to continue making great memories. Financially speaking, the real estate market in San Francisco has moved up anywhere from 8-30% depending on who you talk to due to a tightening labor market and continued low inventory. Prices are up about 12% nationwide YoY in April 2013 so the 8-30% range is in the ballpark.

This post will hopefully help homeowners who are thinking of selling or renters going through the process of buying in a recovering real estate market. Price gains should slow with the recent rise in interest rates, although you never know now that the herd is running in full force!

LESSONS FROM NOT SELLING A HOME