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!
REASONS WHY LANDLORDS SHOULD MAXIMIZE PROFITS
1) The landlord made the initial sacrifice to save. Practically every landlord I know diligently spent years saving a much higher-than-average percentage of their income so they could come up with a downpayment on their property. Landlords made a choice to sacrifice for years instead of spend money on material items or expensive vacations. I saved 100% of my first four annual bonuses in order to come up with a 25% downpayment of my condo. It was very tempting to buy a lot of toys and go on elaborate overseas vacations, but for the most part I kept things pretty frugal.
2) The landlord took the risk to buy. There are three risks for every property buyer. The first risk is buying an asset on leverage. The second risk is buying a property during the wrong part of the cycle. The third risk is renting the property to an irresponsible tenant who damages the property and doesn’t pay the rent. If the landlord wants to invest in something risk-free, she could simply buy a US Treasury bond. To compensate the landlord for risk, the landlord seeks a return greater than the risk-free rate. Renters, on the other hand, assume very little risk if they pay their rent on time and don’t cause a ruckus.
3) The landlord maintains the property. Everything wears down eventually. It is the landlord who has to replace the carpet, refrigerator, tiles, molding, caulk, etc. It is the landlord who has to repaint the walls, sweep the deck, fix the toilet, and change the air filter as well. Surely one can earn a return on the labor deployed.
4) The landlord owns the property. You might think from observing how some renters act that they own the property they live in, but the simple fact is they don’t. Renters exchange rights of habitation for rent. There are no ownership decisions involved for the renter. A renter is a price taker, not a price setter. If a prospective renter finds the price of rent too high, then he/she has the right to move. The landlord has the right to price his property however he wishes within rental guidelines and accept the consequences.
5) The landlord pays property taxes. Property taxes are unavoidable. The more people vote to raise government spending, the higher property taxes will go. The higher property taxes go, the higher rent will rise. There is no free lunch where a renter can vote for benefits paid for by property taxes. Everything comes around. It’s important to be mindful of voting on new unfunded legislation. If renters and property owners do not want to be mindful, there should be separate renters tax and owners tax bills so that everybody can feel the pain.
6) The financing side is independent of the rental side. Just because a landlord is able to successfully go through the gauntlet of refinancing a mortgage to a lower payment doesn’t mean rent should also follow suit. The rental property doesn’t provide less utility to the renter if the landlord pays a lower mortgage. The rental property is exactly the same, and the price is dictated by the market. To ask for a rental decrease is like a landlord asking the renter to pay more rent because she got a raise.
WHAT CAN RENTERS DO TO KEEP RENT PRICES DOWN
Now that we’ve made some great arguments as to why a landlord should maximize his or her profits, let me share with you some strategies that will help keep rent prices flat-to-down. I’m providing these tips from the perspective of a landlord and a renter, unlike the commenter who probably has never been a landlord.
1) Vote to abolish rent control. Rental control is an artificial means of keeping prices down for the very few, while creating a supply restraint that jacks up prices for the very many due to increased demand. Rents are expensive in San Francisco and Manhattan partially due to rent control.
2) Vote to increase affordable housing. The city should incentivize builders to build more affordable housing projects with tax breaks. There will be huge demand for below market rentals, but at least some of the dislocation will be met.
3) Vote to raise height restrictions. If you’re really angry about expensive rents, turn your city into the likes of Tokyo, Hong Kong, and Manhattan with enormous skyscrapers. But eventually, your city will still run out of supply and cause rents to rise. Tokyo, Hong Kong, and Manhattan are three of the most expensive cities in the world, after all.
4) Contact your landlord as infrequently as possible. The less you ask your landlord for help, the more she will love you. Landlords love self-sufficient tenants who can change their own lightbulbs, replace their own faucet filters, and call their own plumbers and electricians if things get a little hairy. The more she loves you, the more guilt she will feel raising your rent.
5) Pay automatically and always on time. Set up a recurring payment through your bank online. This way you’ll never miss a payment. Reliable renters are priceless. Landlords will be much more hesitant to raise the rent for fear of losing your reliability.
6) Offer to remodel or fix things on your own. Because things are always wearing down, tenants who show initiative by upgrading or fixing things on their own are very desirable to landlords. Tenants can consider explicitly bartering for flat rent in exchange for fixing something.
7) Stop voting to increase government spending. Yes, it’s logical to vote on more education, better transportation, and more public servants to protect our streets. I want all those things too. But it’s important to understand that there’s no free lunch. Everyone must pay for increased government spending. To vote on more spending and then complain why rents continue to go up doesn’t make sense.
8) Send him a gift. The holidays are always a great excuse to send something thoughtful. If you can send a gift on his birthday, I can almost guarantee that your landlord will either not raise your rent, or raise the rent by less than he was thinking. If your landlord is a woman, she will be even more inclined to never raise your rent.
WHO DETERMINES WHO WINS AND LOSES?
It’s always an interesting question about how much profit one should make before being viewed as a greedy bastard. But profit margins on luxury good items such as Christian Louboutin shoes and Hermes bags are in the 95% range, yet people still buy them like crazy. Shouldn’t these luxury goods companies be damned for charging $5,000 for a handbag that might cost only $300 to make?
What about the popular shoe company, Nike, who employed child labor overseas to manufacture the latest $160 kicks? They’ve supposedly cleaned up their act, but shouldn’t we boycott them for good? Or what about good ‘ol Apple, who hasn’t come out with a new product in two years but still charges massive premiums over PCs? Their factories in China have been riddled with suicides over the years due to poor working conditions. Shouldn’t we stop buying Apple products?
When it comes to making a profit, you can always make a case for why the person or institution who is making a profit is bad. But I firmly believe in the free markets and our rights as individuals to make as much profit as the market can bear. We enjoy the spoils from our efforts and from the risks that we take. Sometimes, we also get crushed when markets collapse. If someone wants to take the risk of being a landlord, they should go for it. Some of the best tenants around are landlords because they understand all that goes into being a rental property owner.
As for my property, I charge $3,800 a month, which is about $200 a month below market value. I plan to keep the rent steady at $3,800 for another 12 months because my tenants have paid on time and no longer bother me for things after the initial three months. When the 12 months is over, I plan to raise the rent by a marginal $100 a month a year to make sure I’m not too far off market since rents have risen by 10% since they’ve moved in. By providing a $200 a month buffer, my tenants should hopefully cherish my property and continue to pay on time. That’s all I want. Is that so bad?
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 5% -25%. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates around around 4% – 5% in San Francisco, but over 10% in the Midwest if you’re looking for strictly investing income returns. Check out my Fundrise review as well.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2017 and beyond.