Earning rental profits or rental income is the key to having a valuable rental property. A lot of people are buying rental properties now for income since rates are so low post-pandemic.
The value of cash flow has gone way up because it takes more capital to generate the same amount of risk-adjusted income. If you want to build wealth, I would focus on buying rental properties with some of your net worth.
Real estate is becoming intrinsically more valuable as more people spend more time at home.
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.
Objections To Earning Rental Profits
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 Rental 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 Renters Can Do To Save On Rent
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.
The Open Market Decides Capitalism
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?
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If a landlord is turning any profit from rent after running through all the standard home ownership costs + the business costs of being a landlord with compliance, advertising, and the like, by rights it probably would’ve been cheaper for the tenant to have just owned the house. There’s some argument for econ of scale and better interest rates, but the latter can be subsidized and for homeowners, deducted.
If you’re owning a business and claiming you should be compensated for risk, talk to an accountant. The LL in LLC isn’t just for show. A company with a million asset and a million debt has zero net to go after. Pay yourself out to keep equity down. The “owner taking on all the risk” nonsense isnt something that happens with some proper planning.
Rent control should only be repealed if Prop 13 (the whole damn thing) gets repealed. Prop 13 is rent control for landlords. In fact rent control was put into place in reaction to Prop 13. Don’t want to deal with rent control? Get rid of Prop 13. Otherwise, have fun with your tenant’s rights headaches.
Financial Samurai says
That’s a good point. I finally decided to sell one of my rental properties in 2017 and simplify life.
I had Prop 13 benefits, but I was still paying a whopping $23,000 a year in property taxes. That’s nuts, since I also pay another $30,000 year in property taxes for my other properties as well.
Benjamin Barker says
Typical. The lady commenting spoke out against this “Your lease is up. You can stay, but I’m going to raise your rent $50” scam. As a renter, you are left with a choice of paying an extra $600 dollars in rent that year, or spending 2 grand in moving expenses. I’m a renter who just said no to a $50 dollar rent increase as a matter of principle. If all renters said “no” and moved to that, landlords would no longer pull this garbage because it would increase vacancy time. This practice is the equivalent of having a toll bridge that costs $3 to enter, with a surprise $10.00 toll to exit the bridge, but it costs $15.00 to go back and exit the other way. Then your argument is “Oh, you could have swam across, so I’ve done nothing wrong.” People need shelter.
I noticed most everything on your list of “ways to decrease rent” involved decreasing the costs to the landlord. Typical. Rent limits are flawed based on the basic economic principal of supply and demand. Here’s what you have left out: crack down on buying housing for profit. In most cases, I am a free-market, libertarian type. However, profiting by renting out shelter is the equivalent of profiting from renting out oxygen. Both are one of the 5 necessities of human life. You are simply profiting from the fact that you had the cash to buy the shelter before the renter did. You are not producing anything. Even stock market investors are producing something by investing in ideas.
If landlords were limited to having one rental property, demand would be driven down substantially, and I would be able to afford a house right now. But I cannot save up for a down payment on a house because landlords (supply and demand) drive up rent prices to everything they can squeeze out of you, all while increasing housing prices by increasing demand.
I have no problem with landlords profiting off a rental property. I would do the same thing in their shoes. The thing I do have a problem with is when they decide to jack up rental prices on a property they are already profiting from for the sake of more profit.
This is especially true when the landlord sends a letter talking about how his property tax jumped up ($800 / year for his 4 unit property) but decides to raise the rent an additional $150 per unit or $600 / month. The claim in the letter is that the rent increase is to cover the increasing property taxes. I don’t like being treated like I’m idiot, the landlord knows that his $7200 extra a year MORE than covers his property tax increase. At least be honest and tell me you just want more of my hard earned money, because the market is good right now and why not? At least I can swallow the honesty a bit better.
Financial Samurai says
I agree. Here’s an updated post I wrote:
Three Steps To Immediately Improving The Housing Affordability Crisis
PDX Gal says
Sam, can you help us understand why you would never raise rent by 10% with a 30 day notice, and up to 60% with a 60 day notice? Do you advocate raising the rent to be closer to market rate, just with a longer notice? What do you do when, even after consistent raises (3% annually), the rent is still way below market because the tenants have lived there so long and rents have increased so much?
Financial Samurai says
It’s because I feel bad to raise rents so much and disrupt good tenants. If I have bad tenants, then I will be more inclined. I’m happy to raise rents to market after existing tenants move out.
I know this is a financial site, so everyone focuses on the ROI. But it does seem like a very mercenary approach to being a landlord. There are plenty of people still struggling in this economy and living paycheck-paycheck. They are otherwise very good tenants, but constant rent increases are sure to put extreme pressure on them and the consideration is what happens when you are forced to move to a crime-ridden area because your landlord in the decent area wants to make a few extra bucks off you? There is a human cost here that isn’t being acknowledged.
Financial Samurai says
I think it’s actually important for landlords to keep up with the market. SF has become overcrowded, like Manhattan now. A lot of traffic, accidents, wear on the system, etc. If rents didn’t go up, SF would get overrun by population growth, to the detriment of society and the environment.
Giving back starts from within. What are you doing to help society?
My efforts are writing 3-4 posts a week for free to help address financial problems.
What are you doing to help society?
… Interesting question. If you are asking me personally, I help out at local foodbanks a couple of times a month, where I have witnessed first-hand the effects of profiteering on otherwise ably bodied and employed lower middle-class families.
Your blog is an invaluable resource, but my point was to do with the ethos of raising rents beyond what the average renter can reasonably afford. I realize that your subset of tenants is the more well-heeled kind, but I thought it useful to bring in the perspective from the other end of the range – those who are trying to give back to society by ensuring their kids grow up in a safe location, with decent schools. Salaries for most people are stagnating, so I don’t understand where the potential for squeezing a melon from a grapefruit comes from.
Financial Samurai says
Good work volunteering at a foodbank! Maybe consider taking a step forward and working their full time or for a non profit too? What would stop you from doing that?
If I’m charging more than what people can afford, I wouldn’t have any tenants.
There is a balance to giving and earning. It is a private matter, and I don’t think people have a right to judge others on how they decide to help other people. I don’t discuss my private giving a bc I don’t give and volunteer to be known. I give and volunteer to help others.
I think you are getting the wrong end of the stick here. I do have a full-time job, working in hospital administration – the volunteering is on the side (I only mentioned it because you asked). I struggle myself to pay the rent, but I am speaking more on behalf of those families that I have seen at the foodbank, who after rent is paid, can’t afford to feed their kids. These are normal, employed American families who are trying to make a better life for themselves. The city that I live in has two choices – live in the inner city area which is crime-ridden with drugs and gangs, or live in the suburbs, which is horribly expensive, but at least you aren’t going to get shot at on a daily basis.
I am not judging you by the way, but commenting on the system, which seems designed to keep people down – some people have commented that renters should save enough to buy a house. With increasing rents, I ask, with what money? All that money is going towards keeping up with the rent!
Financial Samurai says
What do you think of Section 8 housing and the government’s role in taxing the rich and trying to use those funds to help others? Are they doing an OK job?
The problem with the private sector subsidizing market rents is that the private sector is completely market driven. Given its harder for the poor to compete in a ruthless capital society, the government has to step in. We can’t count on others to magnanimously help everyone.
None of this matters in NYC. Landlord knows the broker mafia will make moving even more expensive than a 10% rent hike.
Consumers compete against consumers…producers against producers.
She should be complaining to the people willing to pay the higher rent. How dare they pay that price and compete for the property she wants to live in…
I also found it interesting that the natural curb to your increasing rent were good tenants. You are competing against other landlords for good, on-time paying, low maintenance tenants. And are willing to “pay” for them with below market rents.
If we only taught economics as much as the hard sciences we really would have a huge ROI for society.
Hi Mr. Samurai:
I am a relatively new follower of The Financial Samurai, came across this article and read as one of your comments, that you “screen your tenants like the CIA”…so I thought I’d take the opportunity to ask for some advice on screening tenants.
We own a small rent controlled apartment building and now have the opportunity to fill the first vacancy at market rents since we purchased the building a few years ago.
We have received an application from someone who recently re-located from another city to start a new job…His proof of employment via offer letter outlining salary details look ok, although we plan to call his employer to confirm… His credit report also looks ok…However, he most previously owned his own home for a few years, so he has no prior rental references to provide…Since we wish to ensure that our new tenant will be relatively quiet like the rest of our tenants, can you offer any advice how we might screen for this, aside from checking personal references that are bound to be biased?
One other point, our standard application form does not provide for balance sheet information. Woud it also be prudent to ask the applicant what other cash resources he would have in the event his new job does not work out?
Any advice you can provide on this matter or in regards to what specifically you do to screen your tenants “like the CIA” would be greatly appreciated.
Tara @ Streets Ahead Living says
In NYC, there is an unfair law that encourages luxury condos and not more affordable condos. There is an up to 25 year tax abatement on NEW properties built in NYC. This is a timed abatement and does not “reset” if the property is resold after ownership. But there is no cap on the abatement. As such, luxury condo owners can pay minimal property taxes in NYC if their place is recently built. If the state passed legislation that capped the value of the $ per square foot for a tax abatement, this wouldn’t be a problem. But builders make more money on luxury apartments, and with the tax-abatement, there is even more desire for the sale of luxury condos. Also, it’s often not Americans buying these luxury places, so the drive for expensive Manhattan real estate does not look like it’s going to dry up any time soon which does not benefit the consumer waiting for a mid-range condo!
Financial Samurai says
Very interesting. Not sure how minimal those property taxes are for luxury condos, but I’ll take your word for it!
The international demand curve is exactly why it’s good for people to buy in international cities like NYC, SF, LA. The Chinese are coming now, and they are going to gobble things UP. One of my biggest regrets is not buying a place in NYC in 2000. I had barely anything, but if I begged and borrowed, I could have got something decent on 22nd and Madison. Damnit!
I think your analysis is spot-on, Sam. I rent a “junior 4” (small 2 bedroom), under market on the UES in Manhattan. My salary is low 6 figures, which puts me at above average nationally but priced out of buying a family apartment in Manhattan. I would love a post about thoughts and scenarios about buying a rental property(ies) for people like me– priced out at home but able to buy investment property elsewhere.
I’m in your exact same circumstances, Ali, except on the opposite coast. Can’t really afford to buy here, but was fortunate to be able to invest in a rental outside the immediate Bay Area where I enjoy the services of a WONDERFUL local property management company. If you can make the numbers work, finding a property outside your major metro area and finding a good property manager can be a great way to go. Aside from properties being downright dirt cheap where/when I bought, property management is also tremendously cheaper than in the immediate Bay Area— cheap enough to make positive cash flow a reality.
If you can find something within a couple hours’ drive (close enough for you to be able to go out and look it over yourself once in a while), and get a good manager, it can work well.
Thanks for sharing your experience on this, Integrity! I starting thinking about this option recently, and it might be fun to do some research and run some numbers. I’d want to research supply and demand in a few tri-state area locations. My hunch says apartments in Stamford, CT or Hoboken area NJ could provide stable alternatives that I could afford.
Someone might say why not just move to Stamford or Hoboken myself, but my affordable apartment, job, and son’s awesome school are in a 5-block radius, which is the trifecta for me…
Financial Samurai says
Ali, that’s an interesting scenario which seems more and more common in big cities. How much is your rent
What about you writing a post sharing your thoughts on a six figure income earner getting priced out of a 2/2 in Manhattan – your thoughts and feelings and what you plan to do about it?
I wrote this post called, “When Should I Buy Property? When You Can Afford It” that I think has some thoughts to your situation. I CANNOT comfortably buy my own home now due to an increase in prices and a decrease in income.
Hi, Sam. I will check out the “When Should I Buy Property?” post, for sure. Also, I would consider a guest post– I value your followers’ comments. I always learn something in my quest to be “above average.” My rent for a 2/1 in a high rise doorman building is $2750, painting a bit more of the picture.
Financial Samurai says
Sounds good Ali. $2,750 doesn’t sound that egregious at all. In fact, that sounds like pretty good value for Manhattan!
The responses from the community are always interesting and helpful, so let me know what you’d like to write about. You an always shoot me an e-mail.
No Nonsense Landlord says
And I always get people that seem to think their credit scores and DWIs should not matter to me when I am screeing them. Or that I should not care about who they have over, or who moves in.
All of that matters. If you have a felon drug delaing boyfriend, I dont want him around…
More tips at my website for any aspiring landlords, or even experienced ones.
Pertinent to much of the discussion here, I was amused to find this comment posted on the SF Chronicle’s website today, in connection with an article about a (rather significant) maintenance issue with the sprinkler system in a downtown building:
“I live in lower nob hill; half the buildings are structurally unsound; and are very old and most of the landlords dont do critical upgrades and maintenence unless they kick someone out and renovate and triple the rent for new occupants. If your living in a building for more than 5 years; that means your living in a building the landlords are neglecting in order to get new people in to jack the rents up. It’s all about money; and safety is the last concern in today’s crazy speculative real estate bubble.”
Reflects the sentiments of a great many renters in SF, I fear. Tenants vs. Landlords is about as juicy and well-defined an antipathy as that of Bicyclists vs. Motorists in San Francisco. Each side stakes out its position, declares its absolutes and articles of faith, and ne’er the twain shall meet!
A word to the wise for those landlords out there. Please be very careful when you rent to attorneys. They will hold you accountable for every ridiculous antiquated city landlord tenant law on the books. It is rather unfortunate that in most urban cities the laws always favor the tenants thus increasing the risk and cost to the landlords.
Financial Samurai says
Funny you mention lawyers, b/c I had the same hesitation several years ago when I rented to a lawyer COUPLE! Thankfully they were pretty good.
The funny thing is, if there were no risky tenants, rent prices would probably be lower. But as the way things are, prices must increase to compensate for more risk. So it behooves tenants to spread the word by sharing this article or just talking to each other various ways in which to become a better tenant. Everybody wins.
perhaps if every person had a home to their name, you wouldn’t have to worry about risky tenants.
then again, you would then be worried about not having any tenants at all.
and what risk?
the risk of taking out a mortgage to have your tenants paying it in your stead?
the risk of being recognized as the swindlers you are, no doubt.
you are all literally parasites, and that’s why tenants don’t feel much like cooperating with your perpetually world-consuming interests.
you think your “hard work” entitles you to seek circumstances where others have to live perpetually at your discretion.
but i don’t care how hard you think you worked to “earn” it, as far as i’m concerned, and this does concern me, you can’t work hard enough to earn that privilege.
the world will celebrate the disappearance of your ilk
Crystal clear analysis. You just got a new subscriber. The lady commenting was pretty clueless but her way of thinking is very common and more and more people are thinking like this nowadays. “Redistribute wealth, the 99%, etc..” These people should try being a landlord and see what it is like. You are right that most of us that acquire rental properties did it by working hard and saving large portions of our income.
Financial Samurai says
Always nice to have a new subscriber. Welcome! How did you find this post?
I linked to your site from another financial blog (iheartbudgets) that I was checking out. I linked to that site from Mr.MoneyMustache. I regularly read his blog. After reading some articles on your site I googled your name to try and get more info on you which brought me to your twitter acct where I saw link to this article.
Financial Samurai says
Fascinating. Thanks for sharing. Hope my side lends a new flavor to your reading list.
Some people embrace and believe in the capitalist model and others just have to live within it, sounds like the person you quoted is the latter. Hopefully she practices what she preaches by working a non-profit or for a school or something.
You didn’t discuss in detail why you think abolishing rent control would lead to lower rent. I’m assuming that if rent control were abolished (in SF) today, the first year or so would see an increase in rent, however as people get priced out of the market and leave we’d be left with too much supply which would lower rents down to their true market level. But that level could still be higher than what rent (at the controlled level) is today. That’s what your “rent control leads to shortage” graph is showing us, correct? If rent control were removed, rents would rise. What am I missing here, would love to get your thoughts on this.
My landlord has been fairly good to us, aside from our first lease signing meetings. At one of those meetings he went on and on about how landlords don’t have any rights, which (to us tenants) is absolutely crazy talk! The landlords, excluding rent control, have all the control. They can charge as much as they can get (up to rent control levels), they get an automatic raise each year through rent control policies, and they get two wonderful people (like my wife and I) to pay their mortgage. What could they possibly see as a downside? Now, from anyone’s perspective there are negatives to be found, but the landlord sits in a very privileged (and earned) position…their negatives, when put into the large context, are minuscule.
I think most of your ideas on how a tenant can rent prices down really just benefit the landlord anyway. Buying gifts, making improvements, voting against rent control all lead to me having to spend more money on a house that I’m just renting. I’ll take care of my rented unite because I’m care about the quality of my home. I’ll pay my rent on time because I’m not a bum and he can charge me a fee if I don’t anyway. My landlord already has 150% of one months rent in a deposit, so I’ll consider the earning potential he has with that $5000 as his gift. And i’ll call my own plumber or do easy fixes myself only because I don’t think my landlord will be prompt in fixing it on his own. To your credit though, I will be as easy of a tenant as possible only so I can hopefully delay how quickly he demands his rent controlled increase from me each year.
Rent control keeps a place like SF habitable for the masses. If it were turned into a free market you’d see instant gentrification of poorer areas, and you’d eventually see instant rent crashes when the market reaches its peak. The control is an amicable solution for both opposing parties.
Where’s your $3,800 a month place? How many bedrooms? Square footage?
This is an interesting topic to discuss, good article.
Last, you said you’ll be giving away some of your property? I’m interested, you know where to reach me…
Rent control does not affect demand, it affects supply in several ways:
– As a builder/property investor, if you know you can only get $X for a potential property if it is in a rent controlled zone, it puts a ceiling on your earnings. (Imagine if you had a jewelry company and someone told you you could only charge $X for your pieces?)
– As a general rule, rent control reduces the available supply on the market. Imagine a market with supply of 1,000 homes and demand for 1,000 homes. This is a market in equilibrium. Now imagine if 100 homes are rent controlled and thus unavailable to anyone who wants to move into that area. Now the 1,000 demanded units only have 900 available to choose from. How does this problem get solved? 100 homes will be below market, and 900 will be above market value. This creates a market distortion. Basically, the 900 highest bidders in this example would get to move in. The rest would either move further away, or have to pay $X+something which they may not be able to afford. It benefits a small minority and hurts many more people who have to pay more.
– Imagine now if those 100 units could now price themselves at a market rate. 1,000 people can choose from 1,000 units. It would lower the price for 900 and raise the price for the 100 people who were previously under rent control.
I can’t speak on SF area because I don’t know what % of real estate overall is rent controlled, but it’s a similar concept when you put any kind of restriction on rent, building height, etc. Say, you could build 10 floors with 4 per floor and make a good return on 1 acre (40 units). But if regulation says you can only build 3 floors up, that’s only 12 units. It makes real estate more expensive because it has less utility (it reduces the real estate available and same situation as above… more people bidding for less units).
Hope this helps.
I can tell you another way that Rent Control reduces availability in San Francisco: It drives many landlords out of the landlording business. They get so fed up with the restrictions, and with lousy tenants with a hyper-inflated sense of entitlement who KNOW they have Rent Control to protect them (even if they’re godawful tenants), that many landlords give up and sell. And what ends up happening to the properties they sell? They’re taken off the rental market and become “flats” for sale, or Tenancies In Common (TICs), ne’er to return to the rental market again. This is a big part of the current rental crunch in the City. I’ve known more than one SF landlord who got out of the business in disgust for exactly the reasons I mention.
Financial Samurai says
On the chart, here’s what would happen if rent control were lifted:
* Prices would rise in the short run along the curve as rent controlled apartments raise rents.
* Demand would decrease along the curve to where the red line and blue intersect.
* But since there is now a structural shift in terms of pricing, the Supply curve would SHIFT to the right. A big influx of new rentals would hit the market to the point where prices eventually fall. Just imagine the red line moving right and intersecting at a lower point on the Y axis of the Demand curve blue line.
For rent control, only a few win while the majority suffer. Without rent control, more people benefit overall.
What’s the Landlord’s downside risk in a rent control situation? If rent levels are being artificially held at a specific level do landlords have less risk of having to lower their rent at any point?
It’s great to hear the landlord perspective from so many people here. Believe me, I wish I were in your ranks…i’d much rather own and generate income then watch my landlord make a “controlled” mint off me and my wife.
Financial Samurai says
What happens if you study rent control over the past several decades is that the controlled rent increase rarely keeps up with the real market rent increase. You’ll have situations where a person who has been renting for 20 years is paying $1,600/month in SF for a 2/2, when it could be rented out for $3,500. The landlord loses out big time, and if he sells, he loses out too b/c it is occupied by a tenant. Often times they have to be paid to move, or evicted using the Ellis Act etc. You’ll also have lots of shady activity where the tenant will sublet a room and have that person pay market rent to pay for the entire apartment. Or AirBnB too. Bad stuff happens when there is artificial control.
I guess the concept might be hard to understand if you’ve never been a landlord before. You’ll just have to trust me that all this government intervention of the free markets tends to mess things up.
It’s insane to me that the commenter says renters have no rights in San Francisco. I’ve lived in many different cities, including SF, and I cannot think of a city in which renters have MORE rights than San Francisco. Evicting a tenant who decides to stop paying rent is incredibly difficult.
Financial Samurai says
Indeed. It takes 6 months to evict I’ve seen. This is why I screen my tenants like the CIA.
Yes but landlords have a contract and can sue a tenant based on non-compliance with that contract and they have a hefty deposit! The tenant would have a much harder time collecting payment for landlord grievances, especially since the landlord already has the money. The fact that landlords can determine how much of your deposit is returned is a huge right for the landlord.
What other rights do SF renters have aside from the eviction process?
It’s in the name…”Landlord”…they lord over the land, property, they have the ownership, thus they have the control and the rights. It’s that simple.
Debt-free Dan says
My Texas rentals have a lease which gives the tenants certain rights as well. Since I choose the lease, you may perhaps argue that it’s biased in my favor (which I won’t dispute), but I don’t think it’s quite fair to say that tenants have no rights (at least in my area).
Sam, I am currently a renter just outside of the Twin Cities. Currently one of our toilets is broken, well, just the handle so that everytime it flushes the chain gets stuck under the flange leading to constant running unless you hold the handle till the water starts to fill the tank back up. I would have no problem fixing this myself as I could probably buy the parts for maybe $10-$15, but when I told the bulding management firm they said they woudl not reimburse me. Basically it puts me in a spot of either making their handyman do it and potentiallly looking like a pain to them or eat the cost myself. Yeah its only 10-15, but the principle of renting is that I shouldn’t be responsible for this. Obviously it is different since this is a 100+ unit complex and they don’t know who hell each tenant is, so I will probably just have their handyman do it even though I know I could with so much less effort.
Financial Samurai says
I would reimburse you in a nanosecond. I win because you do it. You win because you get it fixed ASAP and I pay for it!
Debt-free Dan says
This can get tricky if tenants start fixing things without asking and then withholding the value from the rent. Also, with certain kinds of repairs, if the tenant is not actually qualified, then there may be much bigger problems. Perhaps it’s a judgment call based on the repair and knowing your tenant.
I have 3 rentals in central Texas that I manage myself and I do not allow tenant repairs. I want to be aware of all repairs needed and I want to pick the contractors.
Oh, hey, and Sam— your baby giraffe is down in Scottsdale at the moment playing first base in the Cactus League. He’ll be back at AT&T in a month or so. :)
(that whole bit was most excellent— Bravo!)
There’s a good amount of incentives to build affordable housing in NYC…although some develops tried to build a separate entrance/separate amenities for those who pay the “lower rate.” There was some uproar from that… I rent from a big company so sending them cookies will do me no good. I pay on time and never have problems with them so when they send me the lease with the rent increase, I ask for a smaller increase which I get…last year it was $2 less than what the proposed increase was…oh well. I agree that there are issues with rent control, but I’m not sure abolishing it is necessarily the answer. It is a complicated issue.
Financial Samurai says
You can buy a sweet Anthony’s Cookie in the Mission District for $1.5 and still have 50 cents left over! Gotta be optimistic!
Good point about renting from a faceless corporation. Hope the increase wasn’t too bad.
Mr. Utopia @ Personal Finance Utopia says
Scathing comments or e-mails are fun, aren’t they? Kudos for keeping a thick skin and a sense of humor in your reply, Sam.
As I started to read this, my first thought was “isn’t there rent controls in SF?” My wife and her family are from SF and, until recently, my sister-in-law was renting in the city. Her landlord was going to raise the rent on the new renter who was assuming the lease as my sister-in-law was moving out. They both argued it was unfair due to rent controls. I know what rent controls are, but it surprised me it would apply. I don’t know how that saga ended up, but I did shake my head that any increase was automatically objected to due to rent controls. So, how do the rent control laws in SF apply then?
Cindy @ GrowingHerWorth says
It boggles my mind how many people do not understand the whole idea of risk/reward. Yes, people profit off things. Sometimes they profit hugely! Because they were willing to take a risk. In that sense, they earned it. Without the lure of a reward, no one would take risks. And then there would be no Landlords/CEOs/Athletes/Entrepreneurs.
I’m in a situation with my house right now where it would probably be a good idea financially to rent it. But I don’t want to deal with the hassle of being a Landlord. I’m not willing to take the risk, so I don’t get the reward. And that’s perfectly fair!
Although, I wasn’t aware of the baby giraffes. Now I’m totally reconsidering!
We own two rental properties in my hometown, and I’m all about maximizing profits. However, I’m also all about not being hassled. We have renters in one home who have lived there for five years now without a rent increase. Why? Because they fertilize and edge the lawn. They have always paid on time except for one incident. They never call us and his brother stops by and services the furnace for free. I’m not sure I’ll ever raise their rent.