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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129 thoughts on “Do Landlords Have The Right To Maximize Rental Profits?”
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.
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.
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.
I agree. Here’s an updated post I wrote:
Three Steps To Immediately Improving The Housing Affordability Crisis
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?
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.
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.
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!
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.
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!
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…
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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!
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.
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.
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?
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.
I would be careful with #4. Tenant could have a slow water leak, that could be fixed when immediately contacted. If they don’t contact the landlord after many months or year, it could
be a big issue.
Great point. I should check in at least once a year on everything since that is when contracts are usually renegotiated. Although, after 1 year, it’s month to month here in San Francisco.
That’s the nature of the business. The tenant has the right to leverage on slow markets to move or lower their rents, as much as the landlord has the right to leverage on peak markets to increase their rents. But…sure! I will not maximise my rental profits provided my tenant puts it in writing that they will make up all my losses and then some, in slow years.
The same tenant who says “Your costs have decreased! Why are you still charging so much?!” will never say “Oh, the markets are slow! I know the government just increased property taxes! I will pay you $200 more a month to make sure you don’t make a loss!” At least, I have yet to meet one.
And that is why I have no guilt in maximising my profits as a property owner and landlord.
Would be great if we could have such tenants! I’d surely do my best to keep up the property as best as possible if my tenants were this thoughtful.
“The same tenant who says “Your costs have decreased! Why are you still charging so much?!” will never say “Oh, the markets are slow! I know the government just increased property taxes! I will pay you $200 more a month to make sure you don’t make a loss!” At least, I have yet to meet one.”
Only in SF can you have communist renters who think you’re exploiting them. It’s amazing the entitlement attitude there where some of them look at a rent controlled apartment as an asset.
Power to the man comrade.
Ah comment commentary. I like these types of posts. It seems pretty clear to me that commenter has never owned property, and also has a bunch of other issues going on. Most renters have no clue of what goes into purchasing, maintaining a property, dealing with HOA stuff, finding tenants, etc. It’s a lot of work.
I totally agree there is no free lunch. Sure there are a lot of great sounding government initiatives out there, but they money has to come from somewhere. When it gets dumped on property owners, which happens all the time in SF, of course landlords should/will raise rents.
It really is one of my favorite types of posts too. I encourage more people to comment and speak their mind. It’s half the fun of it all!
Hopefully the commenter comes back to read this post. And hopefully more renters who have disdain over landlords can see the other side.
I see the other side as a renter of four years myself, and I think I’m less biased as a result.
Doh, sounds like a missed opportunity. At least Mr. 1500’s portfolio is en fuego!
Good luck w/ the new neighbors.
As you know, I am still fairly new to investing. I was wondering if you have ever written a post (Could you write one, if you haven’t, it would be a great read!) about how you analyze a stock’s potential. Or is there an article/book, etc that you think does a good job explaining it.
I think anytime someone with means is talking about making money people throw up their arms thinking someone is sticking it to the poor. No one is talking about price gauging. As you even say in your post, your rent is $200 below the value – the tenants are actually getting a deal with your property. That’s responsible business.
Wealth = responsibility. In general, the more responsibility someone shows, the more wealth they will accumulate because they’ve shown they’re responsible with it. The landlords are taking great responsibility for their property and for the tenant’s safety and security as well. They should be able to expect a reasonable return on that investment. Keep showing the truth Sam. Haters will hate.
Interesting perspective on the more responsibility one shows, the more wealth one accumulates. Never thought about it this way. Thanks for sharing!
I do have an upcoming fantastic price gouging story though that is happening to me right now.
I never thought about the affect of height restrictions on rent but it makes perfect sense. Growing vertically is always an option, creating more supply, less demand, and lower rental prices. I do love living in one of the parts of NYC where skyscrapers are few and far between though. Aaahhh sunlight.
And it is crazy how expensive HK, Tokyo, and Manhattan still are! Imagine if they were restricted to only 3 stories like much of SF.
Excellent post! I agree with a lot of the points you have made. Inevitably the landlord has the right to charge as much as they would like. A tenant can agree to pay the rent or choose to move someplace else.
Right now, we’re seeing a severe shortage on affordable housing in inner city neighborhoods in Nashville. I do sympathize with artists, musicians, and creative individuals who will never earn a high income and will eventually be priced out of the neighborhood. Having these people living in my neighborhood (East Nashville) is part of what makes it unique. I also sympathize with friends who have moved into homes that are barely maintained. There are quite a few houses on my street like this. The landlord may be maximizing profits, but they are also hurting their neighbor’s home values.
How much does a nice 2/2 in a good part of Nashville rent for a month?
We have multiple properties that we charge slightly below market value for the monthly rent. I feel this gives me some wiggle room to raise rent when the term is up. I’m always lagging just a little behind (but still competitive) to what could be found elsewhere. I’m in agreement that if the tenant is not high maintenance, I’m more likely to lessen the rent increase. Pay on time, don’t wreck my place, be considerate to the landlords time…those are all positives in your corner tenant.
Of course landlord’s have the right to maximize rent. This is a free market. I work for an investment company that owns lots of multifamily. We attempt to set rents based on data that we spend a lot of time and money collecting and analyzing. We add value where appropriate in order to drive up rents. I too emphasize with people who struggle to afford their rent, but there are low income housing programs that are subsidized by the federal government for such people, and there are plenty of landlords that specialize in providing subsidized housing. In the end, it’s a business. Regardless of whether you’re an individual with a handful of rentals, or a company like mine with billions under management, landlording is a business. The market should put real estate to its highest and best use. And there should be a safety net for the very poor via government subsidies. Not sure I follow the logic of the original complainer!
Most landlords in SF own rent controlled property (multi-family built before 7/79) and can not arbitrarily raise rent beyond the rate set by the rent board (1% this year).
The SF landlord typically accepts rent by check *only* because this is verification that rent is coming from the actual tenant (and not a sub-tenant or unauthorized roommate). An electronic payment could come from a joint bank account (master tenant plus sub-tenant) and if the landlord accepts this payment, that would be an implicit acceptance of that sub-tenant as a regular tenant. Meaning that if the master tenant vacates, the sub-tenant would have all the rights of the original tenancy and the landlord would not be able to raise the rent beyond the allowed rate set by the board. Alternatively, if the master tenant vacates and the sub-tenant stays, the landlord can then issue a *new* lease (re-setting the monthly rent if desired) to the previous sub-tenant. If the landlord has accepted *any* funds (knowingly or unknowingly via bank transfer) from the sub-tenant, the landlord can not raise the rent. It’s muy complicado in SF.
There definitely are a lot of rent laws that’s for sure. Luckily, my unit is a condo, and it is not bound by the traditional rent control laws. I can raise by 10% with a 30 day notice, and up to 60% with a 60 day notice, but of course I never will.
After many years of not wanting to be a homeowner and happily renting, when my previous landlord raised the rent , he did me a HUGE favor. I bought a brand new home in Bay Area and pay less mortgage than a rent would cost me!
Nice! Hopefully it was within the past three years too as prices have really moved upward!
Yes – after 3 months everything started going up and by the time the developers completed the units opposite to mine in a year – the purchase price difference was close to 80K!
I seriously can’t get my head around the fact that people in the US still pay rent by cheque.
It’s unfortunate, but some landlords, mine included, only accept payment by check. They do accept credit cards and e-checks, but add on a $25 “convenience fee”. Not cool.
Your bank should be able to auto send a physical check as one of the benefits. Check it out.
It actually does! I have it recurring since the 2nd check through the end of the lease term. I don’t actually have to do anything each month, I just get annoyed by the idea it takes 5 days in the silly USPS network and my cash doesn’t earn interest (even though it’s just .25% or something like that) for 5+ days per month!
Inefficient things bother me. I’m sure part of the check pays for some person to go through and do all the bookeeping for 200+ residents and nearly as many checks.
One of our renters wanted to use a website to electronically pay us. We said as long as he ate the $15/month service fee we’d be happy to accept payment that way. Surprisingly he suddenly became very happy giving us a check.
Sorry, but with 4 renters giving us a combined $1525/month, we’re not willing to spend $60/month (heck even $15/month is 1% of gross!) on fees!
I’m shocked your bank charges a $15/month service fee! You should fire your bank, seriously. That’s ridiculous.
How do they pay in NZ?
Your graphic summed it up just nicely. Really, you didn’t have to go any farther than that. It’s a simple case of supply and demand. If you can find a buyer @ $3.9k after the lease is up, you certainly have every right to raise the rate on an asset that you own and you are taking all of the risk on. The renters came to you for a mutually beneficial business transaction, not because they love you and care for your well being either.
Me, I can’t afford to transfer my current lifestyle from where I live now to SF so does that mean someone should charge me 1/3rd of the price just so I can live there? Of course not. If I can’t afford it I’d have to get out like anyone else. Life wouldn’t end.
I get what the commenter is saying about the “need” for the extra money. Sure, you might not “need” it, but the commentor is preaching to the wrong choir, since he/she obviously doesn’t understand capitalism. Why not realize the fruits of your labor to their entirety while you’re here and sane and capable of working to make money? It just makes sense.
Thanks for providing a rational answer. It is an interesting mentality how some people others should bend to their desires, instead of the other way around if they want something.
I wonder how much entitlement comes into play.
I think that commenter has to realize that this isn’t some personal matter…it’s just business. If you were letting your sibling stay in your rental when she fell down on her luck, then maybe some sort of emotion would drive the decision of what to charge, if anything. But a rental property is just a matter of business. Often, it’s held in a separate legal entity like an LLC, clearly outlining its purpose as a business: to earn rental income.
Every entity and person ought to aim for a certain degree optimization. Why not be efficient. If an entity is aiming to earn money, why not try to earn as much as possible (within the bounds of that entity’s ethics, of course).
Thoughts on putting all rental property in a separate LLC? Benefits and negatives?
Benefits are basically the liability protection, and for some it may offer and a way to easily seperate and manage your property. If single-member LLC, there is no separate taxable entity for federal tax purposes, so it all goes on your individual tax return.
Negatives: some administrative costs in setting up LLC (but these are nominal, consider it an insurance premium), may have state franchise tax reporting requirements and taxes. Also, check your insurance policy and mortgage/deed of trust before conveying property. You don’t want to accidentally trigger an acceleration clause or cause a technical policy lapse.
Yep, makes sense. Would an umbrella policy not help solve this liability though?
An umbrella policy offers extra protection, but it doesn’t cap liability in the same way an LLC theoretically does (absent a successful veil piercing claim). Further, what if your policy lapses for some reasons? There are several factors involved, and it depends on how much wealth you potentially have exposed. If most of your assets are in creditor protected vehicles, then it probably doesn’t make as much sense. Otherwise, it may be worth the piece of mind. I look at it as a belt and suspenders approach, not an either or.
California, and markets like it, do themselves a disservice through pursuing egalitarian minded (a nice way of saying quasi socialist) policies which limit options and development. Things like land control and rent control create a compounding chicken and egg problem. What you’re left with is Google employees living in million dollar 2,500 sq ft homes, over-extended middle class earners scraping to get by and cleaning ladies (cleaning homes owned by said Google employees) who have to commute 45 miles to live at a reasonable cost.
Studies have shown the effects on rent control in NYC and Germany. Throw in artificial development limitations via land controls and you’ve got a big problem.
Houston, the third largest city in the country, is incredibly cheap to live in. Incidentally, Houston also has no municipal zoning.
Man, if only a 2,500, single family home in SF was only $1 million. The price is more like $1.5 – $3.5 million depending on where.
Imagine if California homeowners all picked up and moved to Texas. How pissed would you guys be?!
Pretty pissed. :-)
While I agree with a lot of what you’re saying… speaking as a native of the SF Peninsula, I have to say Thank God for land control! This place is far, far too beautiful to have ever been allowed to be carved up and developed as it would have been without the work of a lot of preservationists over the years. Yes, conserving the open space and restricting building puts a real cramp in the housing market…. but those controls have contributed to a big part of WHY everybody wants to come and live here. Dammit.
And Sam, as I’ve told you before: Quit telling everyone how wonderful it is here! Just keep playing up the ridiculous housing costs, will ya??
OK! Will keep quiet. But, the secret is out already.
Just wait until the Chinese from China start buying up San Francisco Bay Area in droves.
Our tenants at the rental home has been really good, but they had the same rent for 3 years now. They don’t want to pay more so I’m going to end the lease and sell the place. Might as well take profit while the market is good.
We took the initial risk and should be able to maximize rent. We’re not making much anyway so I don’t feel guilty at all.
If you can get that profit, might as well since the cash flow doesn’t seem that good.
Online income seems much easier, but if it was me, I’d try and find new tenants with the higher rent to stay diversified.
The landlord obviously has the right to set rent at whatever they feel is appropriate. From my experience as a renter I can say I was obviously never happy when the landlord jacked up the rent, in a few cases it caused me to pick up and find another place. So yeah, landlords can raise rent to increase their profits, but renters can also leave if they don’t like it.
Like you said, there are plenty of things renters can do to prevent their rent from being raised. In the last place I rented before buying a home, I stayed there for 4 years and never had my rent raised even though I was paying well below market value by the end of my stay. The reason was I always paid on time, took good care of the property and didn’t cause problems for my landlord. I’m sure having a tenant he didn’t have to worry about was worth more to him than the extra $2-300 he could have been making with a higher rate.
$300 x 48 months is a lot of money to leave in the table though. I’m also assuming that you living in buffalo, $300 is a greate percent of the overall rent as well compared to in SF.
You should send him a gift!
What about REIT to get exposure to rental property? There are companies that pay ok dividend (5-10%) with solid financial statements. Is it better to own a property or own a stock and leverage management to people who are professional in that field? I am not sure about tax breaks, most likely landlords do get better profit because of property tax/furniture/upkeep write offs and dividends are taxed as ordinary income. Would be interesting to compare
I’m definitely not an expert, but thought I might reply since I’m interested myself.
By doing less work, you’re taking less risk and getting less reward as a result. Most REIT funds only return about 3% in dividends alone but if you include capital gains it’s usually higher. Also, like you said, you can’t deduct anything going this route (unless it’s growing tax free in a Roth IRA). If you own the top yielding REITs outright through an individual account, there will obviously be more reward, but more risk since you’re less diversified.
It’s the underlying asset class you have to consider – real estate – and then go from there. I think REITs are generally less risky than most other industries IF you’re willing to ride the storm of the stock market and changing real estate market. But if you’re of the belief that real estate always goes up and people will always rent (which I believe to be true) then you can’t go wrong with either route in my opinion. The trick is determining how much reward you want and decide if the amount of risk and effort is worth it.
I see real estate as protection against inflation (give or take). I wonder what kind of % of all assets should be allocated to real estate. Should it be 20%,50%,80% or even 100%. Overall, i would prefer REIT for one reason only (liquidity, simplicity). Thinking about it, would be interesting to see hypothetical comparison of let’s say 100k investment in 1995 into a real-estate in a major area vs solid REIT.
Things to consider
1. Inflation rate ~3% – so you need at least 3% return to keep up but when you count
2. Taxes – this is where it gets complicated, property taxes can be written off but it depends on what income levels (once in AMT zone you cannot write it off). Income from both REIT and rent is treated somewhat the same.
3. Deductions – writing off all the small things for rentals. Not much you can write off for REIT
4. Time – i think this is important point, you can lose your health with dealing with bad rentals vs letting professionals take care of it for a fee (less dividends)
5. Fees – i think this might really fuck you up (5-10% commissions *2 for buy and sell) and eat into profits. Commision on buying REIT’s through any broker is negligible.
REITs are definitely an easy way to gain real estate exposure. You just have to figure out which REIT to buy, and trust that the managers will do the right thing. But after years of ownership, I’d rather own my physical property than own a REIT that’s traded on the exchange.
I like the control, leverage, and tax breaks of owning property better. Most of all, I want to own a physical asset that provides utility.
I tend to agree. Real property is generally preferable. I’ve heard this comparison many times, but I don’t think REITs and real property are comparable assets. Different tax characteristics and relative volatility. REITs are more like hedge funds since some, not all, place heavy bets to hedge interest rate exposure. REITs don’t always own real assets (i.e. mortgage REIT). Of course, there are some that don’t leverage up their assets so much and simply buy properties and manage them, but their returns are still too low and volatility too high compared to real property… in my opinion.
I would be shocked to find an asset class I would feel comfortable investing $100K+ in that had cash flows AND low volatility like real property.
It’s your property. You can charge what ever rental rate you wish.
I’m sure the commenter is expressing more of a general economic frustration than anything against you personally. The San Francisco Bay Area is too expensive and overpriced. There are a zillion reasons for this, but, the bottom line is that many Bay Area residents are highly stressed financially and there may not be any pragmatic near term solutions.
I do see far more political intervention occurring in the future, making life more difficult for landlords.
I love it when people talk about their right to live somewhere. They probably had their rent raised recently, but this person is blaming the perpetrator. It is people who don’t pay enough taxes relative to the services they use from the local/state govt. It is a flourishing economy with lots of jobs coming in and people moving in driving up demand while no significant supply has come into the market.
It is also their problem for not being savvy enough to save the money to buy a property and fix their living expenses (less the increases in tax/ins).
You’re absolutely right though, this person has no appreciation for the risk that a property owner takes.
On the other hand, I can definitely empathize with those feelings. I recently moved from a condo that I owned (and still own and now rent out) into an apt in a new city. I would buy here, but haven’t found a place I would like to own with an HOA that would allow me to rent it out in 2 years if I had to move.
My old housing cost including utilities/taxes/everything (less rent I received for 1 roommate) was ~$300/mo (I owned the condo outright). Now I have tenants in there and probably get net earnings of $600/mo after expenses. My new apt is around $1,300/mo all in. Talk about sticker shock!!
I suppose my net housing cost is around $700/mo, but it sure hurts to be spending $400/mo more than I was a year ago. But that’s life. Fortunately, I got a big pay raise to come here, so not complaining in the grand scheme of things, but I can totally empathize with the poster. Still, as a landlord AND a tenant, I believe the owner has the right to charge whatever they want. If my apt were to go up to $1,700/mo next yr, I would have that much more of a reason to buy!
Ravi, you would make a good tenant, as a landlord yourself.
Where are you renting and owning again?
I try to separate the two :)
I own in Atlanta and rent in Detroit. I hope good things come from the ICE buyout of NYSE. Maybe property values will go up? One can always wish for the best…
3800 a month!?! What are you renting out? The penthouse suite of the Transamerica building?
I do not miss the high property rates since I moved out of California. But if San francisco rent was $1000 a month, I would sell my house TOMORROW and move back. The weather, the food, the entertainment. SF is a great place to be. I guess that is why demand is so high.
I once had a short term apartment rental in Manhattan. A studio. I loved it. I did some research to see if I could afford to buy it. It was over $1/2M so I did not buy it. What I did NOT do was bitch and complain about the injustices of high property rates. I just found a place I could afford and bought it…in Texas.
When I rented I loved my landlord. When I moved we had anargument was not about the security deposit. She thought I should keep it for all the little stuff I did to keep up the appartment. I thought she should keep it for 4 years of wear to paint and carpet.
Ha! 360 panorama view at the St. Regis! Yeah right. A 2/2 there of similar size would literally cost $9,000-$10,000 a month.
It’s great you found your place in Texas. I’ve really got to give Texas a second chance. I love the no state income tax, business friendly attitude.
One issue I see with Texas, from a rental property perspective, is that the property taxes are very high. More challenging to get the rental ROI to work than probably in other places with a comparable property (excluding SF, NYC, etc.).
That’s what I keep on hearing regarding property taxes. The taxes have to come somewhere, so property taxes and perhaps sales taxes it is.
The rental ROI starts working very well in SF after the initial two years with a 20-25% downpayment. It’s after 10 years where the ROI really starts to surge based on my experience. My property was rented in 2005 for $2,100 and in 1H2013 it went for $3,800. But I think now it can rent for $3,999 pretty easily.
“I only sleep on the finest Moroccan cotton sheets after I bathe myself in Evian water. Where’s my baby giraffe? Come on now!” That was great!
I suspect that the commenter is financially stressed and may have had her rent raised recently (or other financial calamity). I am sorry for that. I have been there.
Keep posting… great info! Thank you.
Glad you caught that humor. What’s life without a little spice?
It would do a lot of renters a LOT of good to get the perspective of the landlord once in a while. I’ve heard horror stories of what it’s like to be a landlord in the City, given the ridiculous tangle of rent control rules and city bureaucracy.
What the average renter doesn’t understand is that rent control makes small-time landlordship in San Francisco such a nightmare that it’s pushed a lot of them out of the business, leaving the field wide open to the only players who can afford to stay in the game: big corporate property managers. You think it’s tough doing business with a small-time, middle class landlord who owns the property as a personal investment/income stream? Have fun renting from a faceless corporation. And it’s the faceless corporations who have no problem buying up a property and letting it “lie fallow” for 5 years to comply with the Ellis Act. So there you go, more units off the rental market, and up go rents. Boom!
My own rental property is outside of the immediate Bay Area. I’m fortunate to have an absolutely wonderful tenant, and despite taxes and utility expenses going up this year, I’m not raising her rent, which is currently ~$150 below market.
I do think it can be very hard for renters to understand the challenges that landlords face. I think many of them just assume that landlords must be really rich! I’m here to tell them that that is absolutely NOT the case. While my rental does provide positive cash flow, it ain’t huge. The goal is to pay off the mortgage by the time I retire so that the majority of the rent comes to me and not the bank!
Anyway, I think it’s just easier for renters frustrated with high rents to demonize landlords, especially in crazy places like SF. “What the market will bear”, folks. And in SF, landlords deserve *some* compensation for tolerating the wacky regulatory environment.
Indeed, perspective is so important. One of my best tenants was a landlord herself. The goal is to build a solid working relationship. Everybody wins.
As a part-time landlord, being a good tenant is the best way to keep rent down. I’m relunctant to raise rent to get a little extra income if I think it may mean the unit will go unrented. It takes time and energy to find a new tenant. I’d rather just keep the reliable one and jack up rent when you leave voluntarily.
I have 9 rentals in colorado and a 10th under contract. You are right about the risks. Many people don’t know how many costs go into a rental property. The 50% rule states the expenses will be 50% of the rental income not including the mortgage payment. That makes it very hard to make much money on rentals. Renters have to realize the landlord is paying a lot of money to keep that house maintained, taxes paid, insured and there is always a risk of eviction that could wipe out years of profits.
Having said that I love my rentals and only by great cash flowing properties. I make about $5,000 a month from my rentals after expenses, but it’s very hard to get properties that cash flow like that. Most landlords make much less. (I do explain all my properties on my blog).
If the tenants don’t like paying high rent they can move, save up to buy a house or use the strategies you suggested.
Thoughts on owning fewer, but more pricey rentals, than more rentals at lower price points?
It all depends on the market. In my market I like middle of the road rentals. They have a better cash flow to purchase price ratio then the high end and less maintenance and turn over then the low end. Some markets have much better cash flows in the low end, but the low end usually means much more management and oversight. Some markets may have good cash flowing rentals in the high end as well, but where I am at, once you get above $150,000 the rental rates drop compared to purchase price.
I will say the high end usually provides the most stable and low maintenance renters. It is a trade off on how much money you want to make versus how much time you want to spend managing the properties.
If you use a property manager you will still have more costs in the low end, because of maintenance and especially if your property manager charges a releasing fee.
I agree with you Mark. The older I get, the LESS I want to deal with tenant issues or any issues. Hence, the older I get, the more I want to focus on higher end properties that attract higher income earners who are more reliable. Might be a little more maintenance though too, as they might be too unwilling to get down and dirty.
Of course Sam!
This is like asking if we should have free speech haha.
That said, the real perplexing thing about housing, particularly in San Francisco where you reside is this… Why can’t they just build taller and more efficient housing complexes?
Oh yeah that’s right.., there is even more legal red tape for that.
Look at NYC, at least they build up the extra living space. In SF the buildings are tiny! Absolutely tiny in comparison!
TL;DR? Height restrictions is probably number one. Then you could get rid of the rent control issue once the supply issue has improved.
We San Franciscans love our architectural history and our air space. I really dig the Victorians, Edwardians, and Art Decos myself. They will never be built again, so we must cherish them as much as possible. We’re pretty against tower buildings.
I think the location of SF is the driver of not allowing high-rises everywhere. The city is built on a seismic fault line and many neighborhoods are built on reclaimed land (SOMA, the Marina), so when there is an earthquake that ground literally liquifies. The red tap you mentioned is to protect everyone from the consequence of an earthquake under what could be a city of high rises.
You bring up a good point about the architecture though, the positive of not having high rises is that SF has maintained it’s old world charm. Maybe this unique beauty should be considered in the high cost of rent in the city. As a renter I pay more, but my neighborhood and street is really unique and beautiful.
I’m not sure the land restriction is about earthquakes. All of downtown is on liquefaction, but downtown has the highest buildings in the city.
What we want in SF is the preservation of history and culture. We love our buildings.
Renters can save and buy a home versus renting. The prime reasons for higher rents are supply and demand. It is an injustice to renters to keep rents below market! I know this may be revolutionary, but it is true. It will eventually mean the landlord will let the property deteriorate which does not help anyone. Believe me if the rents are above market, the renter can leave and find something less expensive. Most landlords do not want to lose renters because it cost a lot to fix a unit up and incur the possibility of lost rents.
I’ve always taken pride in maintaing my rental properties to be clean and fully functional. If I was forced to charge below market rents, I would definitely be less keen to keep things up. Hence, how the term slumlords comes about. Everything is rational.
I do think landlords have the right to maximize profits. But there are risks. List the property with a rent that is too high, and you might have to wait an extra month to find a good tenant, costing you a months payment for vacancy. Raise rent too much on a good tenant and they might leave, then you have to list the property again risking vacancy and a worse tenant.
My rental currently has a great tenant. Market rate for rent is probably $100-200 higher, but I see no need to raise rent. My profit is ok now, but taxes or HOA are always at risk for rising. So if I need to raise rent on them, I’d prefer to do it in conjunction with a tax increase and blame it on that instead of doing it for more profit. When they eventually move, then I can readjust to market rate. But I hope they don’t move.
As for cheaper rents, I have to side with lower property taxes. Wishful thinking.
And that is the risk the landlord has to bear, pricing too high.
What is $100-$200 as a percentage of your total monthly rental income?
Making money off the backs of hard working Americans is evil. How dare you. You should be offering affordable housing to everyone because it’s “the right thing to do”.
It blows my mind that people have this sense of entitlement. It’s not you, Sam, dictating the market, it’s supply and demand. Right now, there is limited supply and ample demand. You are free to charge whatever you want. If you wanted to charge $5,000 a month and could find good renters, do it. You don’t owe anyone anything.