Sunday, January 25, 2015
Posted in
Life
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As the economy gradually improves, house sales seem to be increasing in the East Bay. I have noticed that many houses are being bought up by professional landlords -- i.e., buyers who renovate the properties they buy and then rent them out as apartments. The worst thing about this is that a lot of beautiful historic interiors are destroyed. But this trend, in my opinion, is also bad for renters.
Professional landlords generally ask for higher rents than home-owners do, and they are more likely to want yearly rent increases. I had a conversation with one of these landlords recently, and he made the simple point that his expenses go up every year -- but then, so do everyone else's. Whereas your typical home-owner is renting out an apartment to cover his taxes and pay off his mortgage (if he has one), professional landlords are making a living from their buildings. But how does one determine what the rent should be? From the landlord's expenses? No, the market determines the rent. If the market says that an apartment of a certain size and number of rooms is worth, say, $850 to $900 per month, then that's what it's worth (everything else being equal). If a professional landlord tries to rent it for $950, and then charges his tenant a $25 increase every year, he may have trouble renting it, or his tenant may leave early. Even if he rents it for $900, after five years the rent will soar to $1,025 -- but will the apartment be worth $1,025 after five years? Probably not. My observation is that rents don't go up that fast.
Now, take the home-owner who has an apartment to let in his home. A rent of $850 will bring in $10,200 per year. $4,500 of that will cover the home-owner's taxes, some will go to maintenance, and the rest is profit. If after five years, the home-owner's taxes have gone to $5,000, the home-owner will still make a profit. When the tenant leaves, the home-owner can hike the rent for the next tenant. If the landlord also has a mortgage, well, then we have to question why the tenant has an obligation to cover all the landlord's expenses. After all, the home-owner lives in the building too! (A professional landlord wouldn't have the problem of the rents not covering his expenses because he wouldn't buy a building that didn't have at least two apartments to let out.)
I personally think that professional landlords are being foolish for focussing so much on profit. Let's take East Bay Apartments on Metacom Ave. as an example. As I write this, they are charging $925 for a one-bedroom apartment which includes heat. That's not a low rent; but considering that heat is included, it isn't bad. But when they told me that they couldn't guarantee the rent for a number of years, I didn't even go over to take a look. They are obviously begging for tenants because they are constantly running ads on Craig's List, yet they insist on raising the rent on their whim.
The landlord mentioned above (in the second paragraph) told me that he has a stable of happy tenants, all of whom are paying 3% increases every year. That might be true, especially if he carefully selected tenants who have high incomes. But how many high-income renters are there these days? As we all know, the middle-class has gotten poorer in the last 20 years. In my case, my income has dropped since 2006 (and even more since the mid-1990's). I suspect that there are a lot of people in Warren who are just scraping by.
I think that professional landlords would be better off if they emulated home-owners. Every time a tenant leaves, the landlord must (1) clean the apartment, (2) make repairs, (3) do some painting, (4) lose rent while the apartment sits empty, and (5) advertise and show the apartment. The landlord will make slightly less money if he doesn't charge yearly increases, but he also won't have to do as much work. And let me add that every time the tenants in a building change, the dynamic among the tenants changes, and that can cause problems. I'm a perfect example: I'm now looking to move because noisy people moved into my building.
My advice to apartment-hunters is: Ask prospective landlords if they raise rents on existing tenants, and if they say yes, move on. At the very least, insist that the rent go up at the rate of inflation or less. Rents in the East Bay -- especially in Warren -- are higher than they should be, and tenants need to push back against the upward trend. The fact that there are so many people getting into the landlord business is proof positive, in my opinion, that rents are higher than they should be.
Professional landlords generally ask for higher rents than home-owners do, and they are more likely to want yearly rent increases. I had a conversation with one of these landlords recently, and he made the simple point that his expenses go up every year -- but then, so do everyone else's. Whereas your typical home-owner is renting out an apartment to cover his taxes and pay off his mortgage (if he has one), professional landlords are making a living from their buildings. But how does one determine what the rent should be? From the landlord's expenses? No, the market determines the rent. If the market says that an apartment of a certain size and number of rooms is worth, say, $850 to $900 per month, then that's what it's worth (everything else being equal). If a professional landlord tries to rent it for $950, and then charges his tenant a $25 increase every year, he may have trouble renting it, or his tenant may leave early. Even if he rents it for $900, after five years the rent will soar to $1,025 -- but will the apartment be worth $1,025 after five years? Probably not. My observation is that rents don't go up that fast.
Now, take the home-owner who has an apartment to let in his home. A rent of $850 will bring in $10,200 per year. $4,500 of that will cover the home-owner's taxes, some will go to maintenance, and the rest is profit. If after five years, the home-owner's taxes have gone to $5,000, the home-owner will still make a profit. When the tenant leaves, the home-owner can hike the rent for the next tenant. If the landlord also has a mortgage, well, then we have to question why the tenant has an obligation to cover all the landlord's expenses. After all, the home-owner lives in the building too! (A professional landlord wouldn't have the problem of the rents not covering his expenses because he wouldn't buy a building that didn't have at least two apartments to let out.)
I personally think that professional landlords are being foolish for focussing so much on profit. Let's take East Bay Apartments on Metacom Ave. as an example. As I write this, they are charging $925 for a one-bedroom apartment which includes heat. That's not a low rent; but considering that heat is included, it isn't bad. But when they told me that they couldn't guarantee the rent for a number of years, I didn't even go over to take a look. They are obviously begging for tenants because they are constantly running ads on Craig's List, yet they insist on raising the rent on their whim.
The landlord mentioned above (in the second paragraph) told me that he has a stable of happy tenants, all of whom are paying 3% increases every year. That might be true, especially if he carefully selected tenants who have high incomes. But how many high-income renters are there these days? As we all know, the middle-class has gotten poorer in the last 20 years. In my case, my income has dropped since 2006 (and even more since the mid-1990's). I suspect that there are a lot of people in Warren who are just scraping by.
I think that professional landlords would be better off if they emulated home-owners. Every time a tenant leaves, the landlord must (1) clean the apartment, (2) make repairs, (3) do some painting, (4) lose rent while the apartment sits empty, and (5) advertise and show the apartment. The landlord will make slightly less money if he doesn't charge yearly increases, but he also won't have to do as much work. And let me add that every time the tenants in a building change, the dynamic among the tenants changes, and that can cause problems. I'm a perfect example: I'm now looking to move because noisy people moved into my building.
My advice to apartment-hunters is: Ask prospective landlords if they raise rents on existing tenants, and if they say yes, move on. At the very least, insist that the rent go up at the rate of inflation or less. Rents in the East Bay -- especially in Warren -- are higher than they should be, and tenants need to push back against the upward trend. The fact that there are so many people getting into the landlord business is proof positive, in my opinion, that rents are higher than they should be.
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