Friday, July 22, 2011

Are landlords Evil? Am I Evil?

I was just listening to the CEO of Princeton property management (talk at an annual apartment management meeting).
She has switched all their leases to 6 months so she can put in raises more often. Limiting raises to once a year is less profitable in a rising market, but less ethical I think . Since the typical stay in our apartments is 18 months, if we do annual raises, people can leave more or less as a normal part of their lives, if they choose not to pay higher rent. Our expenses are actually up pretty mcuh in line with our rent raises this year (percentage-wise - and that's mostly water & taxes). And our rents still aren't up to where they were in 2008. When our rents collapsed 15%, tenants do not volunteer to pay more. So it's not a completely one sided thing.

So, as far as landlording goes, we're not evil. Not paragons of charity (or humanity) maybe. But not evil.
I do think it's important to think about that now and then.

My guiding gut check: I saw a documentary on Chinese workers. They could barely survive and were treated horribly.
When they talked to the manager, he said that's where the market was. If they didn't follow, they'd be swallowed by the competition.
So sometimes the market is evil. Following the market can make you do evil things.

I think our moral imperative has to be to provide a nice place to live and not to squeeze people unreasonably. With some exceptions, I think 6 month raises are unreasonable. I think raising rents just to force people out is unreasonable (for example for the guys paying $1000 on when the market is $1270, we would make more money if we raised their rent $200/mo which would probably force them out (and still would be below market).

A lot of people think landlording is intrinsically evil. In olde timey economics, we're called "rentiers," and one of the founders of what they call modern classical economics (David Ricardo) flat out said that rentiers serve no social good. Where is the social good in simply owning property and charging people more than the expenses? The only answer I think is in creating nice places to live.

Look at publicly owned and rent subsidized housing. Inevitably the public overpays to build it. Typically the public pays nearly double what we pay per unit - and we have nice units!. Then it starts out new and fairly nice. But it is not maintained well and it is not improved. Eventually it's torn down or the public pays more than a new building would cost to have it remodeled.

That happens because the Government property managers have little incentive (except kickbacks sometimes). We have an incentive for improving our apartments. Higher rents. So we perform the social good of improving the overall quality of housing available to renters. Ultimately we cannot charge more than people are willing to pay. There are only so many places at the top. My long term goal for our properties is to be as close to the top as we can be while improving our return on investment. So that translates to investing back into the properties (about 40% of our income this year) and also raising rents if we can. That was a risky strategy because there are so many new Pearl units that have been converted rentals over the last 20 months (3000 units) and more units that were planned as condos that became rentals in the North & South West waterfront developments (another 1500 units). If there aren't enough high end renters who prefer us to them, we loose. Right now, most landlords have chosen simply to raise rents, but not invest much in the properties. So our choice add more insulation the buildings, improve the electrical systems, refinish floors, and so on isn't something everyone does. There's a complex in NW Portland - NW 24th - called Nob Hill Apartments. They're kind of like what Corbett used to be. Aluminum frame windows, gray carpeting. No real improvements beyond maintenance. Their rents last year for a studio were around $720. Now their at $820 or so. They're providing less expensive housing in an expensive neighborhood. It's clean and functional. A different choice.

So, anyway, I do think about this.

6 Comments:

Anonymous Anonymous said...

and people work their whole life to pay your rents and your morgages. their food and necessities cost little. it is the rents that they sweat for. how much do they pay? they pay with their working week, their working year, their working life. their lifes. so you can do some decorating occasionally.
kierongill@hotmail.com

3/14/2012 1:24 PM  
Blogger dbau12 said...

As a renter, here's what I've never understood about landlords...and maybe you can enlighten me. So I'm a nice kid, I try and keep things neat and organized. Occasionally, things in the apartment break down. There are many times when I've volunteered to get them fixed myself considering it takes my landlord weeks and weeks to get around to doing something as simple as fixing a broken lock. I don't understand really why landlords can't offer discounted rent rates, to tenets who agree to maintain their portion of the property themselves. If upon exiting the lease, the tenet has left something damaged, then that should maybe be considered a breach of the tenets contract in exchange for a lower rent. I want you to know, I do see landlords as intrinsically evil. The "market" is not an ethical institution. I am from Austin Texas where, similar to Portland, we are an art hub and a city that still thinks of itself as a town. Our character of our community is only possible in my view because people from different socioeconomic classes can afford to interact with each other without being segregated (such as the citizens of Washington DC) based upon what they can afford. In DC, the rents get higher, the poor get isolated in crappy neighborhoods which either gentrify or become worse and worse. Packing your entire city full of the same income level cuts of diversity, creativity and innovation. You won't have these little Mexican restaurants in Austin catering to middle class or wealthy citizens, or lower income neighborhood residents when rent continues to skyrocket. The poor cannot afford to interact with the rich at a certain point, and I blame this entirely on the "market value" of real estate and the landlords that follow market trends.

Do you foresee the utilities such as water ever going down? If you could, would you put in solar panels and have your tenets pay for water while you pay for electricity which is self sustaining? I'm not delusional enough to think solar is an easy fix since currently it's mind bogglingly expensive to put in solar panels...but perhaps cities could subsidize sustainability rather than overpaying for new lower income housing. I don't know....you landlords make this sound like raising rents is just what you have to do because the market demands it...I'm struggling to understand that mentality.

9/30/2013 11:21 AM  
Blogger Max Rockbin said...

To try and answer some of your questions:

Landlords in general tend to be wary of tenants doing repairs. There are definitely exceptions, but most of them aren't all that well done and can make problems worse. For larger repairs there are insurance issues. In any case, more often than not, landlords tend to believe it makes sense to handle repairs with their own staff.

Most buildings are managed by service companies - not by the owners of the buildings. Those professional managers have incentives that push them to skimp on maintenance. For them, it's a numbers game. Run as many units as you can with as little staff as possible. That leads to delays and a lot of half ass maintenance. It's a tough nut to crack because the management company will never have the same motives as the owner. Quick fixes or delayed maintenance give the appearance to the owner (who doesn't know the details of individual units)of a lean, efficiently run operation. In Economics, this is called the "Agent Paradox" or "Agent Dilemma."

I run my own buildings, and I know it's in my interest to keep tenants happy and make repairs which will improve the buildings (and rents) in the long run. A professional manager will never see it that way. It's my belief that if I provide a good place to live, it is OK to charge market rents.

In terms of diversification and a range of different rents: Strangely, in the long run, higher rents will actually lead to more (and nicer) housing at all income levels. That's happening - bit by bit - in Portland right now. High rents and low vacancy rates have lead to a huge building boom. Sometime after next year, there will be too many apartments on the market. Rents will drop and there will be a lot of nice new housing out there. Nicer older housing will have to aim for lower income tenants and you have nicer housing for everybody.

Ultimately, landlords are going to follow net income / total cost. If that percentage drops below a certain level, they'll just sell and go for other investments. And you won't have any new apartments being built.

Utilities: Water won't go down in Portland! Funny water politics here. Water costs more than in Austin, I think. The trend is for landlords to shift those costs to tenants (as law allows). It kind of makes sense. Utility costs as paid by landlords are built into the rent. Tenants paying utilities makes for more transparency, which should be good for the consumer (assuming rents lower in tandem, which they seem to do).

Solar: I worked on a large Solar project on our largest building for several months. Ultimately it fell through because of subsidies. The Govt said we had to tear off our perfectly good roof if we wanted the tax credits. No 15 year warranty, no credits. Ironically, the energy cost of producing and installing the new roof would have been more than the lifetime benefit of the solar panels. Sigh.

Anyway, it's kind of obvious to say, but landlords raise rents because they can. It's a business. In my opinion, that's OK as long as your not being exploitive (e.g. raising rents to push out someone you don't want, or raising rents on someone just because you know it's hard for them to move cause of kids in school or whatever). And as long as you provide a nice place to live.



9/30/2013 12:28 PM  
Blogger dbau12 said...

@Max Rockbin, thank you for your response. As Portland is a city that shares a lot of Austin's values, it's particularly interesting to hear about rent from the stand point of a Portlander. Austin natives tend to be against growth--despite its inevitability. We have a lot of people from out of state moving in and many of them have money and want to live downtown in the new luxury high rises they're building. Admittedly Austin does not have enough housing downtown to accommodate the demand but at the same time, a lot of natural treasures managed within the city parks are also downtown and its becoming difficult to balance urban with natural.

Ultimately I think you're right about nicer housing for everyone. Currently I live and work (temporarily) in DC, and in a city with such physical geographic limitations of its boundaries and very little regulation on property taxes rising until quite recently, many residents are indeed getting pushed out and landlords are charging--what to my southwest perspective--seems absolutely absurd for what you're getting in terms of space and amenities.
It's worse than NYC in some areas. For the east coast though it seems there is no easy fix except to continue building upwards, which DC is currently prohibited from doing over a certain height.

10/09/2013 8:57 AM  
Blogger Unknown said...

Yes, landlords use the renter to pay off the mortgage, insurance and taxes, and hopefully make a profit. If the tenant doesn't like this arraignment, they are free to find financing and purchase a home of their own. They are not held hostage by the landlord. There are giod and bad landlords, just as there are good and bad tenants. If the tenant decides they don't like the decor of the apartment they rent, they can look for something better once the lease is expired. It's really simple. But ih, the tenant only wants to pay $350/mo in rent? Then you get an apartment that is not as nice. That's the way life goes. You only want to pay $5000 for a car? You get what you pay for! Welcome to the real world. You want an apartment with marble counter tops, stainless steel appliances, high end faucets and custom wood trim? Then you'll pay for it. Simple. It's not the fault of the landlord that the tenant has a basic education, minimum wage employment and poor money management skills. Why should the landlord be looked down upon?

6/03/2016 5:59 PM  
Blogger A good landlord said...

Yes, landlords use the renter to pay off the mortgage, insurance and taxes, and hopefully make a profit. If the tenant doesn't like this arraignment, they are free to find financing and purchase a home of their own. They are not held hostage by the landlord. There are giod and bad landlords, just as there are good and bad tenants. If the tenant decides they don't like the decor of the apartment they rent, they can look for something better once the lease is expired. It's really simple. But ih, the tenant only wants to pay $350/mo in rent? Then you get an apartment that is not as nice. That's the way life goes. You only want to pay $5000 for a car? You get what you pay for! Welcome to the real world. You want an apartment with marble counter tops, stainless steel appliances, high end faucets and custom wood trim? Then you'll pay for it. Simple. It's not the fault of the landlord that the tenant has a basic education, minimum wage employment and poor money management skills. Why should the landlord be looked down upon?

6/03/2016 6:00 PM  

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