I've sold and appraised homes and apartment buildings of all sizes in Los Angeles, California for over 35 years. My grandmother owned apartment buildings many years ago. I've been a renter in the past. I know the issue from both sides. I've seen the leases, expense sheets and profit and lost statements.
Let me first state that there are indeed some greedy law breaking landlords in this world. That does not mean all rental property owners are "greedy slumlords." I'm writing this article in hopes that people will understand the industry and rental property owners so they stop promoting the false narrative that ALL landlords are "greedy slumlords."
Rental housing is a business like any other business. You work to get paid and so do rental property owners. They worked hard and saved their money to buy real estate to rent to secure their financial future. They could rent cars, tuxedos but instead they rent homes.
A rental property owner needs a certain return on their investment in order to pay for the upkeep of the property and themselves. They are entitled to market rent and an income just like you are entitled to fair market wages or payment for your goods and services. The reason rents are so comparatively high today is the lack of affordable housing. The current lack of affordable housing is caused by two main problems neither of which have anything to do with the rental property owner.
One, there are not enough homes or apartments available. Supply and demand is out of balance causing home prices and corresponding rents to rise. Rents directly correlate to home prices. Land prices have risen so much that building new apartments only makes sense if they're expensive luxury units. We need affordable housing but there aren't any new ones being built because builders would lose money. Would you go to work if your pay check was less than zero, if you had to pay to work for someone else? Of course not. Neither would developers.
Two, most wages haven't kept up with inflation or the cost of real estate. Today's tenants are paying over 35% of their wages in rent. They shouldn't pay over 30%. In Los Angeles it's easily over 50-60% of their wages. You can't rent a one bedroom apartment in Los Angeles with a full time Los Angeles, California minimum wage job of $15/hr. Wages have been basically stagnant while the cost of living has doubled or more. We need to increase wages to match the increased cost of living. Landlords don't control your wages. They wish people made more money so paying rent would be easier.
First some basics on rental housing. A person who owns a home or apartment building which they rent must cover their expenses. The biggest one is generally the mortgage. They don't pay cash for apartment buildings just like people don't buy homes for all cash. They also have to pay property taxes, insurance, utilities for common areas or units depending on age of building (water, power, trash, oil), gardening, repairs and maintenance, management fees, salaries and benefits, business tax, income tax, permits, rent control fees, state fees, county fees, city fees, vacancy loss, rental loss, bad debt, legal fees, eviction costs and more. They also need to keep a fund for renovating units and replacement for major building components, i.e. roof, plumbing system, electrical system, furnaces, air conditioning, appliances, seismic retrofit and more. They need to cover the expense of their own work hours on the property. Most rental property owners are small mom and pops with only one or two small buildings where they also live. If tenants don't pay rent, they can't pay the mortgage and could be foreclosed upon. They'd lose the building and probably also their place to live.
If someone just bought the building, the rental income does not cover all of these expenses and the mortgage. They are losing money for the first 5-10 years especially in Los Angeles, California. If the building is in older rent control, they're losing money even longer because they can't raise the rent to market until the tenant vacates. People rarely leave a rent control apartment because of the low rent. They generally stay for life. The property owners' expenses go up but the rents don't go up accordingly. I know many property owners who refuse to own rent control units for this reason and I don't blame them.
If someone is renting out a house or small units such as 2-4, the income to expense ratio is even lower. The only time the rental income will cover expenses and produce a profit is after the owner has owned the building for many years, all the rents increase to market and the mortgage amount decreases to zero. Even if the building is free and clear, that equity belongs to the property owner. They could refinance the property if they have a large expense and add a new mortgage. They may need money for building renovation, personal medical bills or personal emergencies.
One important thing which most renters don't realize is that rent directly positively correlates to the value of the property. As property values rise so do rents. We've recently (Los Angeles, California June 2022) had a huge appreciation in real estate values in the last two years. Real estate values went up 15% per year and more in lower valued revitalizing areas. Some went up 30% per year. That would mean market rent also went up by that same amount. As property values rise so do property taxes, insurance and other expenses which are tied to the value. Interest rates just increased. If the mortgage has a variable rate, their mortgage costs just shot up as well. Lumber prices went up making renovations and repairs more expensive. All the other costs and fees continue to rise every year. If you're in a rent control building and maximum rent increase is 3% a year, the rental property owner's expenses are increasing at a greater rate.
I remember 1978 rent control in Los Angeles, Beverly Hills, Santa Monica and West Hollywood. The elderly mom and pop rental property owners who kept rents lower before rent control were forced to sell their properties when they later couldn't break even. Some were mortgage free and still couldn't break even. Some owners lived in their buildings. They lost their homes. These are the people you called "greedy landlords."
More sophisticated entities bought those properties and increased the rent as soon as legally possible to the maximum allowable amount every year. They evicted tenants any legal chance they got. They passed through capital improvements to the tenants. They converted some buildings to condos. They moved their children into the units. Rent control forced property owners to do this to try to break even so they wouldn't lose their buildings in foreclosure. It was legal and the right thing to do. Again, would you work for less than minimum wage? Of course not.
Some say that housing should be a right. Okay. I just don't believe the government should force private citizens to give away their assets and services for free. If the government wants to buy housing for market rate and let people live in it for free or low cost and lose money, fine. Otherwise it's a violation of the Constitution to take property owners' assets except by eminent domain. In eminent domain they are paid market value for the property. Property owners would be sort of okay with that even though they bought property to hold long term. They'd go into another business such as commercial property or maybe they'd sell cars.
The problem with this idea is that the government tried this and failed. They couldn't properly maintain the properties because they weren't bringing in enough income and government expenses were high. The government became a slumlord. Remember the "projects?" It also costs the government at least 15% more in administrative costs to run a business than a private entity. The government has to add a minimum of 15% onto each project for this reason. 15% goes right out the window wasted on bureaucracy. The government lost a ton of money trying to provide cheap housing to poor people. This is why they no longer do this. Instead they try to incentivize rental property investors with tax breaks, low interest loans, grants, free or cheap land, density bumps, zoning variances and exemptions from some Building and Safety, environmental and other regulations. This has helped.
If you're a tenant, some suggestions. Work hard, don't take vacations, never buy anything you don't need, save your money, live as cheaply as possible and buy real estate. You can live in it or rent all or part of it out. You've solved your "greedy landlord" problem. YOU are now the "greedy landlord." If you want to rent your units out for $1 a month to people with very little money, go right ahead. It's your property. You just have to pay for the loss. Obviously the main benefit is that real estate appreciates over time, you control your home and you will make money over the long term.
If you don't want to do that or can't because you're living in poverty, here's more advice. If your landlord is breaking the law by not properly repairing things or is charging over the legal rent allowed, take action. Research the law for your city, county and state. If your landlord is not doing these illegal things, please, be nice to them for your own good. There may come a time when you are between jobs, sick...and need a month or so of grace period on your rent. My grandmother always gave breaks to her nice tenants. Some went months without paying rent during trying times. If you act like a jerk because you've falsely believed the greedy landlord narrative, don't expect a break. Would you do favors for someone who treats you like shit? Of course not.
If you're a landlord, some suggestions. Obviously if you're a slumlord breaking the law, you won't read this article or the one below. All rental property owners should follow the law or you will be sued and tenant won't have to pay you rent. You will lose money and deserve that. If you're a good legal rental property owner, here's a nice article about how to avoid being stereotyped with the false narrative of the "greedy slumlord."
Mary Cummins of Cummins Real Estate is a certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.
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