Carol has a PhD and a heart as big as a Western state. Her resume shows her commitment to helping people of all flavors improve their position through education. She and her husband contribute to the broader society in more ways than their financial donations. Like many thinking people she’s keenly aware of inequalities which she did not create.
Both she and her husband have superior education and character. They have lived and worked in several economically and politically potent cities and states. San Diego is home now. Soon they will become rental owners again.
Carol understands that government policies caused San Diego’s rental housing shortage. Even if San Diego’s apartment construction doubled in the next decade there would still be a rental housing shortage. That truth makes rental ownership a low-risk escalator to wealth.
The wise question that emerged from an initial meeting was “Could a compassionate person ethically own rentals in a market where tens of thousands of people were unable to rent within 15 miles of their employment?” A related question was, “Over the next five years if she and her beloved spent $25,000 per apartment to upgrade the property, what level of rent increases would she be comfortable with?”
California’s rent control law allows annual increases 5% plus a cost-of-living increase. Over Carol’s lifetime cost of living averaged a 3% increase per year. The most recent year inflation was 4.1%. The previous year was below 2%.
So, if over the next five years inflation averaged 3%, California law would allow rental owners to raise the rent 8% annually. The properties that Carol and her husband buy will benefit from upgrades. Historically rental owners who bought the property with “the right things wrong with it” and who improved the property raised the rents more than inflation.
Carol understands she cannot fix the rental housing deficit. She knows everyone’s retirement dollars deserve a return over time, and prudent stewards make choices based on the expected return and the relative risk.
There’s no way she wants to come close to exploiting the poor.
Suppose she and her husband steadily improve their rentals with new appliances, easier to clean and longer lasting flooring, more energy-efficient and quieter windows. Suppose they upgrade the kitchens and bathrooms, make the landscaping more ecologically appropriate, and other such improvements. Would the property be more desirable? Would people pay more to live in upgraded rentals? Could higher income families pay an increase greater than inflation for better housing?
The law allows a huge range of potential rents. Carol’s family will decide which property, which upgrades, and how much to charge.
She heard that less than 10% of my clients never raise the rents. This week at an estate sale we learned that the deceased owner never raised rents. Since rents were far below the market the property is worth nearly 25% less than if rents had merely kept pace with inflation. In effect that owner had cared more for her tenants than her kids and grandkids. That was her ethical choice.
Less than 10% of owners raise the rents greater than the rate of inflation without doing any improvements. Out of 30,000 rental owners, maybe there are 1% who are slumlords, who do not even do repairs, but raise the rent greater than inflation. Carol would be disgusted by that horrible behavior.
I explained to Carol and her husband that my job was to understand my clients, not to agree with them. When they improve the housing stock, the residents will benefit, and better rents boost values. Apartments are sold on a multiple of income, the higher the income, the more valuable the asset.
Many people would prefer to rent from a compassionate owner than the other kind. Some compassionate people are more comfortable putting a face with the benefit conveyed.
There are idiots who drive recklessly. Just because a fool misuses the tool, does not mean that anyone who uses that tool is evil. A bigoted or exploitive person has bad character. Regardless of the clothes that they wear, or cars they drive, or their investments, their character flaw is the problem, not their clothes, not their car, nor their investment.
I respect Carol and I admire her concern. She drives a car every day even though reckless idiots also drive cars. She can be an ethical rental owner even though there are some exploitive people will also own rental property. They may own some of the same mutual funds she and her husband own.
Many of the readers this blog are also rental owners. If that’s you, bow do you decide on rent increases as you upgrade your property?
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”