By Dr. James M. Dahle, WCI Founder
We published a post recently about investing in mobile home parks, not terribly different from a post we ran about it in 2015. The reaction to the post in the comments section and across social media, however, was dramatically different. Part of that may come down to tone, writing style, and specific words used or actions described. But mostly, it was a reaction to rising rents, rising home prices, and the ensuing affordable housing crisis that has appeared on the scene in the seven years between the posts.
I was most concerned about knee-jerk reactions and the lack of understanding of basic economic principles seen across the WCI community. So, I thought it would be worthwhile to spend some time today on the concept of market rent and talk a bit about REAL solutions to the housing crisis (which naturally will have to get a little political. If you hate that, stop reading this post right here and come back tomorrow).
What Is Market Rent?
First, let's define what market rent is. Market rent is the highest price at which you can rent out a property within a reasonable amount of time using an appropriate amount of marketing. It's relatively easy to determine in a big apartment complex. If 95% of your units are rented at a given price, that's market rent. If only 90% are rented, you're overcharging. If 100% are rented (or worse, if there's a waiting list), you are undercharging. It can be harder to determine with single-family homes or other unique properties, but you understand the concept.
Contrary to popular belief, market rent is NOT set by the landlords. It is set by the tenants. A tenant who is out shopping for a place to live quickly becomes an expert 0n what market rent is. If you look at 10 or 15 available apartments or homes, you can reach that same level of understanding. Why would you rent this place right here when you can get [whatever feature or location or amount of space] for $100 less a month over there? Tenants rightfully don't care about the landlord's expenses. They don't care that property taxes or mortgage interest rates or landscaping expenses went up. They're only going to pay as much as they have to pay. Nobody gives landlords a break on their expenses during inflationary times. Thus, it doesn't make sense for landlords to provide a discount for anything less than market rent.
It's really a fair proposition. The landlord provides a clean, safe, functional place to live in exchange for market rent. That market rent allows the landlord to pay the expenses of the property (perhaps 45% of the rent on average); pay the mortgage; keep the place clean, safe, and functional; and presumably, if managed well, provide a little profit to make all that hassle worthwhile. This is why leases should be carefully written, clearly explained, and strictly followed by all parties. They outline the deal. The landlord should keep up their end of the deal. The tenant should keep up their end of the deal. It's a win-win, and everyone is happy. It only becomes a win-lose or a lose-lose when one of the parties does not maintain their end of the deal.
Why Should Landlords Charge Market Rent?
If a landlord charges less than market rent, they will not have the funds to properly maintain the property. Then, it becomes difficult to maintain their end of the bargain to provide a clean, safe, functional property as agreed. Renting out the space also becomes not worth their time because they may no longer be making a profit (or at least as much profit as they could make with another investment)—or even worse, they could actually be subsidizing the housing costs of their tenants.
When you charge less than market rent, you are, in essence, deciding that your tenants are your favorite charity. In essence, that money you are no longer making from your tenants could be used to support your favorite charity. However, it's worse than that. The value of a commercial property is almost entirely dependent on its income. When you are not charging market rent, you are lowering your income and lowering the value of the property at sale. You would be better off charging market rent and then writing a check to your tenants to help them out. This would allow you to support your favorite charity (those tenants) while still maintaining the resale value of the property.
Charging more than market rent is even worse. Above-market rent is its own punishment. It rapidly results in vacancies. What happens when you raise the rent? When you raise it, the tenant goes and looks around and discovers what market rent is. If you are charging market rent, they realize they're not going to get a better deal elsewhere, and they come back and grudgingly pay the additional rent. They probably also demand you fix that leaky toilet (and you should). If you are charging above-market rent, they leave and you get no income for that unit. Now, there is a certain amount of “stickiness” to a tenant. It costs money and takes effort to move; sometimes a lot of money and effort. Perhaps some tenants will put up with slightly above-market rent for a while, but you can't do that for the long term. Eventually, people move out, and nobody moves in to replace them.
What's the lesson? You should charge market rent. It's not only the best way to run the business, but it's the only way you can stay in business long term. No margin, no mission. Naturally, that means you may have to REDUCE rent at times to get to market rent. But more commonly, it means you need to raise rent. In fact, a lot of the “value-add” that a savvy real estate investor does to improve the value of a property is simply to find a property where a landlord doesn't know what market rent is, buy it, and then raise the rents to market rent as the lease agreements renew. That was partially what guest Paul Moore was writing about when it comes to mobile home park investing and what some commenters were getting so upset about.
Either way, the property is now worth 10% or 25% more than the price paid for it, all due to the ignorance of the previous owner. Know what market rent is and charge it.
More information here:
Raising Rent: Is Dave Ramsey Wrong?
Should You Ever Make an Exception?
Sure. You can rent to your grandma for below-market rent (keep in mind if you get too far below market rent, the IRS may view the difference as a gift). You also don't need to throw out a tenant that has been excellent (i.e., pays the rent and doesn't destroy the place) for years just because they can't make rent one month while being treated for breast cancer. It's your business, and you can run it however you like. Here at WCI, we've had lots of great partnerships over the years with people to whom we gave “below-market rent.” It cost us some money in the short term, but we made a lot more in the long term due to investing in that relationship.
We also try to give back to the community that has given us so much, via the WCI Scholarship, Champions Program, and Financial Educator Award. But for the most part, we try to charge market rent. No more and no less. You simply cannot work for free for long, and that's what keeping non-paying tenants for too long or charging below-market rent is doing. You have to draw a line someplace. Reasonable people can disagree about where the line should be drawn, but they cannot disagree on the fact that it should be drawn. And who should get to decide where the line should be drawn? How about the person putting in all the work and putting their money at risk? That's right: the owner of the property, aka the landlord.
More information here:
How We Became Accidental Landlords
Is It Ethical to Invest in Rental Property for People with Low Incomes?
I argue that it is not only ethical but beneficial. If nobody invested in workforce housing (such as Class B or C apartment buildings), if nobody invested in mobile home parks, if nobody invested in Section 8 housing, there would be no place for low-income folks to live. They would be forced onto the street and into homeless shelters. In that respect, investing is a noble act. Sure, some ignorant people will call you a slumlord, but in reality, you are providing a beneficial service.
Just like Apple sells phones to low-income folks, just like Exxon sells them gas, just like Walmart sells them groceries, and just like you sell them housing. It's a beneficial transaction between two willing parties and exemplifies the best of capitalism. You can see a microcosm of what happens when there is no low-income housing in a Colorado ski town. All of the property owners realize they can make a lot more money renting their properties out as short-term housing to vacationers. So, they convert their properties to Airbnbs. All of a sudden, for the folks who sell stuff in stores to the vacationers and for those who clean the Airbnbs for the vacationers and who guide the vacationers around on hikes and who take them down rivers and who serve them meals in restaurants and who operate the ski lifts, there's nowhere for them to live.
Sure, for a while they can commute in from elsewhere, but at a certain point, a labor shortage results and the pendulum swings back the other way.
Solving the Affordable Housing Crisis
We have an affordable housing crisis in America. I don't even know how doctors can afford to buy houses in many areas. And rents are rising right along with the price of properties. Some of this is due to low interest rates. Some is due to excessive stimulus money. Some is due to general inflation. But mainly, it is simply a problem of supply and demand. There is more demand for housing than there is supply. As a result, the prices have gone up dramatically.
What is the solution? The main one is to build more housing. That raises supply and lowers the price. It's basic economics that you should have learned in the 9th grade. Yes, you can make a few tweaks around the edges. A community can give out fewer permits for short-term rentals. It can allow accessory dwelling units (for long-term use). It can subsidize the construction of high-density housing. It can raise taxes on secondary homes and short-term rentals. It can even provide stipends to low-income folks to help them afford the rent (a la Section 8). But that's about it. Mostly, it's about getting more units into the market and letting the market solve the problem.
You know what doesn't work, at least in the long term? Rent control. If a community dictates that a landlord cannot charge market rent, what is that landlord going to do? Probably sell the property and invest elsewhere. That landlord certainly isn't going to build another apartment building in that community. So, demand continues to rise and supply does not keep up. Now, there is nowhere to live. And in the long run, rents do go up, so even if you find a place to live, you can't afford it.
Rent control isn't the only thing that constrains supply. Sometimes NIMBYism (Not In My Back Yard) rears its ugly head. Sure, people want more housing units to be built, just not in their neighborhoods. Build them on the “bad side of town,” so we can have our beautiful one-acre lots and country clubs over here. Or regulators make it so difficult for operators, contractors, and tradespeople to work in a town that they just go elsewhere—also a bad idea if you really want to solve the affordable housing crisis. You can work on the other side of the equation, too. Instead of helping people by keeping housing costs low, you can help them to earn more money by investing in education and building good businesses that pay good wages.
Get Off Your High Horse
If your knee-jerk reaction to someone who invests in Section 8 housing or mobile home parks or Class C apartment buildings is that they are “unethical, immoral, un-Christ-like slumlords,” I think you should consider a couple of things.
First, if you invest in a Total Stock Market Fund like most of us, you are already investing in these sorts of investments. I'm sorry. Just because you're up there viewing it all from 30,000 feet doesn't mean that there aren't people down on the ground having to move out of YOUR mobile home parks when they can no longer pay the rent. Sun Communities Inc. (Ticker SUI) owns 661 mobile home parks across 39 states and in Puerto Rico. Yup, you own those mobile home parks just like I do. I assure you they “kick out” an unfortunate mobile home owner at least every week (if not every work day) to keep their investors (i.e., you) happy. If you don't want to overweight it in your portfolio by buying a fund that specifically invests in these properties or buying one yourself, that's fine. But don't kid yourself that your hands are somehow clean.
Second, if you're reading this, there is a good chance you work in healthcare, an industry notorious for opaque pricing practices and pushing countless people into bankruptcy. Very few people declare bankruptcy because they can't make the rent, but it happens to more than half a million people a year due to medical debt. Mote meet beam. Stones and glass houses and all that. Yes, we all do some work for which we are not paid (especially those of us to whom EMTALA applies), but my group sends self-pay patients a bill, and I bet yours does, too. If they don't pay, they are hounded by bill collectors, and their credit is ruined.
Is There No Middle Ground?
Like most things in life, the truth is probably in the middle somewhere. There are clearly terrible people out there who do dirty business deals all the time with profit as the only motive and care not a bit for the end customer. Some of them clearly work in the low-income housing space (such as mobile home parks). Here's an example from a piece that NPR did not long ago. Planet Money talked about how some of the private equity trends we've seen in medicine are also being seen in the mobile home park space.
Mobile homeowners are particularly sticky compared to other renters, because it is particularly expensive to move a mobile home to another park. If you can't make rent, you certainly can't afford to move. Despite that, it's still both moral and ethical to charge a mobile home owner market rent for their spot. In fact, it is the best practice in the long run for all involved. Businesses do not need to be run SOLELY to maximize profit so long as the owners have other goals for the business to accomplish. But still, no margin, no mission.
Is Everyone Cut Out to Invest in Real Estate Directly?
If you like the returns and tax benefits of real estate but you hate the idea of having to tell a tenant they need to pay more, collecting rent, or initiating eviction proceedings, you do have a few options. You can hire a manager to do it for you. You can invest through private syndications and funds. You can even just buy a Total Stock Market Fund. If you are a people-pleaser, being a direct real estate investor may not be for you.
That's OK. You're probably in the majority. One reason the returns of doing direct real estate well are so good is because it's hard work. Part of that hard work is being on the front line and having to see what happens when bad things happen to a family and they can no longer make rent. This is just one reason I don't personally invest directly anymore. I'm too much of a people-pleaser. It's also why I hired somebody else to sell the ads at WCI. Sometimes you don't want to know how the sausage is made.
More information here:
Landlords Should Not Be Expected to Solve the Affordable Housing Crisis by Themselves
What is particularly unfair is to expect landlords to somehow solve the affordable housing crisis by themselves by charging below-market rent. If society wants to somehow subsidize housing costs, we all need to contribute—not just a subsegment of the population. Grocery stores get money from the government (i.e., the taxpayers) when they accept food stamps. It should be the same for landlords. Better yet, encourage the building of new housing.
If you'd like to invest in private real estate, check out our partners in this space.
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What do you think? Do you think it is ethical to invest in low-income housing, such as mobile home parks? Why or why not? What practices should you adopt in doing so? What do you think are the best solutions to the affordable housing crisis? What role do landlords have in solving it? Comment below!
My impression of the recent mobile home post is that it really celebrated the “stickiness” factor in way that just felt off putting; hey guys you can charge ever higher rents to these poor folks in mobile home parks because they can’t afford to move!! Cha-ching!
Certainly there was a little more nuance than that, and your current post reads as much more reasonable and thoughtful (even though the overall message and economics may be similar).
Hey Josh.
Thanks for your comments. As the author of the original post, I will confess that I see exactly what you mean. I regret that I did not word that better. And I genuinely appreciate your input.
Our firm, alongside our investors, invests in mobile home parks, self-storage, RV parks, light industrial, shopping centers, and multifamily. We are particularly sensitive to the plight of many mobile home park tenants, and in fact, we ask our operating partners about their policies regarding rent increases. I would not want to invest in a deal that took advantage of low-income tenants. In fact, our other residential investment (apartments) specifically works with an operator who specializes in providing affordable housing opportunities to tenants in very nice complexes.
Yesterday, we sat in the Phoenix headquarters of an operator we may invest with. They assured us of their plan to only moderately raise rents for existing tenants, but to make most of their profit on adding additional homes to the park. They are quite sensitive to this issue as well.
Another operating partner is in a state that instituted rent control with a 3% annual cap for mobile home park lot rents. This operator said 3% wasn’t a limiting factor because they typically raised existing rents only about 1.5% annually anyway. (I do wonder how this will play out in an era of higher inflation, however.)
Thanks again for weighing in, and for your sensitivity to this issue.
The key thing is that people have no choice, if they want to retire, except to invest in the stock market. By deciding to be a landlord you’re making a specific choice to engage in rent-seeking and pushing housing further into unaffordability. As a private landlord you are totally different from a social housing provider and the attempt at equivalence is facile.
Do you really behave ethically as a physician if your response to people disagreeing with you is “here’s 5,000 words on why I’m right” #iamverysmart
So what’s the alternative? Have private equity buy up rental real estate? Who should own these properties and rent them out?
Bzzzt false dichotomy.
There is money to be made here. However the investment can’t be done without participating in and promoting exploitation. It is not a question of whether private equity invests, or Dr Chud does instead. it’s purely a question of whether Dr Chud has a moral compass that says yes, or no, to profiting from the exploitation.
I suppose “exploitation” is in the eyes of the beholder. One man’s profit is another man’s exploitation. How much is “enough” profit? I would say the person that gets to decide that is the person putting in the work and has his money at risk.
Joseph – your words make it obvious you do not invest in residential real estate, nor do you have any experience. I’ll admit, I was originally schooled to feel like you, especially living in a high priced area, where the rich are ridiculously rich, blaming all of society’s problems on people with assets. Then – I decided to invest in cash flowing residential real estate myself, and believe me – Jim is absolutely right. The affordable housing problem is NOT the problem of the mom-and-pop landlord, which is the majority of landlords in this country. Landlords / mom-pop investors are providing an affordable place to live to those who can’t afford a down payment, or don’t qualify for a mortgage, which is a huge percentage of the population. Trailer park homes are one of the last bastions of affordable housing, and it is difficult for a single person to just start a mobile home park. It has to be investors. It’s not like it’s normal for someone to have a few million dollars to start a park.. Finally – there are people with money that actually choose to live in mobile homes, not because they’re poor or desperate. Some like the affordability. Another idea that you obviously have no familiarity with.
You are wrong that we have no choice but to invest in the stock market. You are obviously not doing your financial homework! Owning property is not necessarily exploitation. Would you rather have the government own a shabby property and attempt to mange tenants (which always fails), or have it fixed up by a private owner and charge reasonable rent to the local community?
Do your due diligence in investing before you criticize landlords. One day you will decide to own a rental home for extra income (or whatever reason). You’ll look back at your comments and be embarrassed.
There are lots of investing choices, certainly without and even within stock market investing. You could invest in funds that do not invest in mobile home parks for instance, or buy TSM and short those stocks that do to offset that effect.
I have no idea what you’re referring to with the ad hominem “you’re an unethical physician” bit.
“ The key thing is that people have no choice, if they want to retire, except to invest in the stock market. By deciding to be a landlord you’re making a specific choice to engage in rent-seeking and pushing housing further into unaffordability.”
Funny you mention the stock market.
Are you suggesting publicly listed companies aren’t diligently lobbying for rent seeking legislation at the tax payers expense?
How about the discrepancy between US medical costs and the rest of the world? Are you sure none of that is caused by lobbying?
Or should I read your comment to imply that you don’t think anyone should retire or accumulate wealth?
Sincerely interested in how you morally differentiate one as superior to the other.
Maybe we can have politicians buy Pharma shares right before the Gov mandates the public to take a vaccine that doesn’t prevent the spreading of a virus? That would be morally superior because?…
Just wanted to point out –
1. The COVID vaccines were designed to reduce hospitalization and death, not prevent spread
2. They do, incidentally, reduce spread
https://www.bmj.com/content/376/bmj.o298#:~:text=A%20study2%20of%20covid,transmission%20by%2040%2D50%25.
This does not negate your concern about insider trading.
To an extant great enough to attempt to mandate? I don’t think so.
And it was presented by the gov and media as an analogy to the polio vaccine, so the bill of goods sold was to prevent spread. Like not prevent a little bit like the study you linked, but prevent like the polio vaccine prevented.
The 2 things that were known even before Covid was officially stateside.
1) Extremely high survival except among people with severe co-morbidities.
2) And it was said to be more infectious than the common cold.
So my realization? “Oh well, I guess we are all going to get it.”
My other realization? “It is more contagious than the common cold, but they are accurately tracking it. I don’t think those 2 things can both be simultaneously true.” I think it was here before it was here.
I think the heavy handed nature of how it was dealt with lead to at least as many deaths of despair as people supposedly saved by going into panic mode.
My grandfather died of Covid. He was almost 90 and lived in an Alzheimer’s care facility. Have you ever seen a 80+ year old come home from an Alzheimer’s care facility? Me neither.
I’m sure all the people who commented on the prior post are perfect people themselves. Especially those who showed the most outrage. They are without sin!
Kind of a cop out. By that argument if you’ve ever jaywalked you are now disqualified to criticize anyone else’s behavior no matter how bad.
Wow, great blogpost. My favorite from Dr. Dahle in a long time; pithy; direct without avoiding controversy, but also not inflammatory clickbait.
Long-term interventions other than increasing supply on the supply-demand curve (e.g. price controls) will only serve to prop up the overall cost and exacerbate the situation.
Thanks for your kind words.
Dang, not clickbaity enough? I know you mean that as a compliment, but we actually do want people to click on and read our articles so we don’t necessarily take “clickbait” as an insult around here!
Thank you Cody.
I was talking to a coworker who owns some rent control units. It actually forces his hand to raise the rents because if he doesn’t he’ll never catch up.
It also forces landlords to charge top dollar on any new units and limits the supply of new units.
I laughed and texted him the acdc Econ video of price ceilings and price floors.
Great article, Jim. It covers the issues very well and explains why landlords shouldn’t be blamed for the affordable housing crisis. The fact is that some readers are beyond reasoning. You quite succinctly explained why it’s not accurate to say that landlords are causing the affordable housing crisis, yet one of the comments above again accuses landlords of “rent-seeking,” whatever that is.
I encounter a lot of this hostility in my own media. Though I generally embrace it under the adage, “there’s no such thing as bad press,” it does get tiresome.
As a landlord who’s spending $16k to replace a roof and $24k to upgrade a dated unit this month, I can attest to the fact that the whole enterprise falls down if market rent is not charged.
I don’t fully buy it. I am all for investing in multifamily dwellings and looking at investing in apartments once I get some short term debt (from buying our house) gone.
When you invest in an an apartment bldg you’re providing housing for lots of people, particularly if its a new one being built. When you buy a single family home with intent to turn it into a rental, your taking supply out of the system at a time when there is an imbalance in supply and demand. Mom and pop investors likely only have 1-3 of these each, but as a whole that’s taking a lot of supply out of the housing market at a time when the short supply is legitimately causing issues.
If you’re going to talk about how owning rentals is or is not contributing to the housing crisis, I don’t think you can talk about single family homes and multi family dwellings in the same sentence.
You’re taking it out of the owning market but adding it to the rental market. Unless you’re doing short term rentals anyway.
By “taking it (SFH) out of the system,” I suppose you mean “change the name on the deed.”
18 months ago I finally bought my first multi family rental. Which has turned into owning 3 properties already along with a likeminded friend who is now my business partner. It’s great to share the labor. And my ethics and altruism as a physician does play a role I think. This venture is more like a fun hobby that takes my mind off the hospital and also fills a good spot in my investment plan and also helps tenants live.
I not so humbly believe we are the best landlords these tenants may ever have in their lifetimes. We remain available. We care. We take pride in our workmanship when we fix places up. We are reasonable with our rents. Sure we make a modest profit. But there are not better places out there with better landlords and these tenants know it. Each apartment we have I would live in myself. Sure we won’t put granite countertops in but clean and functional finishes that aren’t the cheapest but also don’t break the bank are just fine.
So yes Jim, you said it perfectly. Real estate can be looked at as a service. And it can be done where everyone wins.
Change the word “But” to “and” and I think you’ve hit the nail right on the head. No need to apologize for a profit, especially a modest one!
The issue here is not that people lack an understanding of basic economic principles. We all understand supply and demand. The issue is whether or not the market is the only solution to the housing and health care crises. It’s only when you think that the market is the greatest thing ever, something that should be shielded from reasonable criticism, that you believe that it is moral to raise rents on people at the bottom of society, for no other reason than you can, because they tend to be sticky.
I would argue there is far more room for government intervention in these sectors than you allow, before you arrive at Socialism. Rent control is not the only option the government has. We could agree as a society that housing and healthcare are human rights, and then take basic steps to ensure these. Providing massive government subsidies to all Americans for housing and healthcare would be reasonable steps that would show far more benefit for society than subsidizing already profitable pharmaceutical companies or allowing home owners to deduct mortgage interest.
I guess we could agree that housing (or healthcare) is a right. But we certainly have not yet done so.
I’m curious what your other solutions are. Please share. You allude to something besides rent control and I’d like to hear what it is.
Dr Jim, you seem to be a making a different case than the recent mobile home park article. You are advocating for landlords to charge market rents… which seems reasonable and good. But the previous article didn’t say market rates, instead he talked about raising rents… because mobile home tenants are “sticky”. As if to say, you can manipulate above-market rate from these tenants because many don’t have the option to move out.
Dr. T:
As the author of the original post, I take responsibility for the wording. I see what you mean, and I don’t blame you for feeling the way you do.
Almost every landlord is aware of the risks and hassles caused by tenants who leave without paying. Some trash your properties. Some set them on fire, or worse.
As a past landlord for four personally owned mobile homes, I can tell you three turned into nightmares. After almost completely destroying them, multiple tenants moved out without paying rent. I literally had to have two of the three homes hauled away to junkyards.
What does that have to do with this? Because mobile homes are typically the property of the tenant, they are often cared for much better. And while many tenants in lower-income housing stay about a year and move on, it is nice for operators and investors to have tenants that are sticky, in the sense they often stay over a dozen years…since it is their home.
I regret I gave the impression that this means they should be taken advantage of. That flies in the face of everything I and my firm believe. In fact, our partners were in Phoenix yesterday where we were part of a group that raised $150,000 in 20 minutes to provide housing for the poor and disadvantaged. We spearheaded a $255,000 raise for the same cause at an event on June 25th.
Thank you for your thoughtful comment. I will choose my words more accurately in the future.
Hi Paul,
I appreciate that you took the time to respond.
I’ve been thinking about your strategy of raising rent on “sticky” tenants (and maybe we are on the same page here???). So I think business-wise, stiff rent hikes on sticky tenants may be a strategy that works… especially in the short-term. But long-term, people become successful and stay successful only by avoiding gimmicks and respecting their customers.
Wish you well with the Phoenix project (I live in AZ myself).
Thanks, Dr. T.,
I appreciate your comments and so thankful that Jim addressed this as well. He is right.
By the way, I am based in Virginia. I was in Phoenix at a conference and investment due diligence trip.
Best,
Paul
I addressed both those points in the article. You can’t charge above market rent for long and maintain an adequate occupancy rate, even with sticky tenants. The rate obviously falls more slowly the more sticky the tenants are.
Amazing to see the replys of the wealthy on the affordable rent situation.
My Husband and I worked our entire lives working in Retail Management. We looked forward to a nice retirement and home ownership. Youngest son in an accident, Cha Ching. Our health suffered set backs.
In the last year alone, rental prices have gone up several hundred dollars.
Corporations are buying all rental properties. We may end up having to live in the hood, because the dollar bill is more important than the right to a decent rental at an affordable price.
Pat yourselves and your bank accounts, on the back.
Renters don’t have a choice. People are being made homeless.
I’m sorry to hear of your misfortune.
Unfortunately, I am not aware of a ‘right” to a “decent rental at an affordable price.” It’s not in the US Constitution (just life, liberty and the PURSUIT of happiness), so I’m not sure where it’s coming from. I agree there is an affordable housing crisis. I just think that landlords are as much a part of the solution as a part of the problem.
I suppose personifying your bad luck as landlords helps you sleep better at night… Why not grumble at the grocer? The utility company? The oil/gas company? The federal/state/county/city government for all those taxes you paid? The clothier? The insurance saleswoman? The plumber, electrician, carpenter, mason? Surely there are capitalist devils to be morally rebuked aplenty!
While this article is not wholly incorrect, the percentage of landlords that only own a few properties as a retirement venture, is much lower now as large investment firms have swallowed a much larger part of the rental market for not only homes but vacation rentals. It also ignores the fact that landlord lobbying groups have been instrumental in keeping new units from being developed exacerbating the supply issue. Market rent isn’t the issue but the landlords actively protecting their profits by manipulating the market supply. That is not being done by your uncle that bought a rental house to get their mind off their real job.
Can’t say I disagree with much of that.
Seems like medschools are churning out more and more saps. From a recent story in the news… “A new report reveals that top medical schools are weeding out applicants who voice skepticism about Diversity, Equity, and Inclusion policies, and contends that the application process for doctors has been compromised by viewpoint discrimination. “
Let’s try not to be “woke” about everything, but educated. Dr. Dahle wasn’t malicious at all in his last article in using the term “sticky”. Is calling an investment “recession resistant” toxic rhetoric that’s too exclusive of others and hurts their feelings?, does it trigger people? Gimme a break.
I assume this was in reference to my comment since I brought up the stickiness (?)
I guess I may or may not be a “sap”, but I definitely graduated medical school before official DEI policies and before “woke”ness, “trigger”ing, and “toxic rhetoric” became things that human beings said to one another…
For the record, I think this current article is a good course correction after the push back to the mobile home article.
To be fair, it wasn’t my article, but I have used the term before.
Dr. Dahle, my wife and I are both Primary Care Physicans and paid off 700k in student loan debt 5 years out of residency using the tools we learned from this website. For that, we are forever grateful to you.
But…this is just Icky with a capital Ick. I don’t need to see my retirement grow 7% a year by picking on poor people. As an ER doc you know the class of people this hurts. You see them every shift.
I’m assuming you mean you invest in the stock market for your 7% return. If you are investing in the stock market, even in ESG funds, you are investing on the backs of low income individuals. Denying that is, frankly, ignorant of who pays those companies to give you that return. That return doesn’t just come from the wealthy.
I’m a real estate investor and I can tell you I may charge more than the previous owner (at market rates), but you want to know something. Those tenants no longer have to worry about that roof that was leaking. They no longer have to worry about the fire hazard from the extremely old wiring. If I don’t get market rents, this doesn’t become affordable to me. Would you prefer these tenants live in a bad/unsafe apartment? If your are willing to invest in an rental an pay for these things out of your own pocket and take money away from your family to pay for people to live in quality housing, then I’ll happily eat my hat and thank you for what your doing. But if you just want to trash people for offering good and safe places to live then please learn about what we do before commenting. I’m happy my tenants have good places to live. I don’t raise rents beyond market for good tenants. If I have a good tenant, I’m happy even being a little below market to keep them. But at the same time, I have expenses. If I can pay them the bank will own my properties. Have you ever had a bank owned property manager? Want to know how they’ll manage the property? See the projects in Chicago and NY.
Congrats on your success!
What do you find icky about being a landlord exactly? I don’t see providing poor people housing as “picking on” them, I see it as doing them a service.
You do have the option to invest very passively using index funds so you don’t have to feel icky, but as noted in the article, if you own a total stock market fund, you invest in mobile home parks.
“Mobile Home Parks Have Sticky Tenants
Mobile homes aren’t really mobile. Tenants tend to stay in mobile home parks for a long time…imagine getting a 7% rate hike in a mobile home park.”
Defending the above statement about 7% rate hikes because of sticky tenants is what I find Icky. If I invested in the S&P 500 I can pretty much assume all 500 companies are corrupt in their business practices and oppress the poor in some form or another…But just because a company oppresses trailer park tenants to make a buck doesn’t make it ethically ok for individuals to do so. Since when should an individual’s moral compass be guided by decisions made in a corporate board room?
I find these individual real estate martyrs like Azrad hilarious if they think they are providing some amazing service to the community by owning all the real estate and renting it out to people for a profit. Wow, what a sacrifice!
Bottom line is “Market Rate” puts more money in the Landlords pocket. This money is not legally earmarked for anything so it’s not like the tenants have the options afforded to stockholders like dividend reinvestment, stock buy backs, or a 3-1 split. They just have to hope they get lucky and have such a selfless landlord like Azrad that provides for their well being.
Inflation is at 9%. If my rent only went up 7% I’d be considering myself lucky. But your comment did remind me of this sweet skit:
https://www.youtube.com/watch?v=YAA-G947ofg
Justify your portfolio however you wish. Thank you for the advice over the years in helping me get out of med school debt.
This is rich. You wield moral baton like a Birkenau storm trooper on direct real estate investors but give yourself a big, fat pass because you only invest in…publicly-traded corporations?! Because it’s SOOO much better to hold shares in clothing companies who pay Malay children pennies, or jewelry companies who mine blood diamonds, or paper companies who log old growth forests. Enjoy that superiority
An adequate supply of housing to prevent a lack of affordable housing is the responsibility of government policy.
We need more multi family development, more tax incentives for developers, and less overzealous regulation on construction. We also need more government programs like vouchers to support the provision of affordable housing for the disabled and unemployed.
We own a significant portfolio of properties that we rent to wealthy tenants. More recently we bought a 180 unit affordable townhome complex. Our intention is to provide high quality property management to good working class tenants at an affordable price point. We intend to make a profit doing this, but a primary goal is well maintained housing with quality management at an affordable price to improve the lives of our tenants and to improve the quality of the community overall.
Thank you for this article. Great article. People who are against investors buying properties clearly doesn’t understand the industry. If they are willing to provide housing to people at a loss of their own income, then they should do it and I will thank them for their sacrifice. Who else will provide quality housing while losing money? The only entity willing to do that is the government and we know how that turned out. There’s a reason the projects are going away. I agree slumlords are terrible people. But just because you make a profit doesn’t make you a bad person. You are offering a much much needed service.
Based on your article it seems you never delt with landlord much in past 20 years. It is pure fallacy on your part. Landlord for most part do not reinvest. They take as much money as possible from their property. Will not fix it till someone complains enough.
Even your comparing to food stamp failed to mention government does help with rent. I suggest you do more research and less hyperbole. Thus, write something you know about.
I have had two long-term landlords in the last twenty years and many short term landlords. All charged me market rent. All the property were appropriately maintained, although I did generally have to bring issues to their attention. I was living in the unit, not them. So I guess if that means “complaining enough”, then yes, you have to do that. If you’re not getting good service from your landlord, I suggest you consider moving when the hassle becomes worth it to you.
I’m not techy, but I bet there is a market for a landlord review site. I do agree landlords that I’ve had as a whole suck. The last one took a year to replace the broken stove. We brought a house and moved out, but there’s no real accountability for landlords in this current market. Normally you’d say vacancies are the consequences of being a bad landlord, but the rental market is so hot it’s easy to replace tenants as long as your rent isn’t too extreme (at least in my market it is, though it may not be true everywhere). There’s no way to know if the landlord is responsible until after you move in, and then it’s rather expensive to move out again. A “healthgrades for landlords” may be a thing of the future.
Now THERE’S a good idea. Probably a viable business too, although that might introduce some serious conflicts of interest!
I’m beginning to think I shouldn’t be posting my bushiness ideas here … tho to be fair it’s probably the first one I ever had lol
I can appreciate the cogent arguments on both sides of these tandem articles. I think one point that hasn’t been raised (unless I missed it) is when economics deviates from theoretical pathways. Jim clearly described establishment of market rate in the article. However, permit me this thought experiment: is market rate truly established if the tenant doesn’t shop for a better deal? What if the tenant unwisely uses debt to pay rent above one’s means, because it is simpler than moving. If this happens amongst a class of tenants (paying a higher rent than they can actually afford or willing to shop for), is a true market rate actually established? Or have they just moved into a higher rent class by [mis]taking on debt? I suppose it’s situations like this when bubbles/crashes are looming.
I’m not saying this is actually the case, but one can easily imagine this happening in a lower-class rental market without good alternative means to relocate. As Buffet said, “there are no called strikes”, so if this asset class is not attractive for one reason or another, you do not have to go out of your way to invest in it.
I suppose a few people can be suckered into paying above market rent if they don’t shop around. For example, if you had an apartment complex that was 60% vacant, you’d say they were charging too much. But there are still lots of people paying that rent.
Never thought much about your point about debt and rent. I usually think more about that when we’re talking about people buying homes.
…specifically running up credit card debt on other personal items in order to cover the rent.
Thank you for your well thought-out and on point post!
Good editorial this week in WSJ about the real-life experiment where rent control was enacted in Minneapolis but not in neighboring St. Paul, with predictable results.
Funny how many people don’t understand economics.