Tuesday, September 12, 2023

The law of unintended consequences strikes again


I'm cynically amused at the indignant tone of this report from California (link found at Wirecutter's place).

A growing number of property owners and managers are hitting tenants with extra fees each month — a nickel-and-diming of people that the airlines, for one, have made a core aspect of their business model.

It’s been common for years for landlords to charge more for a parking space or having a pet.

The new fees being levied — which might run an additional $5 or $10 each — cover a wide range of once-gratis services, including trash pickup, pest control, use of a mailbox and routine maintenance requests.

. . .

... some [landlords] now charge fees for moving in and moving out. Some have fees for “lease administration” (whatever that is). One Minnesota landlord collects a $100 “January fee” on the first month of the year.

A January fee!

In suburban Phoenix, a number of buildings are instructing tenants to leave their garbage near the front door and then slapping them with a $30 monthly fee for someone to schlep the garbage to a dumpster.

There's more at the link.

In response, Divemedic (who owns rental property) pointed out that he'd predicted something like this some time ago.

The entire situation was created with the double whammy of the eviction moratorium and tax increases. In my area, you can add large increases to property insurance. Any business that has increased costs must recoup those costs by increasing prices. The government responded to that by enacting price controls (rent control). In places all over the nation, landlords are being told what they can charge for rent, even as the costs like property taxes, interest rates, and insurance continue to climb.

So landlords are responding in exactly the way that I predicted they would- they are looking for new revenue streams by charging for perks that used to be gratis.

. . .

This is a situation that was created entirely by government. Businesses respond in a rational way to price controls and increasing costs. Government officials and idiot liberals don’t seem to understand that.

Again, more at the link.

Divemedic is right, of course.  If you force landlords to allow tenants to stay rent-free because of the "pandemic", and restrict their right to evict non-paying tenants or those causing damage to their property, you're inflicting economic injury on those landlords.  Of course they're going to try to make up their costs any way they can!

There are two more aspects to the situation, however.  I know several individuals who rely on rental income to fund their day-to-day expenses and/or retirement.  Over the past few years, their income stream(s) has/have been devastated by such government decisions.  One or two have been literally unable to buy food to eat, or pay their own electricity bills, because their income has been so severely slashed - through no fault of their own, but by legislative or regulatory fiat.  Rent control is also a factor in some cases:  their expenses are rising steeply thanks to rampant inflation, supply chain issues and other elements, but they can't recover enough from their tenants to pay them, because they're not allowed to raise their rents in line with economic conditions.

Another aspect is the blatant abuse of their properties by some tenants.  This is apparently rampant in some areas.  Too many people living in a space not big enough for them;  illegal connections to utilities, sometimes from a neighboring rental unit, sometimes from a travel trailer parked next to the unit providing accommodation for transients, etc.;  pets brought into units where they're not allowed and/or the pet fee(s) are not being paid;  and so on.  To make matters worse, when municipal officials discover some of these abuses, they don't fine the tenants - they fine the landlords, who suddenly have to pay for problems that aren't their fault.

Put those factors together, and it's no wonder that many landlords are trying to recover their costs and stabilize their income by any means available to them.

I accept that corporate greed is probably pushing many such charges.  Now that big money is pouring into housing, the corporations that now own a large proportion of America's rental properties are trying to maximize their return on investment.  Just like airlines charging for anything and everything they can think of, and auto companies charging for features on vehicles that used to be free, corporate landlords are following their example and trying to make money every which way they can.  Smaller landlords are following the example of the corporate giants, because if the entire market is shifting in that direction, they're basically leaving money on the table if they don't do so.  That makes no business sense.

Nevertheless, when push comes to shove, if landlords are prevented from charging and/or receiving a fair rental for their properties, they're going to have to make up for it in some way.  They're not running a charity;  they're operating a business, no matter how big or how small a landlord may be in market terms.  If government interference in the market through over-regulation and chasing votes through demonizing entirely legitimate businesses prevents them doing that, they're either going to make up for the shortfall in their income through other means, or get out of the rental property market altogether.  That doesn't make them evil;  it makes them sound businessmen.  (Sure, there are bad landlords out there [New York City is notorious for them], but they don't dominate the market.  They can't, because if they did, the market would destroy itself.)

Demonize landlords, and they're going to respond.  Limit their ability to earn money from their properties, and they're going to look for alternative ways to do so.  Restrict what they can charge, and they'll charge for something else.  Welcome to the law of unintended consequences.



Anonymous said...

When I inherited my parents estate we looked at maybe buying a distressed home or two near ours, fixing them up, and using them as rentals for income during retirement.
Several friends and family have done such things and done well, its a well known way to build ones wealth (real estate!)
People are the biggest problems with being a landlord, but I've heard from most, if you get good tenants, its great.
I left WNY for ETN 8 years ago because the government was forcing landlords to rent homes in suburbs to section 8 families from the city, who promptly destroyed the home and neighborhood. Landlord got to keep his security deposit and a 10k bill from the lawyer to force the eviction.... damage to home was over 50k.
I'm not interested in rental properties for retirement income anymore.
Sadly that was one of the government's goals.

oldvet1950 said...

Also known as the Cobra Effect. One question I always had about the suspension of rents due to Covid....Did the landlords' mortgage payments, taxes and insurance premiums get that protection too, or was it intended to be used to foreclose on the properties so the banks could own them? Perhaps someone with personal knowledge enlighten me?

Anonymous said...

The short answer; Government, the next time you want to help. DON'T!

Michael said...

Makes me grateful I sold my rentals years ago before nanny state COVID nonsense.

SiGraybeard said...

Instead of "unintended consequences", call it the Law of Unbridled Stupidity. Anyone who doesn't realize landlords will do everything they can to avoid going bankrupt is too stupid to have authority.

Four years ago, I ran into a story I'll never forget. It was about how the North Vietnamese communists said rent controls destroyed Hanoi. When even the real communists realize rent control is stupid, you'd think it might occur to American left wingers that they're being stupid.

Foreign Minister Nguyen Co Thach said, “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy,” he said.

—From a news report in Journal of Commerce, quoted in Dan Seligman, “Keeping Up,” Fortune, February 27, 1989.

JustPeachy said...

We have to rent. Housing market is still completely out of our reach. Every year we save up more for a downpayment, and every year, the price of houses leaps up past the reach of what we've saved.

You know why?


Screw landlords. There are some honest ones out there, owning and maintaining a few rental properties as a retirement gig. I haven't met those.

I've only dealt with predatory property management companies who friggin paint KITCHENS with matte paint. Kitchens. With textured plaster walls. So that unless you cook in a tent, every tiny spot of anything that gets on your walls is permanent. You can't clean it. It's there forever. And did they paint it white so you could touch it up? No. It's some freaking copyrighted sooper-special shade of lightly toasted ecru beige whangdoodle from Sherwin Williams that you will never ever be able to match exactly (but if you try it'll cost you $60/gal), so forget that. When you move out, this will be their reason for confiscating your deposit. "Well gosh, we had to repaint the whole house, just gonna keep that deposit..." I got my deposit back on the last place in spite of this, but only because I had the photos to prove it wasn't freshly painted when we moved in, I spent a week busting my arse cleaning and painting before we moved out (it actually looked better when we moved out, than when we moved in) even though I was still recovering from a bad flu and practically killed myself to do it and spent $300 of my own money to make sure it was up to spec, they tried to take the deposit anyway, I was pissed as hell, so I looked up the relevant law, wrote up a nice official letter and sent it registered mail, and lamented about how nice they'd been and how much I really didn't want to have to take them to small claims court over this, but we really couldn't afford to leave that deposit on the table. I got it back. But it took two months. Keeping your security deposit is apparently just another hidden surcharge these days. But in some states, if the landlord doesn't follow the law and you successfully take them to small claims court and have all your ducks in a row, they have to pay you not just your deposit, but *twice* the deposit for your troubles. Know your rights.

The crash, where they'll all be forced to sell their "investment properties" at real-value prices (not real estate bubble prices), so the rest of us can finally afford to exit the rental trap, cannot come soon enough.

Why? Because the rental we moved into after that one... you know what kind of paint it has in the kitchen? Matte. Beige. Over textured plaster (is there some kind of shyster landlord handbook out there that they all follow?). Cannot be cleaned. No backsplash behind the sink. No helpful tile cover behind the stove. And don't even think of attaching anything to the walls yourself. It's against the terms of the lease and they can keep your deposit for the "damage".


Anonymous said...

There were zero protections for landlords. If I failed to make a mortgage payment (or pay utilities), the regular consequences would have followed. This was a real issue since I had several tenants who took full advantage of the protections the state gave them.

Magson said...

@Oldvet1950 -- Back in the 90's I worked in a foreclosures department of a mortgage servicing company. Believe you me, the very very very LAST thing "the bank" wants is to be a residential property owner. By law, a lender is not allowed to profit from a foreclosure -- they can only be "made whole" up to the principal of the loan, the interest accrued up to the date of the foreclosure auction, and reimbursement for the cost of maintaining the property (utility bills, locksmith, repairs, property taxes, lawn mowing).

Meanwhile, this non-producing asset requires them to pay a department full of people to make sure that the properties are maintained, balance the ledgers on their reimbursement claims, verify the taxes are being paid, file the MI claims (or in my case the "conveyance" of the property to HUD or the VA with the associated "sale price").

The banks don't receive "overage" -- they aren't permitted to charge more than their stake in the property. At the foreclousre auction, they bid their stake amount. This is why real estate folks like to go to auctions -- they can sometimes get properties for a song and then flip them for a profit themselves by selling at the market rate. But the bank? No... it's not the bank.

Xoph said...

Was thinking about renting and read a very good book on it. #1 - This is a business and if you are a nice guy you'll get bad renters and go broke. Sounds harsh, but landlord must pay for repairs, costs while unit is vacant while waiting for new tenant and a myriad of other expenses.

Big gov't tends to favor big business. Black Rock and others buying up every home they can and turning them into rental properties. Who might have the money to buy decisions that hurt small landlords? I might not be so suspicious if it wasn't a consistent pattern. Also a great way to make the landlord the bad guy and gov't the good guy.

Glad I didn't start doing rentals, too many horror stories. Had a co-worker who moonlighted as a property manager. One bad renter is more work than 10 good ones.

Rick T said...

When we were selling our house to leave CA many, many people asked my why I didn't keep the property and rent it out. I told them there was no way I would do that as an absentee landlord, plus why oh WHY would I do something to keep the Franchise Tax Board's hooks in me?

Anonymous said...

It shouldn't surprise anyone since it's been happening in the medical field for at least 30 years. I've read that the reason a dose of Tylenol cost $10 in the hospital is because the government controls how much most medical procedures can charge. If the hospital costs are greater than what Medicare/Medicaid will pay, the money has to come from somewhere.

Anonymous said...

That New York city is famous for rotten landlords is just another way to say NYC has had the worst rent control laws for the longest time. "Don't hate the player, hate the game."
Each of the measures taken by the landlords you mentioned is considered "Rotten" by those on the other end. Maybe NYC landlords have just been doing it longer and gotten better.

Brian said...

Bunch of BS pretending to be actual reporting. No names of landlords or apartment complexes where all this is happening. Searching for the so-called "January Fee" only brings up the quote from news articles. I'm not claiming that there are no fees being added, just some sound made up for clicks.

Ozborn said...

Protections for landlords varied by state. Foreclosures stopped for a while, though - courts were closed.

Ozborn said...

If you know what market you want to buy in, suggest any/all of the following to improve your ability to purchase:
1) Buy the lot, keep it vacant while you continue saving for the construction cost. That will lock that part of your costs.

2) Invest your down payment fund in a REIT, preferably in your market, and definitely in the same type of property (single-family housing). That should hopefully track your local market, preserving your invested purchasing power.

3) Develop the skills to build part of your house yourself. Carpentry, framing, electrical, plumbing, cabinetry, carpet, painting, roofing.... (if doing this, know the code and inspection requirements, and either be licensed or do the non-inspection parts). Minimizing costs can be a huge advantage.

Waiting on the crash /timing the markets is a losing game - my Dad waited his whole life, watching the signs of breakdown in the Ag economy increasing, and it never broke.

Anonymous said...

Renting an apartment is just like buying a ticket from one of our air carriers, then, eh?

More and more stuff is like this. You can't buy something and just have it anymore - there have to be subscriptions and fees and add-on costs for everything. It's the death of price discovery.

Ray - SoCal said...

Lots of mis-information in the article, and multiple states mentioned.

In California our “amazing” Democratic Governor along with our super majority legislature decreed Rent Control. Max rent increase per year is 10% max basically.

Taking away any service, such as adding fees, is just asking for legal issues in California.

New tenants are fair game.

Being a remote landlord is asking for problems. Property management charges 7-10%.

Single family homes are easier to manage than multi family, but getting the right tenant is key.

Providing washer, dryers, and fridges I have mixed feelings on. They add to the rent you can charge, but also to headaches. Cost buying used is relatively cheap. Buy front loading washers if possible, so much more reliable.

I’ve never pressure washed the outside of our buildings, much less my house. Nice landlord.

A guy that makes major money off aids drugs is bankrolling another rent control initiative, sigh.

Hopefully Supreme Court will decide rent control is unconstitutional.

Some cities are even stricter, like Los Angeles, so many landlords selling.

Prices per door in multi family are still high, with low rate of return (cap rate). Sales are down 50%.

The problem in Ca is it’s so expensive to build anything. So the only thing that pencils out is luxury apartments.

The Freeholder said...

I'll toss out a prediction for the next round--landlords will give up trying to make any money with rental properties, understand the Law of Sunk Costs and will start walking away from their properties in droves. If the locality or state wants it, they're free to forclose.

To see how this winds up, look for pictures of the Bronx or Brooklyn in the late 70s.

Technomad said...

Very much against my will (long story) I was a landlord for eighteen years. The only way I'd ever go near that business again would be if I had the Mob backing me up.

People who'd come down HARD on their child for swiping a candy bar from a store thought nothing of cheating me out of thousands of dollars. The civil court system was utterly toothless.

David Davies said...

I would not anything whatever to do with owning a rental property and being a landlord.


Just no.