Written by Brian Wocjik, CEO of diyRealty, Inc. for ThinkRealty
As landlords, we are unknowingly conducting our business in a Perfect Storm. By dictionary definition, this occurs when a rare combination of circumstances aggravate a situation drastically.
There are several rare combinations of circumstances leading to unfavorable - and significant - change for landlords. The storm is already brewing and will likely permeate borders. Some landlords are naive, some arrogant, and some are apathetic.
The #1 aggravated situation landlords are unknowingly mired in: affordable housing. And who get’s blamed? In most cases, the landlord. Why? Simply put, it’s much easier to identify assailants and victims. The underlying problem goes largely unnoticed or avoided because it seems too big to solve. When you add politics to the equation, it gets downright nasty. The noise becomes loud and the root cause gets lost in that political noise and emotionally-charged debate. The net result: everyone loses
Case in point: The Baltimore Sun recently wrote a series of articles that took issue with Rent Court, Maryland’s legislatively-mandated legal process to collect unpaid rent and agreed-upon expenses of the lease contract. (View the series here). The baseline theme of the series is that landlords take advantage of poor tenants, and judges are unjust. Anyone who has been a landlord or a judge would be quick to tell you otherwise. It’s easy to point fingers, identify assailants and victims, and in turn, ridicule lack of progress. In my first-hand experience while participating in a Summer Study Work group to develop consensus legislation, the lack of progress is the result of obstructionism by tenant advocacy. I was hardpressed to find journalistic integrity in this series, which was rampant with confirmation bias.
By the same token, the series was extremely moving and compelling to the uninformed. Had I not been through the horrible and costly experiences that I encountered in my early landlording days, the series would absolutely sway my opinion that landlords are bloodsucking vampires. This series and tenant advocates have the power and ability to win the hearts and minds of public opinion, and by extension, win political votes and eventually elections. We run the risk here of new legislation that is fueled by public opinion and sympathies, not facts.
The average small business and independent landlord, meanwhile, is unaware and does not have a seat at the table. And yet, we are the majority of rental property owners. 53% of all rental properties are four units or fewer, with individuals or trusts owning 87% of those homes. There is currently no trade association for small business and independent landlord that can advocate on our behalf to represent our interests. As a community, we are fractured and decentralized in contrast to the multi-family rental space.
By contrast, the multi-family rental industry is organized and has trade organizations represented by lobbyists. While many interests are shared, there are also many differences between the multi-family and single-family rental spaces. In the multi-family arena, tolerance for risk is spread across a far greater number of units, and ownership is often held through a legal entity and among investors. Capital is thus more accessible, and there are often training programs and systems in place, allowing costly changes to be more easily absorbed. Meanwhile, the single-family rental owner, who holds all of the responsibilities and legal requirements for one or a small handful of units, carries significantly more risk - and faces growing opposition from tenant advocacy. We are neck-deep in the affordable housing issue, and yet we are not at the table. We are the silent majority.
The forces against us are numerous and the need to organize as a way to mitigate risk has never been greater. The question is, are us small business and independent landlords willing to organize, be proactive, and get ahead of the curve? We have the opportunity to do so, but we have to insert ourselves into the conversation, to bring intelligent and robust debate to the table and begin reframing the argument. We need to bring the real problem to the foreground in order to create lasting and meaningful change.
Landlords are not the problem in the affordable housing debate. The real problem is the larger macroeconomic forces that contribute to this Perfect Storm:
- There is an unprecedented decade-long surge in rental demand, an increase from 34 million rental units to nearly 43 million rentals in 2015. This figure is expected to grow to 47 million units by 2025.
- 80% of the market’s growth has come from the conversion of single-family homes to rentals, with individuals or trusts owning 87% of those homes.
- By income, the largest increase in renters, 4 million, was among households earning less than $25,000 annually.
- Growth in the number of renters earning $50,000 or more was nearly as large, at 3.3 million, including an increase of 1.6 million renters earning $100,000 or more.
Key takeaway: Demand from higher income renters has led to a slowing expansion of lower rent supply, exacerbating affordability.
Let’s take a deeper dive into the economics:
- One in five renters earns less than $15,000 annually. By definition, for rent to be affordable (paying no more than 30% of income for housing), that would mean rent would have to amount to less than $400/month.
- Lower-cost housing tends to have more quality concerns, both structurally and maintenance-wise, in 12% of units with rent at $400/month vs. 7% with rent greater than $1,000/month.
- 11% of units renting under $400/month in 2003 were permanently lost from stock by 2013.
- If income grows faster than rent by one percentage point, there will only be a decline of 170,000 cost burdened renters. The more likely scenario is the inverse, where rent will grow one percentage point faster than income; the result is 3 million additional cost burdened renters, a new record level.
- Approximately 50% of the 43 million renters in the U.S. (21.3 million) spend more than 30% of their income one housing, with 25% of this group (11.4 million) spending more than half of their income on housing.
In other words, rents are rising and incomes are falling. At the same time, housing stock for low-cost rental units is declining. By the numbers, real rents rose 7% between 2001 and 2014, while household incomes fell by 9%. Between 2003-2013, the availability of low-cost rental units increased by only 10%, while households competing for that housing rose by 4%.
These are powerful changes in market dynamics. And government housing assistance has failed to keep up with the need. Just over one in four income-eligible households actually benefit from federal housing assistance. Federal funding is just one part of the equation. State and local governments play a vital role in determining how those funds are used.
Looking at the facts above, sourced from the Harvard Joint Center for Housing, there is clearly a more deeply-rooted cause for the affordable housing crisis. As landlords, we are providing housing that is badly needed and in short supply. We don’t set incomes for our tenants. And in reality, we don’t truly set rent prices either. Rent is ultimately set by market forces. Landlords should not be blamed for the disparity between income and market rent. Nor should landlords be labeled as individuals who are taking advantage of the poor.
What does this all mean? Mounting pressure from politicians and advocacy groups have the advantage. There are more of them, and only a few of us. Unless we take action and organize, it’s probable that the status quo will remain. We’ll be reacting to more and more legislation, making our jobs increasingly difficult.
My belief is that if we band together to show strength in numbers, we can affect change - and everyone wins. As a collective voice that provides the majority of rental housing, we can begin reframing the argument and reshape the lens through which we’re viewed. We are better together. Improving our situation will improve the situation for our tenant customers as well.
Landlords, I would love to hear your thoughts on all of this. Please visit www.NAIL411.org to add your voice to the conversation and join our grassroots movement!