Rents Blog: Landlords say costs drive increases

Rents Blog: Landlords say costs drive increases

Michele Ellson

Don Lindsey began investing in Alameda half a century ago, after falling in love with the community and deciding he wanted to live and buy property here. Investing in property allowed him to be more hands-on than putting money in the stock market would have, he said. But it also carries risks.

“Owners have had years where the apartment next door becomes vacant, and if you don’t lower your rent, the tenant moves next door. It was really a struggle to keep these buildings filled up,” Lindsey said. “We’ve had years where you just wouldn’t think about putting out (rent) increases.”

Property owners who The Alamedan has interviewed and others who have commented on prior stories in The Alamedan’s running series on rents have said the recent rise in rents is only part of the story of rental housing in the Bay Area. They said the free market cuts both ways, impacting both tenants and landlords.

The Alamedan is including anonymous comments from self-identified landlords in this story because only one of the landlords the site contacted to interview for the piece was willing to speak about the costs of operating rental housing, and The Alamedan believes the context is needed to more fully and accurately tell the story of rising rents on the Island.

Alameda has seen some dramatic increases in asking rents over the past several years, data for large apartment complexes that was examined in an earlier story show. And some tenants and their advocates believe that greed, and not cost, is driving landlords who are handing tenants big rent increases.

But for the decade before these price spikes, rents on the Island were essentially flat – even though landlords’ costs continued to rise, some said. And they said the tight market has given them the opportunity to raise rates in order to cover those costs.

“First let me say the landlord property taxes increases by 2 percent a year regardless if rents are increased or not,” one person who identified themselves as an East Bay landlord on a prior story said, adding that utilities and other costs had gone up as well.

Taxes, utilities, insurance, maintenance, building management and depreciation make up half the cost of operating a rental unit, another landlord who commented on an earlier rents post said. That landlord said taxes have risen sharply over the past decade, which has seen Alameda voters okay a pair of parcel taxes and two bonds to support Alameda’s schools.

Items that cost $1 to buy in 2000 would cost $1.37 to purchase today, according to an online inflation calculator using federal Consumer Price Index data.

Landlords said they want good tenants to stay and that turnover costs them money, too. But when a tenant leaves, some said they would raise their rents at that point to whatever the market would support in order to recoup their costs.

“I have long term tenants, and I have raised the rent modestly (a two hundred dollar per month increase this summer) which was the first rent increase in 8 years. I want them to stay,” a commenter who identified themselves as Family Landlord wrote. “If they had to move out of the house for any reason, I would instantly double the rent for the next tenants, because that is what the market will support.”

Lindsey said he’s seen some of Alameda’s most populous addresses fall into foreclosure because their owners weren’t able to generate enough cash to cover their loans, taxes, insurance and other bills.

“We bought units in the mid-80s and we were selective in the buildings we bought,” he said. “Other people (who) bought in the same time period – they paid too much, didn’t manage them right, and they went back to the lender. They lost them.”

Alameda has a range of property owners, from local mom-and-pops who bought a few rental properties for retirement income to local investors and out-of-town giants with hundreds of apartments under management. Larger owners can balance costs among their properties and realize volume savings for costs like maintenance, Lindsey said. But their total costs are also greater than those facing mom-and-pop owners.

Longtime owners typically see lower costs thanks to lower purchase costs and the Proposition 13 tax cap. More often than not, landlords said, they pass those savings on to tenants in the form of below-market rents.

But when those longtime owners – or their heirs – sell a property to a new owner at current market rates, that owner has higher costs to recoup.

When an Oakland real estate agent who drew fire from City Council and community members for imposing steep rent increases on tenants living in a Benton Street fourplex purchased the building in 2012 from a family that had owned it for 50 years, its value jumped sixfold, from $105,798 to $652,000. Taxes on the property jumped from $4,630.46 to $10,930.04, records show.

Meanwhile, their rate of return may be lower than what rental properties offered here even a few years ago, according to one local real estate agent familiar with the multifamily market. The agent said the capitalization rate on some of the buildings he has looked at here – the return on a property owners’ investment in the purchase – is hovering at two to three percent.

In addition to managing increasing costs, landlords said they invest in upgrades like marble countertops and hardwood floors in an effort to attract good tenants. That investment also means higher rents.

“The landlord has no motivation to spend money on a tenant that has been in a unit for 10, 20 years with small increases,” the East Bay landlord wrote.

When San Francisco’s Carmel Partners bought Marina View Towers in 2013, the new owners got a $15,000 per year break on their taxes, records from the Alameda County Assessor’s Office show. But the company invested in a major seismic retrofit and upgrades to the 84 apartments in the 37-year-old building, now called Panomar.

Former tenants said the rents the company was asking on Craigslist were up to $1,000 higher than what the previous owner was charging. At one point, three bedroom apartments in the building were being listed for a rent of $3,300 per month.

Lindsey, who like other landlords, has voiced opposition to city-sponsored rent control, has advocated smaller and steadier increases; he’s spoken out against landlords who impose big increases on tenants. He’s advocating for better linkages between property owners and renters, which could help renters who find themselves in crisis.

“The reason we invested here in part was, it was free market. And you could go with the ups and downs – I think we’ve seen six recessions since we’ve started,” he said.

Lindsey said he thinks the market will shift again, as tens of thousands of new units being built across the Bay Area become available. Carmel Partners, for example, is offering a break of up to $1,000 for “select” one-bedroom units at Palomar, its website shows.

“The market will adjust,” Lindsey said.

Comments

Submitted by b. (not verified) on Thu, Feb 19, 2015

"The market will adjust"...and meanwhile, decent, hard-working peoples' lives will be disrupted (and in some cases destroyed) by "the market".

Why are none of these people willing to talk about the HUMAN cost? Why are none of these people willing to talk about how they are PURPOSEFULLY changing the makeup of the community?

Why can none of these people talk about their "tenants" as anything but "tenants"...why don't they call them "neighbors"?

It's just disgusting.

Submitted by z! (not verified) on Thu, Feb 19, 2015

Interesting juxtaposition- article about rental units with a Gallahar & Lindsay real estate advertisement at the top.

Submitted by Kevin Smith (not verified) on Thu, Feb 19, 2015

Rent control is just price fixing and should be illegal like all price fixing is. Why should just some be able to selfishly shield themselves from the market forces that everyone one else has to bear? Any new apartments built since 1995 can never be rent controlled by state law. Sure some can get an advantage, but others will pay more because the market will be segregated by have rent control and don't have rent control, and the ones that have will get an unjust enrichment over the ones who don'y have rent control.

Submitted by L (not verified) on Thu, Feb 19, 2015

B. It's disgusting? Landlords - tenant relationship is just that . A business relationship. You think the landlords bank cares much about the landlord (human)? No. They want their loan back. You think the tax assessor cares about the human landlord? No, they want their money. You think alamedans care about the human landlord? No, they raise taxes.

You want a decent place to live, in a neighborhood with well-funded schools? Pay up, tenant.

Submitted by David (not verified) on Thu, Feb 19, 2015

The reality is that some people simply believe that the rental market is a 'special' one that should not be subject to 'market forces' - so explanations about raising rents to what the market will bear does not resonate with them.

As for neighbors v. tenants - unless the property owner lives on the same block as the person renting from them, why would they use the term 'neighbors'?

Submitted by anonymous landlord (not verified) on Thu, Feb 19, 2015

What is disgusting is lumping everyone into a category and then disparaging them. We are not foreign investors, we are members of this community who through very hard work (and no handouts from our family) were fortunate to buy when the market was low but not so long ago that our taxes are not steep. We support the schools, parks and more through the property tax we pay. We absorb every rise in water and recycling costs that come through this city. We are your neighbors and your friends. We rent our 2 bedroom flat for $1100 because our tenants have been there for several years and they are good tenants and good people and take good care of their home. Turnover is not good or fun for anyone. If the city tries to impose some type of rent control then mom and pop owners like us will raise rents as high as legally possible as often as possible. Is that what you hope for? Just because we have worked hard to buy and manage a property does not make us monsters. We are ALSO people, not inhuman 'landlords.' There are many of us who are good and decent and fair who care about the people who live in our houses and our town and we're sick of being painted as some sort of evil creeps by those who have not been as fortunate or worked as hard. We never take vacations, we fix every problem that happens immediately, we upgrade, we do the work ourselves, we are not getting rich on this enterprise any time soon. Price fixing via rent control is NOT the answer you are looking for. Small owners like us will be forced to sell and larger and largely uncaring entities will take over the rental stock. This quaint town will be gone, replaced by people who have no vested interested in what you have to say.

Submitted by C. (not verified) on Thu, Feb 19, 2015

We give up. We are leaving Alameda upon retirement in a couple years. We had hoped to downsize to a smaller rental and remain on the island but we look at the rental listings now and see that it will be impossible. Do landlords understand they are not just dealing with any sort of commodity? Do they fully grasp they are dealing with people's shelter? Have they ever experienced the insecurity of never knowing whether or not they will have a roof over their head 30 days from now or if they will have to completely uproot their life and move out of the community they've lived in all their lives, as we have? I appreciate the comments of "b" who posted on this thread. Where is the humanity? Do our city leaders understand people's lives are being turned upside down? Anybody reading this who owns a home - please count your blessings. It is so very hard to be a renter in the Bay Area now. The insecurity and unrelenting worry tenants face is huge.

Submitted by anonymous landlord (not verified) on Thu, Feb 19, 2015

I'm sure that there are many small landlords who have experienced the uncertainty and feelings you speak of C. 2015 is not 2000 - there were many years that were very dry rental years, where rents trended downward, yes, where we had to lower rents to make it - too bad the city and county did not have any compassion and lower our taxes, our utility bills, our insurance costs. Many years where people were not 'discovering' Alameda, when those who'd invested their life savings and every ounce of sweat equity into their little buildings worried that if they were unable to find someone to live in them that they too might lose it all. Many of them sold and lost so much money, some hung on. Insecurity is not a commodity for renters alone - owners have borne the brunt of it as well. I am compassionate towards and truly sorry for anyone that is being displaced, but please understand that rent control is NOT the answer to the problem, and please understand that there are real, living and caring people on BOTH sides of this equation.

Submitted by JB (not verified) on Thu, Feb 19, 2015

We're going to hear a lot of the same old arguments here. People either care about the human costs or the bottom line but rarely both. So rather than getting into that, I'd like to raise one question about something that jumped out at me in this article...

On what planet is a $200/month increase "modest?"

Submitted by David (not verified) on Thu, Feb 19, 2015

Unless one owns a house mortgage-free, one has similar insecurities. How many people lost their jobs during the recession and couldn't make mortgage payments, and lost their house?

Who can predict when utility rates will increase significantly, as they did with EBMUD and water rates just recently? (http://oaklandlocal.com/2013/06/ebmud-rate-increase-publish-before-heari...)

Show me a homeowner that can predict the failure, and necessary replacement, of a water heater or furnace, costing $1000 and up?

How many homeowners have money set aside for a big capital expense, like, say, a roofing replacement?

As I've noted before there really is a perception of landlords as "haves" and tenants as "have nots" and the discussion devolves into some sort of pseudo-Marxist class struggle.

BTW, long-term tenants in California are entitled to 60-day notices. (http://articles.latimes.com/2004/feb/08/realestate/re-rent8)

Submitted by David (not verified) on Thu, Feb 19, 2015

JB: $200/month annualized over 8 years, would translate to a fairly modest increase - when accounting for time - on as little as $1000/month base rent. i.e. roughly the equivalent of year-in-year-out increases of 2% to 3%

“I have long term tenants, and I have raised the rent modestly (a two hundred dollar per month increase this summer) which was the first rent increase in 8 years.

Admittedly, landlords that don't make the modest increases each year but then make a large one after 8 years don't do themselves any favors. But in this case, the tenants have been the beneficiaries, as they've held on to those rent dollars for 8 years, instead of paying yearly increases.

Submitted by M. (not verified) on Thu, Feb 19, 2015

In response to C, do you realize that owners have expenses that must be paid or they can looses the property? Mortgages and taxes MUST be paid or the property can be lost. If the property is lost the owner looses the initial investment in the property, say 20% of the purchase price. This is money the owner had to save up to invest. The owner has a great deal to lose. The tenant can move at any time. Just walk away. They don't put a large down payment into the property. They also don't have to worry about any repairs, major or minor. Plumbing breaks, roof leaks, no heat...just call the landlord. Nothing is free. If you live in a rent controlled apartment the owner is subsidizing your rent. Complaining about high rent is like complaining about the price of anything else you must buy. Why not control the price of food and clothing. If you want to have a long term residence buy your house and accept the risks and costs of home ownership. Don't ask landlords to subsidize your living arrangements.

Submitted by L. (not verified) on Fri, Feb 20, 2015

I keep hearing over and over that renters should buy homes, accept the risks and COST of ownership!!! Kind of impossible when your rent is increased by $400 dollars a month like mine, mind you..salary has stayed the same like most people and you are working just to pay the bills. No, my family is not poor, we work hard to raise our kids in this community, but can't stay here much longer if this continues.. Yes, I agree owners have costs, but you can't tell me a $1400 apt a few years ago is justified being $3000 now! I applaud the landlords that are not destroying peoples lives and wiping out their savings. This really is a great town and wouldl love to be able to remain raising my family here.

Submitted by PeonInChief (not verified) on Fri, Feb 20, 2015

Depreciation? Huh? Depreciation is a tax write-off, and has nothing to do with the cost of operating the property. In fact, when the property is sold, the depreciation is recaptured in computing the capital gains tax owed, as the property has generally appreciated.

Submitted by David (not verified) on Fri, Feb 20, 2015

Right. So "depreciation" is not really "free money" for the property own - depreciation recapture ensures that.

http://en.wikipedia.org/wiki/Depreciation_recapture

Also note that there's depreciation, and then there's depreciation.

Yes, the value of the improvements on a property, but not the land, are depreciated over the ownership of the property.

But so too are are large capital improvements. For example, if an owner does a $50,000 remodel on the property, he or she does not get to deduct that $50,000 from their rental income that year. The $50,000 must be depreciated over time, according to IRS schedules.

So *that* depreciation does indeed have to do with the cost of operating the property. i.e. it's a genuine cash outlay with benefits (tax deduction) deferred.

Submitted by Alan R. Simmons (not verified) on Sat, Feb 21, 2015

my rent has increased by 10% the last three years and i expect it will happen again next year. the city should put a stop to this. greed is not the answer.

Submitted by Jeff Cambra (not verified) on Mon, Feb 23, 2015

Good day:

If you would like to be part of the ongoing discussion regarding rental housing issues here in the city, please send an email to jeffcambra@earthlink.net. I have compiled a list of tenants and housing providers who have requested to receive my reports of the progress we are making on dealing with the diverse issues facing both tenants and housing providers.

I do not disclose the names or email addresses and your input can remain confidential. You will also receive advance notices of public meetings, housing provider only meetings, and tenant only meetings.

Sincerely,

Jeff Cambra,
Community Facilitator

Submitted by Linda (not verified) on Mon, Feb 23, 2015

A recent friend of mine who lives in San Francisco described rent control as a “life’s tenancy” where the tenant basically takes control over the rental unit with no investment and receives small rent increases over the life of their tenancy.

She described a tenant who lived in a three bedroom apartment for over 20 years and was renting the other two bedrooms out at market rent. When approached by the owner to buy him out, he asked for $200K and refused to move for less.

This is the type of madness that goes on in rent controlled cities under the guise that it’s the landlords that are greedy.

Submitted by VG (not verified) on Mon, Feb 23, 2015

I'm always amazed by the strange omissions of facts that accompany these discussions about rental costs. We're living in the *most expensive housing market in the country*. We're not talking about run of the mill rent increases -- no one objected to that before and no one would now -- we're talking about astronomical rents that are beyond the reach of the average tenant in this city, a total disconnect between the cost of housing and the tenant's income. This is why people are upset. As someone said above, it doesn't follow that rents must suddenly increase from $1400 a month to $2200 just so the landlord breaks even, and we know that's not the reason. We've all seen housing inflation spill out from SF before, just as it's doing now. It's already rendered parts of Oakland unaffordable for the *citizens* and *long term residents* of those neighborhoods, not just "the tenants". People see that wave headed in our direction and they see 2 bdrms on Craigslist for $2400 -- this is what has set off a crisis, not some irrational desire to deny landlords a living. My landlords have owned this property since the '40's -- they're good landlords, they deserve a fair shake, but they don't require $2000 a month on each apt. here to break even, and neither do most of the other landlords in Alameda. NEED IS NOT THE ISSUE. It's the market, and the desire to cash in on the market.

And another note -- I've followed this discussion closely from the outset, and not once have I seen any reference to appreciation, which is odd. It's like property sits fallow, generating income and nothing more, when in fact, any longer term property owner here has seen massive appreciation. We all know that too, of course -- what's the median now, $700,000 for a single family? So what is all this talk about not seeing any increase? Right, except for the 100%+ increase in the value of your property.