When I first arrived in San Francisco many years ago I bounced around from couch to couch and rented space in other people’s homes until I finally found a place that I could afford on my own. It was a little 1930’s garden shed in what was then a disreputable neighborhood. (How times change.) It was a 9′ x 18′ space and I loved it. I pulled up the ancient carpet, sanded and varnished the old wood floors, gave the place a fresh coat of paint, installed a couple of IKEA cabinets, and set about furnishing it with the essentials. I had a bed, a cafe style table, a mini fridge, and some kitchen appliances for basic cooking. It was exactly what I needed at a price I could afford. I bought a second hand bicycle and all my needs were met.
Of course, everything about this arrangement was illegal. My landlord was an older man in poor health who needed the rental income. At one time he had looked in to making the place legal, but it would have involved a barrage of overlapping and sometimes contradictory bureaucracies, each of which would have had multiple problems with the cottage: zoning regulations, building codes, minimum setbacks, minimum square footage, off street parking… Even if money were no object (and it absolutely was a huge object) the place probably never could have met all the necessary parameters to become legal. And if it were possible the cost of compliance would have completely negated any hope of a reasonable return on investment for the landlord. There was also no possibility that I could have afforded the rent at that point. So the landlord and I had a quiet gentleman’s agreement. I paid him rent and he provided me with an affordable place to live. We kept it just between us. No need to involve the authorities.
Now, I’m well aware of the objections to this kind of thing. We were breaking the law. I know. I get it. We can’t have people willy-nilly building unhealthy, unsafe shanty towns wherever they want. But I also get that this little backyard cottage was in no way a menace to society and that neither my landlord nor I would have been able to manage any other way.
All the individual rules, procedures, costs, and restrictions that have built up over the years like an alluvial delta of red tape are perfectly reasonable when viewed in isolation. But collectively they make it impossible for ordinary people to meet their own basic needs, particularly at the bottom of the income pyramid. Low income individuals are at the mercy of the market. The market is highly incentivized, in part by regulations, to not serve that lower demographic.
The situation has only gotten worse in recent years as many of the spare bedrooms in the city have been converted to short term rentals to tourists via home sharing services on the Internet.
Many years later I find myself in a completely different position. Now I’m the landlord with various rental properties. In San Francisco the regulatory environment is such that it takes, on average, ten years just to get approval to start a new building. The bureaucracy is unrelenting and the voting public hates new construction while it simultaneously demands more affordable housing. That combination doesn’t add up. And you can grow old and die waiting for affordable subsidized housing to be built.
Buying real estate in the city stopped making sense at a certain point so I went out to the countryside in search of property. As an example, I bought this little 700 square foot two bedroom house in Sonoma County some years back. It’s in a quiet neighborhood within a comfortable walk or bike ride from town and it sits on a half acre lot. I was fortunate to find excellent tenants who pay their rent on time each month, are respectful of the property, and get along very well with the neighbors. I love them.
I just did a quick search for comparable rentals in the immediate area and found a two bedroom 1973 trailer in poor condition on offer for $1,700. There’s also a two bedroom 1950’s ranch house with a tiny front yard and back patio for $2,300. Prices head well north of that for most other properties and the quality isn’t always great. My tenants are currently paying significantly less. The cheapest place I could find on Craigslist was a 500 square foot apartment for $1,275 and it’s in a much less desirable location.
I could jack up the rent to match the current market value, but that would ruin my tenants’ lives and in all likelihood force them to leave the county. But I couldn’t sleep at night if I did that.
On the other hand, I could build a little 300 square foot cottage in the back half acre like this and create a second revenue source on the property. I’ve had this conversation with the neighbors and the tenants and everyone is on board assuming it’s done in a sensitive manner that addresses everyone’s reasonable concerns. In fact, my current tenants expressed an interest in downsizing to a backyard cottage in order to stay in the same excellent location at an even lower rent. They could manage with less space since it would free up their budget for other things they value more. And they, along with the neighbors, would have a hand in choosing the new occupants of the main house. Everyone knows someone who is desperate to find a reasonably priced vacancy.
I was thinking of a simple $40,000 cottage built with standard off-the-shelf materials that would rent for $600 or $700 a month. That would be, by far, the least expensive accommodations anywhere in the region and within the grasp of someone earning minimum wage. It would also be profitable for me. But then I looked in to what was involved in doing this by the book. That simple $40,000 cottage would inevitably become a $150,000 fiasco by the time all the regulations were satisfied. At that point I’d be taking out a loan and I’d have to charge a ridiculously high rent just to cover the debt service. Unlike my old landlord I have no need or desire to skirt the law. The risk of fines and penalties is too great.
I was fortunate enough to speak to the mayor recently and he explained why the regulations and costs are what they are. It all sounded perfectly reasonable and I couldn’t argue with the logic of the codes, fees, and design parameters as he described them. But at the end of the day I just wasn’t interested in moving forward under the circumstances. For me the numbers didn’t add up. Only debt and high rents work in this environment and I shy away from that sort of thing.
Sonoma County does, in fact, have a special set of incentives for people who wish to build affordable housing. Some of the rules are modified or suspended, but in order to qualify for these programs you need to comply with even more additional rules and conditions. It just isn’t worth it to me. Evidently it isn’t worth it to very many other people either.
Sonoma County is a hotbed of alternatives and work-arounds, partly due to the high costs, complete lack of vacancies, and tight regulations in the area. The Tiny House movement is a prime example. Some people build backyard cottages on wheels in an attempt to circumvent the law. This example of a “mobile” backyard cottage is from Colorado. See video. I love these little houses and spent five years exploring them as a possible rental unit option. But these aren’t legal either. While the county has a de facto “turn a blind eye” policy it’s still too risky for me personally. I just don’t want the authorities coming around and giving me grief for anything. Ever. I’m not a “fight City Hall” kind of guy.
So when my existing tenants choose to move of their own accord I’ll list the house at whatever the new market rate is and I’ll make my money that way. No doubt I will be contributing to the general problem of impossibly high rents and a lack of affordable options. But I’d be foolish to not take the money when everyone else is. I don’t make the rules. It’s not my responsibility to provide subsidized affordable housing to society. At least not in the society we live in.
Last week I noticed that the nearby town of Santa Rosa announce the emergency imposition of rent control to provide temporary relief for the growing numbers of people who are dealing with the 30% increase in rents in the last three years. Rent control is a Band-Aid on a tumor. What’s really needed is more supply to satisfy the demand. With current high land costs, a severe regulatory environment, and no prospect of adequate government subsidies… it looks like the countryside is going the way of the city.
As a side note, for the cost of a permit to build a backyard cottage in Sonoma I paid cash for a property in an up-and-coming neighborhood in Cincinnati. As I’m fond of saying, “Ohio is the solution to California’s affordable housing crisis.” Yeah, I know… it snows there. But with the $500,000 you save on a house you can buy a second home in the Caribbean. And the Ohio countryside is every bit as gorgeous as Sonoma.