The Not-So-Invisible Hand

16 thoughts on “The Not-So-Invisible Hand”

  1. Hi — I would be up front about it. “Hey guys, I love having you here, but I need to increase rent in order to pay for the well maintenance and XYZ. I would like for you guys to stay here long term, so I wanted to let you know that while your rent is going up, I will also be making these other XYZ proactive improvements to the property to make it more enjoyable for you.”

    Since you guys have a good relationship, this would make things clear and also show them that the status quo is untenable (i.e. maintenance you MUST do), plus you through them a bone of some other proactive addition you could do.

    Getting them to stay long term would be the goal i imagine. Being able to travel like you do and not have to worry about turnover every every year/bad tenants every month is pretty valuable in and of itself.

  2. If market rate for your house is $2700 and the tenants are intelligent, then they are no doubt aware of what market rate is, and paying $1800 or even $2000 a month is still a serious discount, which they should be pleased about. It is very respectable of you to be so up front with them. This is one reason why in the past when my wife and I have rented, we always rented from a single owner landlord whom you know personally. They are much less likely to jack the rent overnight than a corporate entity with shareholders.

  3. Just a tangential comment: quantitative easing by monetary authorities post-2008 crisis had and still have the intent of pushing aggregate demand (aka GDP) up, with sibling goals of preventing deflation of current prices and reducing unemployment. Its effects on equity prices or fixed asset prices in general (such as real estate) are second-order effects.

    Specifically, in regard of real estate, the very low interest rates (even negative in a growing number of developed countries right now) quashes certain investment routes usually considered ‘safe’, such as government bonds, and then all financial capital slated for investment start chasing better yields. The rates paid by A-rated (not even AAA) companies on their own bonds and loans is astonishingly low right now, and governments that can borrow can do so at extremely low costs. The counterfactual is that this pushes a lot of idling capital into real estate, land banking, high-end art, intellectual property detached rights on pharmaceutical drugs etc.

    Bay Area already has a quite high latent demand and a lot of local cash-rich people looking for their piece of the dream, which just compounds things.

  4. Worse, at the end of the day it’s not even much easier to leave the state – there’s few places left that aren’t just as dysfunctional.

    Someone made a great point about the different dynamics in the past here:

    One advantage that Midwestern kids of the Putnam / [Charles] Murray generation had over today’s Midwesterners is that they could easily afford to move to California. Back in 1960, when only 16 million people lived in the Golden State, compared to 39 million today, new freeways were bringing cheap suburban land within reasonable commuting range of decent paying factory and office jobs. The California magnet also benefited stay-at-homes by driving up the wages Midwestern employers had to pay to keep their workers from decamping for the West Coast.

    It’s interesting to think that high housing costs in the most desired locations might be suppressing wages and salaries everywhere else. There’s evidence that a significant portion of increasing income inequality is due to increasing housing costs. <a href="http://economix.blogs.nytimes.com/2012/10/17/housing-prices-and-income-inequality/?_r=0"Here's a summary of research from 2012.

  5. I love your posts, but have never commented. I’m so pleased you opted to do what you did, which was communicate and compromise. I mean it’s not unreasonable you’d want to charge more but you’re keeping it far below market. And the price increase should be understandable to your tenants considering what you say about having big-ticket repairs coming up. So they know you’re increasing the rent out of need not greed, and the decision to stay or go is in their ball park. I really think you’re handling it in a fair and kind way.

  6. I grew up in Sonoma County. It’s a shame. Perfect climate, walkable downtowns, S.F. close by.. But somehow we couldn’t translate all these natural advantages into a functional regional economy and housing market.

    Part of the reason is that Sonoma County was traditionally rural and became suburban only in the late 60s/70s as hippies like my parents sought to create some kind of compromise between their back to land ideals and their real jobs back in the City. But they sure as hell didn’t want anyone to follow them and ruin their paradise found. NIMBYism along the 101 ensued with predictable consequences in hindsight.

    Funny thing is, they still don’t connect the dots. My pops thinks California is so expensive now because of greedy bankers, techies or simply “too many people.” He’s saying this as we’re driving past one empty lot after another, cursing the “traffic nowadays”, etc. He’s half right anyway.

    1. In my experience the more homeless that appear on the streets the more homeowners freak out and call the police. In that panicked political and cultural environment the rules tighten up rather than loosen.

  7. “As for the local political situation… It’s hopeless and unreformable”.

    I would like to change our detached garage into a granny flat. Supposedly the California legislature is moving bills in that direction. There are already many clearly unpermitted units around the neighborhood. Maybe I should just get out the plywood and tar paper I go for it.

    1. The state legislature and all the local municipal governments have been playing cat and mouse with Accessory Dwelling Units for years. The state does X to make it easier, and the locals do Y to make it harder. The proliferation of convoluted rules and regulations never ends. If I lived in this house full time I would already have created some type of semi legal “room mate” situation on the property since most of the neighbors have such arrangements. But as a landlord who lives elsewhere… Nope. Too risky.

  8. Very interesting. I know a guy who hasn’t raised the rent on his tenants since the 70s. If you can afford not to, that’s an amazing thing to be able to do for another human being. If you can’t, well, then you can’t.

  9. You are a considerate and empathetic man Johnny. As an owner of a duplex in Long Beach I too allowed rents to fall far below market, appreciating cooperative tenants. However, reality is often not far off. I recently replaced the roof ($15,000), replaced floor furnaces with HVAC systems. The floor heaters were 66 years old ($21,000. – both sides), New electrical ($6,500), new kitchens, etc. the list goes on and on. Sure, the units needed it but when it came time to pay for it I was the only guy in the room. If you don’t charge the appropriate level of rent then you simply accept the cost of subsidizing others. In landlord world – it’s our choice. I’m handling matters differently now.

    1. While a new roof, and new electrical is almost certainly must-fix sorts of things, are floor heaters? Long Beach isn’t really know for its deep cold snaps, so other heating methods could be worked out which are affordable, and you could tell the tenants this, that you are deferring repair instead of raising their rent to pay it quicker. There are choices like these you can make to be the fair and equitable landlord I’m sure you are, because is certainly appears tenants in California need all the help they can get.

      1. California renters need help in the form of reduced regulations. It’s nearly impossible to build anything in green field/nature/farmland, but it’s equally difficult to do brownfield urban/suburban infill development. Existing property owners lobby to make almost any new construction illegal. Multiple bureaucracies from zoning restrictions, to mandatory fire sprinklers for every little shack, to minimum parking requirements, and massive impact fees all distort the market. At the end of the day it’s easier to leave the state than to build anything here.

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