As a landlord I’ve long struggled with how to balance ethical and economic choices. In the aftermath of the 2008 financial crash I bought a sad little 1941 vintage fixer upper on a half acre in Sonoma County. I could never have afforded property in the wine country under normal circumstances, but 2008 wasn’t normal. The banks seized up. No one had cash on hand. It was a unique buyer’s market. To be honest, I didn’t buy a house so much as some really well located dirt that happened to come with a free house-shaped pile of long deferred maintenance.
I spent months bringing the place up to a better standard: paint, sanding, new windows and doors, new roof, new wood stove, a ton of insulation… It’s still a modest house, but it’s clean and livable now. And it’s still on a half acre in an amazing location.
Taxes run $4,600 a year. Insurance is another $1,000. Twice a year I spend about $700 keeping the well equipment functioning. (Sonoma County has some seriously iron rich water that’s difficult to filter and so acidic that it corrodes everything it touches if it isn’t softened and neutralized.) There was a small mortgage for three years, but that’s paid off now. So call the minimum basic carrying costs $7,000 a year.
I rented the property to a great couple who are ideal tenants. They’re spotlessly clean, they enjoy gardening, the neighbors love them, and they pay the rent on time each month. I never want them to move. In the years since I bought the house the rent has been raised once from $1,500 to $1,600.
Since the economic crash of 2008 the real estate market has bounced back thanks to all manner of Central Bank and Federal Reserve shenanigans designed to artificially goose equities. Stock fueled money from San Francisco and Silicon Valley has poured in and driven prices even higher. But there are consequences to this sort of monkeying with interest rates and liquidity. If you already own property it has regained or exceeded it’s pre 2008 bubble value. If you don’t you’re entirely priced out of the market unless you arrive with a wheelbarrow of cash.
Real wages for most people have remained stagnant or have actually declined. If you’re earning an hourly wage and renting… you’re screwed. The situation is further complicated by the fact that it’s nearly impossible to build new housing of any kind in the region due to regulations so supply and demand are prevented from self-correcting.
Here’s a rental three blocks away that was on the market for a nanosecond before it was snatched up for $2,700 a month. Same size. Same two bedroom one bath home. Same half acre. There’s an unlimited demand for housing in Sonoma County and a severely limited supply. That brings me to my moral conundrum…
I could jack up the rent from $1,600 to $2,700. My tenants would have no real choice but to pay up since there are effectively no vacancies anywhere in the county – or neighboring counties. The entire San Francisco Bay Area for a hundred miles in every direction is massively overheated. If they’re lucky they might find an inferior property in a much less desirable location with no garden at all for significantly more that they’re currently paying. Their search will be complicated by the fact that they have a large dog and many rentals don’t allow pets. I’m in a perfect position to extort more cash out of them. And who doesn’t want an extra $1,100 a month in income?
Keep in mind, soon I’m going to need to spend about $20,000 to replace the well since it’s 75 years old and is starting to fail. It’s just a matter of time before it collapses altogether. There’s also a crack in the foundation that needs a $30,000 repair. That additional rent money would help offset these inevitable expenses. And every boom has a bust. Rents and home values won’t always be so high and I may not be able to collect as much rent in the future if the economy goes south.
Of course, a rent hike of that kind would do unpleasant things to my tenants and their budget. Our cordial relationship would be strained in a way I’d find uncomfortable. And they might actually choose to up and leave for their native Canada and write off California as an experiment that didn’t quite work out. Finding new tenants is never fun since you don’t know who you’ll get next time. I’ve had bad tenants in other properties in the past and it’s a nightmare.
This situation is complicated by the political response in neighboring towns. The larger economy is distorting prices. Wages are inadequate to support high rents. Regulations make meaningful new construction impossible. So the former middle class is being pushed out and are living in their cars and old RVs (or worse). The stop gap response by local governments is to impose rent control and tenants rights laws to keep people from becoming homeless.
I’ve attempted to create an additional rental unit on the half acre lot that would be truly affordable, but the authorities make that incredibly difficult and hideously expensive. My tenants are well educated professionals. They’re in no danger of becoming homeless. They can always relocate to a more affordable part of the world if they had to. But that doesn’t mean I’m keen to drive them away. So I’ve taken a middle path. I’ve laid all this out with them and informed them that their rent will be increasing from $1,600 to $1,800 on December 1st. That’s significantly less than the market rate, but probably a bit more than they really want to pay. It’s a compromise. That gives them a few months to prepare for the increase. They understand that there will be similar increases in the future, but they’ll be incremental and predictable.
However, if regulations continue to move in the current direction things will change very quickly. I’m inclined to sell the property to the highest bidder and use the sales proceeds to buy real estate in some other location entirely. I could buy a palace in most other parts of the country with what this flunky house in California would sell for. Or I could stop renting entirely and simply use it as my own personal weekend house instead of engaging with a dysfunctional economic and political process. I don’t make the rules, but I can navigate around them if I have to. My tenants have been given fair warning. As for the local political situation… It’s hopeless and unreformable.