Are Landlords Parasites?

 

There is a mentality online that views landlords as parasites leeching off the hard work of everyday people. It’s a fair sentiment. You cannot opt out of housing, and buying a home to avoid renting is becoming increasingly difficult with rising home prices. Many of these critics support rent control to keep prices more affordable. But is rent control a good idea? Are landlords truly not providing any service or good for society?

A World Without Landlords

In a hypothetical world without landlords would things be better or fairer? Well in this world, only those with 5% of a down payment would have housing so homelessness would go up. More people would be living at home with their parents until they save the necessary amount to purchase. You might think house prices would go down with no landlords but demand for purchasing homes would go up since no one can rent, which would equalize demand for the most part. There are only so many homes and so many people. If people can not rent then they would be forced into the real estate market. Imagine the whole market is 10 houses with 5 renters and 5 home owners. If you eliminate landlords from the equation, the landlords with no one to rent to, would begin selling. The renter with nowhere to live would begin purchasing homes. The market would rest with 10 homeowners, give or take, since not everyone has enough for a downpayment but you get the gist of it. 

Why Is Rent Expensive?

So you might be asking why is rent so expensive? Well there is lots of demand which some blame on immigration, which is part of the problem but complicated. Rent is correlated with the price of a home. If home prices go from $500,000 to a million dollars, rent is going to be affected. When potential landlords are looking to enter the market they want to make sure the rent covers their mortgage. 

So how do we lower rent? With more supply. Imagine the housing market is 10 houses with 10 homeowners, a balanced market. Add an additional 5 houses to the mix and house prices drop by half. Markets naturally balance. When house prices become unaffordable people move to cheaper cities. When prices go down, more people move in.

Landlords, believe it or not, are providing a service. No one has to rent. If you don't like landlords, buy a house. There is no law preventing you. In fact if everyone did immediately switch to owning the rental market would crater and rent prices would drop like a stone as they race to the bottom for tenants. Sure you would need 5% down payment, but just like our hypothetical world people could live with their parents until they save up the 5%. Hate living with your parents, you better start saving more. People could do this, but renting is easy, it's flexible. You can move every 6 months to a new location or city or country if you wanted to. If you find a better job in another city, moving is easier with less strings holding you down. No waiting for your house to sell, realtors and lawyers. 

What if you don't mind landlords you just don't want them profiting off of housing or massively profiting. If you are a renter do you want more landlords or less. You actually want more. More properties for rent equals lower rent prices. Landlords, like everyone else, like money. Everyone loves money. Think about game shows, people are not just excited to be on Deal or no Deal or Who Wants To Be A Millionaire just for the bright lights. They want money. And people who have enough money to buy a rental property want more money, that's why they are investing in the rental market. Now if they could get a better return in the stock or bond market, they won't invest into a rental and there will be less rental properties for renters to choose from. As we know with supply and demand, less rentals equals higher prices. 

The Market Effect

So renters actually want landlords to turn a profit and actually lots of profit. Not on their lease ideally, but profitably promoted competition. Let me explain. Say you see your friend buy a rental property with a mortgage of $2000 a month and they charge $4000 a month in rental. $2000 profit, not too shabby. Eventually word gets out and other people want to get in on the profits so they start purchasing rental properties. More people learn about the opportunity and eventually the rental market is flooded with new rentals. With increased rental supply, rental prices decrease as competition for renters heats up. Landlords wanting to attract renters and not wanting their rental empty lower the rent. More supply over demand lowers prices and thus lower profits for landlords. Hating and shaming landlords will decrease the amount of people wanting to buy rental property and increase rent. The exact opposite of what renters want and often complain about. 

Housing currently is not a human right, and as such, it is a for profit industry in our capitalistic society. Maybe someday it will be a human right, but today is not that day. You may dislike capitalism but this is the system that we currently live in. In capitalism transactions are supposed to be win-win. So everyone is happy after a transaction. If you are not happy with your current living arrangement you can leave and find a better fit. That is the beauty of capitalism. You vote with your dollar. If you think rent is too high, don't rent from them. Rent will rise and fall with what the market can sustain and tolerate. You might think this is not a hot dog, this is housing which is a need not a want, which is fair. Certain policies have pumped up the house market making rent unaffordable, but that is not the fault of the landlord, that is policy makers not prioritizing affordable housing. If 50% of landlords just stop renting, rent prices would skyrocket.

Rent Control  

You may think we need regulation and policies to reduce rent and that is a good thought, but short sighted. Rent control is a government policy that limits how much landlords can charge for rent and how often they can increase it. The goal is to keep housing affordable, especially in areas with high demand and rising costs. There can be hard caps with a strict limit or soft cap that limit the percentage increase. Sounds great right? Well it can be, for those within a rent controlled building. The problem lies once again with economics. People don't get into the housing industry out of the goodness of their hearts; they want money. If the government comes around and says you can only charge so much and make so much profit, you might think to invest your money somewhere else that is not housing. Over time less and less potential landlords enter the markets and those that are in start to leave. With less supply comes more demand and higher prices. Rent control creates the exact problem it is trying to solve. If you are in a rent controlled unit it is really helpful, but if not, you may be fighting for the last few remaining units on the market. 

Income Based Rent

So what are some real solutions, other than building more homes? That is pretty much it, or get rid of people. But there are government programs that offer rent based on your income. The demand is normally quite high and it is normally only for those who make very little, but it is a program that can help those who are struggling to afford rent.  

Life of a Landlord

So, going back to the original complaint—are landlords just exploiting tenants, making them pay for a stress-free lifestyle? Well, is being a landlord truly stress-free? Is it even a "real job"? Is it really some kind of life hack to free money?

I’d argue that being a landlord isn’t a real job in the same way that selling knitted sweaters isn’t a real job. For most people, it’s a side gig. Managing a rental property typically takes anywhere from a few minutes to a few hours per month, depending on the circumstances. However, just like you can turn knitting into a full-time business by selling on Etsy, you can turn landlording into a full-time job by acquiring multiple rental units and scaling up your operations. There is a long list of tasks and duties that go into home ownership and managing tenants:

• Searching and Purchasing the property
• Renovations and Repairs
• Legal & Administrative Tasks
• Advertising
• Application Reviews
• Maintenance & Repairs
• Rent Collection
• Tenant Disputes
• Move Out Inspections
• Cleaning and Repairs
• Handling Evictions

That's just to list the big ones. If being a landlord is not a job or doesn't take any work, there wouldn't be a whole industry built up for managing rentals. It clearly takes work or why else would they hire out the so-called, "not work". 

Being a Landlord is Risky

Here is the big issue no one likes to address. People want the rewards of risk, but don't want to risk anything themselves. Entrepreneurs are among highest earning occupations because of risk. You can earn the most and the least. It can literally go bankrupt and lose your house and life savings. With great risk comes great reward. Being a landlord takes risks. You can buy high and have the market come crashing down losing the vast majority of your investment. You can have a tenant from hell that can trash your house and refuse to leave. Here are just some stories from landlords, 

"We had one tenant who wouldn't pay rent. We followed the protocols to evict him but he kept getting the judge to agree to an extension. He ended up staying rent free for 7 months. He also complained about anything and everything. "The neighbors are too loud" "Someone's car alarm went off across the street", "one of the neighbours has a cat and I'm allergic". There is literally nothing I can do to remedy those situations.

When he finally got evicted he left the apartment in shambles. Holes in the walls, curtains stained with what I can only assume was doo doo, and the rug was littered with cigarette burns.

I wouldn't wish someone like that on my worst enemy"

and 

"Used to have a job that involved cleaning and minor repairs of rental apartments and houses between tenants. Usually it was easy enough, but the ones who were evicted often made it a point to wreck the place on the way out.

One particular asshole decided to pack plumber's putty into the sink and bathtub drains, then turn the taps on before he left. They had to get professional contractors to fix most of it, but I got to rip out a bunch of stinky wet carpet and water-damaged floorboards."

Landlords are not saints, but they are not villains either. They take risks and provide housing in a market-driven economy. Housing is not a human right under current laws, making it a for-profit industry.

The best way to reduce rent is to increase supply. Policies restricting landlords will only reduce investment in rental properties, worsening the problem. Renters may dislike the system, but landlords are a necessary part of the housing market. Instead of blaming landlords, the focus should be on policies that increase housing supply and make homeownership more attainable.

If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com