Toward Reasonable Rents
The average worker is being squeezed from all sides. Workers are still
fighting for minimum wages let alone earning living wages. Even as higher inflation rates are making their wages worth even less, landlords, citing the same inflation rates, are increasing their rents. What rents are reasonable?
In the small city where I live, not unlike many cities in the country, rental units are often owned by investors who don’t live here. Rental prices have increased at more than double the rate of inflation in the decade before the pandemic arrived. Nationally, according to one estimate, between 1970 and 2021 whereas inflation totaled 600%, home prices, and hence rental costs, have soared 1,600%, i.e., nearly tripled the inflation rates. The pandemic has made the situation even worse. I contacted a landlord to hear their side of the story as a step toward understanding the actual nuances of what is involved in renting and pricing. Here is that story in their own words with some edits. While there are many variations in rental markets, the general contours likely hold.
“Vijay, our experience as landlords is limited but perhaps instructive along several lines. In short, we’ve been very fortunate to own a decent rental property — though this has had little to do with us and a lot to do with, well, luck in the form of good tenants and a good real estate market for renting.
We paid cash for a modest 2-bedroom condo as an investment in 2011 from the bank that had repossessed it during the Great Recession. As you might imagine, it was offered at a bargain price. Unable to stand the thought of renting out a place that was substandard, we put in a few thousand more dollars to upgrade some kitchen features, clean and paint everything, and replace all the appliances with new ones. Our own self-devised rule-of-thumb and perhaps, not an uncommon one, was a monthly rent of 1% (or an annual rent of 12%) of the property value, with the tenant paying utilities. For a property valued at $100,000, the monthly rent would be $1,000. After expenses, this rent netted us about an 8% annual return.
We’d heard horror stories in renting but the risk we perceived in finding good tenants proved to be not true. Our first tenants were good ones: they paid on time and took care of the place and made few demands on us. But after a couple years, they had to move. We were worried we’d never find tenants like them again. Yet in fact, since then we’ve rented our condo to three other tenants. All have paid on time and have taken care of the unit to our satisfaction. Our current tenants of five years are an immigrant couple who barely speak English, so their daughter — the previous tenant — serves as our translator.
Because our current tenants are model tenants, we have kept their rent increases very low: we like them and want to keep them! Because our property value has almost tripled in about 10 years where we live, a consequence is that the monthly rent is now perhaps 0.6% of the property value (or annually about 7% instead of about 12%). For example, for a property whose value has increased from $100,000 to $250,000, a current monthly rent is kept at only $1,500 instead of near $2,500. Partly, we feel we have benefitted immensely from property value appreciation and see no need to have the renters pay even more! However, if these tenants leave, we’ll be tempted to maximize our profits by charging the subjectively ridiculous rent that our unit could command in this market, but this is how capitalism works.”
The story reveals two points. A new landlord likely over-estimates the risk in renting and often prices their rentals near the highest market value possible. An established landlord, the more common case, has a choice: Keep rents soaring for ever increasing returns or limit rents for more modest returns. Universally, there is a housing shortage problem, and all people have to live somewhere! A good city can perhaps bring its citizenry together in making reasonable rental living a common cause.
I conclude this Women’s History Month noting something that is apparently not all that obvious. It takes many, many generations for a society to achieve even a semblance of equality for its previously marginalized. In America, women got the right to vote over 100 years ago. Yet it would be 60 years before one woman would be judged to be qualified to serve on the U. S. Supreme Court. Only last year, the first Black woman justice was appointed to the Court. If it took a century for historically marginalized women justices — who are extraordinary — to achieve equality, is it any surprise that the fight for equality and justice for marginalized others must continue?
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