Tuesday, December 18, 2007

Are Landlords Always The Bad Guys?

by M. Anthony Carr

Is it better to rent or buy?

Just when I think I've answered this question for the last time and pointed renters to a good "How To Buy A Home" website, I received this letter from a disgruntled high-rise tenant in Arlington, VA, a suburb of Washington, D.C.

I have been a loyal renter for over five years at the same apartment building in the Crystal City area. I have seen annual rental increases go from 2 percent to 3 percent to 5 percent to 8 percent to now 11 percent. Isn't there some kind of limit to this ridiculousness? This just is not fair. Do rules vary from jurisdiction to jurisdiction?

In the world of low- and moderate-income rental property, there are rules. The government steps in with its calculations on what the property owner can charge. The formula includes such factors as the net operating income for the multi-family complex and the median household income of renters to determine fair market values. And in many areas, though not as many as in the past, there are local rent control regulations which often limit year rent increases.

With private-sector housing, all that really matters is the NOI (net operating income). The NOI represents gross rent less uncollected rent, taxes, government fees, insurance, maintenance and repairs. As time passes, landlords face rising taxes, utility bills, repair costs and other expenses, increases which must be covered by pushing up the rent.

Coupled with the NOI is supply and demand. If you live in an area where the supply of rental properties (as well as homes for sale) is dwindling, than it's likely you'll see higher rents than in areas with a surplus of housing units.

A good web site to research your area's rent statutes is Rental Housing Online where you can find information for landlords, tenants, investors and more. The U.S. Department of Housing and Urban Development also has some good resources for renters.

Rental increases are one of the reasons I encourage renters to purchase instead of lease.
With a purchase, you can largely lock your monthly payment with fixed-rate financing for the next several years, considering most homeowners move about every seven years. In addition, if property values rise you can begin to build cash equity in the property that can be used later for other investments or expenses, such as college tuition, purchasing another home, paying off consumer debt, vacation, retirement, etc.

Another benefit to purchasing is that the mortgage interest you pay each month is generally deductible when you calculate income taxes. For instance, let's say you purchase a condo for $150,000 today with only 3 percent down -- that would give you a monthly loan payment of $1,017 -- of which $909 per month would be interest. The first-year tax deduction would come to$10,908. A homeowner in the 28 percent tax bracket, would save $250 per month in taxes -- $3,054 for the year.

Besides all of this with fixed rate financing you cost to borrow will not rise. Unless you refinance, the monthly payment for principal and interest stays at $1,017 year after year. In fairness, though, costs for property taxes and property insurance can rise, but such costs are usually far smaller than monthly financing expenses.

Now I tend to take exception to the writer's other complaint, that "This just is not fair."
Well, fair for who? For an investor, it's very fair that the property owner should be able to increase his cashflow from his or her investment if the market demands it -- just like investors in any other endeavor. I've never heard anyone say that it's not fair that the stock market keeps going up (on the downside, though, there's plenty of griping).

The investor has taken on all the risk of providing housing, the mortgage, interest payments, taxes, maintenance and management of the property -- all of which keep fluctuating, usually up. Trust me, this is not a cheap investment. For this, the owner charges a rent that will hopefully cover all expenses and then provide a profit at the end of the month.

For renters who are tired of rent increases, my advice is to do something about it. Begin paying yourself by saving money from each paycheck for a downpayment; reduce your debt load (which is the largest barrier to homeownership); and research the many, many private and public programs available to help people get into a home of their own.

Just a little research and budgeting can help stop the rental increases year after year and put you onto a home of your own.

For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at http://commonsenserealestate.blogspot.com/.


landlordchoice said...

I think not all landlords are bad guys! They are just protecting there investment to get there business going!

information for landlords

Anonymous said...

No not all landlords are bad. There are many tenants from hell who do not hold up their end of the contract and in the end the landlord suffers financially not the stupid tenant.