what is more tenant rights doing to LTR market?

Question

I have been putting a lot of thought into the housing market and our homeless issues in Washington and I'm wondering if all these tenant rights are pushing investors away from LTR? I have always wanted my investing to be about a bigger cause and hold long term rentals but the laws seem to favor tenant heavily. The icing on the cake is now what look to be a 18 month evection moratorium. With LTR cap rates dropping and risk rising I feel pushed to change my strategy... which in turn seems to be part of the problem.. what's your thoughts? What is this going to look like in 5-10 years?

Joe Splitrock · Answer

@Amanda Dallman CAP rates are a measure of risk and with the number dropping in these big cities, it seems investors are not convened about the tenant rights laws. This is because professional investors and corporations know how to be profitable within the system. They know these laws only push rents higher. They use tenant screening as a way to ensure they have the best tenants who will not cause problems. These laws affect "mom and pop" investors more than anyone. It drives them out of the business and corporatizes the industry. This means higher rents, higher qualification standards and increases homelessness. Corporations know how government will react when more people are homeless, which is by expanding housing programs. Corporations only rent to "poorly qualified" applicants if they are on housing vouchers or subsidized housing. The answer to the problem is run your business like a corporation would. Screen tenants and only rent to those with good credit history and income. If you are renting to less qualified applicants, only do it with government vouchers.

Andrew Syrios · Answer

I agree. There are risks but long term buy and hold is still the way to go. Honestly, when prices shoot up, that's when you get hit by onerous regulations (because housing becomes less affordable and people get mad about that). There's always good and bad in a market. When there are lots of good deals (i.e. 2009-12) there is no financing. And when financing is easy (like now) there are few good deals. There's always some good and some bad but LTR is the way to go IMO.

Alex Olson · Answer

I would not be affraid of any KCMO address unless you are a slumlord. Low taxes, great tenant base, landlord friendly (depsite what the media may indcate) and the tenant bill of rights has minimal impact on landlords. You now have to have a license which is dirt cheap and you can use it as an advertising aspect of your business if you have quality apartment units. You can still screen your tenants as you wish assuming you don't violate a protected class. The number 1 impact on a good tenant is credit score. Reward those that pay on time every time with a lower rental rate and you will see longer term tenants while also keeping your pockets full. Hope that helps!

Nathan Gesner · Answer

I think a lot of amateur investors are getting out because the sales market is hot and they don't want the risk of dealing with government intrusion. Like @Joe Splitrock said, the professional investors are staying in the game because they know how to navigate the nonsense and continue to turn a profit. I think this continued intrusion will result in fewer mom-and-pop investors which means large corporations (or government) controlling housing more and more, which is a negative for all parties involved. But that's still a long ways off.

Martin Carstens · Answer

Amanda, Joe is correct. Tip of the iceberg! Almost everyday there is a thread on Californian land lords fleeing to land lord friendly states. This is close to my heart, as well as your bigger cause. I own SFR homes and have a homeless family member. After thirty years, my mom still tears up over the issue. My cousin, has chosen a life of being homeless. With many family members and professionals attempting to get him off the street. Cant do it. Im old enough to remember boarding or rooming houses. You know, maybe a dozen single bedroom, with a hot plate and one toilet down the hall. Turns out this business model is exactly what the lower income folks need. Once tenant rights were implemented, the land lord could not police them. Then they became a targets for not being humane to the tenants, and have for the most part, become a distant memory. I have read of new similar start up model, where four bed rooms surround a commons kitchen area. Unfortunately, it is for much better off, in high rent areas. As stated above, and no secret, screen, screen and screen. I personally take pride in offering good, safe homes for reasonable price. Great book on the subject. Evicted, by Mathew Desmond. A on the ground account of this topic.Best of luck to you!

Brett Mach · Answer

@Andrew Syrios I'm only one property in, but believe buy-and-hold will always be the way to go (I've been listening to your dad on podcasts). Concerns on LTR, however, are real, but I don't see them as apocalyptic. I've been asking a few people to get a feel for this around Kansas City, as KCMO is certainly increasingly tenant friendly. Here's the dilemma: there are PLENTY of other municipalities in KC metro to shop, and so far, my strategy is to avoid KCMO proper (it's always been tenant friendly since I started following a decade ago, but created a whole new dept in the wake of affordability crisis-- see this press release from earlier this year). I figure there will always be more red tape down the road w KCMO properties, so I should stay in other burbs. But my realtor and some other friends think I'm undercutting access to deals because if I would just analyze KCMO properties (focusing north of river), numbers are so much better, and I could scale more quickly. It seems like the mom and pops who I know don't think twice about purchasing KCMO addresses, and threat of regulation from City Hall isn't on their radar--they'll probably be just fine. I would be surprised if City Hall even knows about the existence of many mom and pops' w tiny portfolios--and I certainly think they'd enforce any license requirements, etc, w bigger shops like Stewardship anyway, if at all. Wondering if you've run into any compliance hurdles... And wasn't City Hall (and many state/non-profit agencies, and REIAs) focusing on connecting people to CARES money in order to pay their landlords? Not all tenant advocacy is anti-landlord by default. Seems like, as said above, the point is to screen super carefully, or go for Section 8 compliance--either way, I think LTR, even in a place like KCMO could be navigable and profitable for decades...right?

Brett Mach · Answer

Thanks to both of you for the assurance and perspective. All makes sense--I really appreciate it! My realtor will feel vindicated too:)I will be more open to KCMO, look into the licensing, and not rule it out in the future.

Joe Villeneuve · Answer

What you just described is just the tip of the iceberg. Think about the domino effect what you described will cause.

Anthony Gayden · Answer

@Andrew SyriosTake a look at what happened in Kansas City with tenant activists blocking entry to the courthouse. This stuff can spread to places in the Midwest that were considered friendly to landlords.

Andrew Syrios · Answer

I know. I remember that nonsense regarding the Tenant's Bill of Rights which originally was going to ban screening for felonies or evictions. It's a contributing factor for sure, but there are other things too that are causing this.