The Washington, D.C. Rental Housing Commission recently approved a rent increase of 8.9 percent based on the rate of inflation. Many tenants and activists are upset about the increase, with one arguing that “landlords have been getting inflation plus 2% for years, so why hasn’t it been enough?” This same tenant asserted that her landlord has plenty of money for upkeep and maintenance. This attitude is shared by many tenants and housing activists, and it illustrates how utterly clueless they are.
If we assume that a landlord’s expenses increase at the rate of inflation, then he is left with a 2 percent return on his investment. Few investors would want to endure the hassles of being a landlord for such a paltry return. They will move their money to more promising investments. Indeed, this is precisely what happens every time rent control is implemented. Regardless of what rate of return an investor desires, he should be the one making the decision, not politicians and bureaucrats.
Many of the expenses involved in owning and operating rental housing are not obvious to a casual observer, and most of those in favor of rent control are casual observers. Such people might understand costs such as taxes, insurance, and maintenance. However, these expenses can be difficult to predict in advance, and they can increase substantially. As an example, the appraised values of my rental properties have nearly tripled in the past four years. This increases the property taxes I must pay, and the higher values also require more insurance, and thus, higher premiums. I know that my taxes and insurance are likely to increase each year, but I often have only a vague sense of how much.
Vacancies are also an overlooked expense. Not only does the landlord lose the income during the vacancy period, he also incurs make-ready expenses. My properties are typically vacant for six to eight weeks. This translates to about $1,800 to $2,400 in lost income. Depending on the size of the house, make-ready expenses (at a minimum painting and cleaning) are typically more than $2,000. And that is if the tenant has not done much damage. In total, a single vacancy can cost more than $4,000. If I am limited to a profit of 2 percent, a house renting for $1,200 a month will produce an annual profit of less than $300. A single vacancy could wipe out more than a decade’s profit.
As the above example illustrates, a real estate investor needs a return far greater than 2 percent if he is to remain solvent. What that return needs to be can vary significantly based on many factors. But the landlord knows his costs far better than the clueless tenants and activists who support rent control.