When I was little, my mother would tuck me in to bed, and whisper in my ear, “good night, sleep tight, and don’t let the bed bugs bite.” I truly had no idea what she was referring to, and never suffered a bed bug bite in my life, but it stuck in my head as a cute notion. Now that we manage hundreds of properties, I don’t consider bed bugs to be cute anymore. In certain areas, bed bugs have become a huge problem. Bed bugs are tiny insects that live off the blood of their host. They create irritation from their bites, blisters and rashes. Are difficult to eliminate because they hide in sheets, flooring and furniture. And they spread quickly and bed bugs in one room will infest the next unit.
Best Ways to Deal with a Difficult Tenant
Most tenants abide by the terms of the lease contract. They pay as agreed, take proper care of the property, allow inspections and can be considered a “good” tenant. Our company categorizes over 95% of our tenants as such. . However, if the economy sours and tenants struggle financially, 20% of tenants go from “good” to “bad”.
What is Section 8?
Section 8 housing is, as found in the Housing Authority of the County of Los Angeles states in their website:
“The Section 8 Programs offers tenant-based assistance. Participants find their own housing to rent in the open market, and pay a portion of their income towards rent. The Housing Authority subsidizes the balance of the monthly rent in direct payments to the owner.”
We have seen a family with a mother and three children live in a nice unit, in a nice area. The family contributes $150 and the government covers balance of the rent. This allows families with low income to have suitable housing when otherwise, they may be homeless. First, let me state that I am not opposed to Section 8. It is a massive program (assists almost 5 million households) and huge in scope (over 17 billion in federal assistance). In Southern California there are far more eligible section 8 families than there are properties for them to rent.
During the election, Gavin Newsom was rather quiet on his stance for tenant protection and rent stabilization (rent control) measures. However, he did promise to add 3.5 millions homes by 2025, which equates to more homes than have ever been built in any 5 year period. Only in 1963 did California build anything close to that (322,018), short of the 500,000 goal. To build 500,000 affordable units would require high density housing which takes years to secure land, financing, obtain permits and then build. What about rising housing costs for the other 6 million renter households until those 3.5 million housing units are built?
“Carrot and Stick” Approach
The Governor seems to be using a carrot and stick approach to appease everyone in the room: the builders who want to be able to build more units and ease the affordability issue by having more supply, as well as tenant rights groups who want more relief given the current short supply.
On January 15, Governor Newsom signed an executive order and then included large sums of money in his proposed budget to spur the construction of housing units. The housing “carrots” includes:
- Free up state land for housing
- Force cities to allow “accessory dwelling units”, adu’s or granny flats.
- Provide up to 1.75 billion in new housing production dollars broken down as follows:
- 500 million…
- to house the homeless
- for low income housing incentives
- for moderate income housing incentives
- 25 million for federal disability programs
- Penalize local communities for refusing to hit their state mandated housing goals with the following “sticks”
- Allow developments around transit oriented developments in the state to bypass local approval and receive state approval
- Penalize cities that willfully ignore their state mandated housing goals by withholding transportation tax dollars
- Sue cities who don’t comply with their state mandated housing goals.
The “Casa Compact”
Now the Governor is working with the legislature to increase protection and provide relief to renters. As an indicator of these possible protections, he has embraced the “Casa Compact”, a 15-year housing policy package developed by the Bay Area and forward to the legislature for approval. Some nuggets from this proposal:
- Just Cause Eviction – Only when tenants have “fault” can they be removed from a property.
- Failure to pay rent
- Breach of a material term of the contract
- Illegal conduct
- Rent Cap – An owner would not be able to raise rents to any amount.
- Rent cap in effect for the emergency period of 15 years
- There can be no increase in rent more than Consumer Price Index (CPI) plus 5%
- Capital improvements can be passed on an amortized basis
- Legal Assistance – Low income tenants would have access to free legal counsel and emergency rent assistance.
- Tenants can have “legal representation” for the full scope of eviction.
- Paid for by parcel, vacant home and ¼ cent sales tax.
The political path of the legislature seems clear: try to appease all constituents and allow the state to be more heavy handed with local governments when it comes to both tenant rights and their housing elements.
Will tenants be satisfied with potential 5% to 10% annual rent increases? Will the offer of just cause eviction offset the desire for minimal rent increases (2% to 3% annually in most rent controlled cities)? I doubt it. In the end, local cities will fight back, a recession will put a hitch in the housing goals, and tenants will clamor for more protections and lower rent increases.
By trying to please everyone, perhaps no one will be.
I don’t want to wax philosophical, but life is too short to SMIPO (Self-Managing Investment Property Owner). For a monthly collected rent of $2,400 we charge $120 a month to manage professionally a property. Since property management fees can written off on your taxes, that equates to $75 a month (depending on your tax rate) or $2.50 a day. My double non-fat latte at Starbucks costs $3.95. If you wash you car twice a month, that costs $30 (no write off there). I suspect your car is worth less than $100,000 and is a depreciating asset. I will guess your rental property is worth more than $500,000 and appreciates almost every year.
Many mistakenly believe California has the most tenant protection laws and most liberal rental policies in the country. There are a few states on the east coast that are far more tenant friendly, but on the west coast that prize goes to the State of Washington. If legislatures are looking for more laws to make managing properties more difficult, they may want to entertain the laws that Spokane, Washington is currently considering. Proposition 10 was soundly defeated, and the attempt to repeal Costa-Hawkins, which could have included single family homes and condominiums in the rent control pool, and now I doubt there will be another statewide attempt to push rent control. Local cities may still pursue rent control as it is currently configured, meaning it will apply to multi-unit buildings older than 1994, but the legislature will probably implement measures that provide more benefits to tenants. There are no shortage of options, and here is some laws and measures being bandied about in Spokane: Continue Reading
How Long Should a Lease Be?
We are often asked, “how long a lease should I have with my tenant?”. Some owners want a month-to-month because they can have possession of their property with only a 30-day (if they have been there less than 12 months) or 60-day (more than 1 year) notice. Others think a 2 or 3 year contract is best because they don’t have to worry about a renewal or finding another tenant in a year. Here is our policy (even though everything is negotiable): we prefer contracts that are 9 to 15 months in length.
Proposition 64 legalized the recreational use of marijuana. As of January 1, 2017, people 21 years of age and older may possess, process, transport, purchase, obtain or give away up to 28.5 grams of non-concentrated cannabis. They may also plant, cultivate, harvest and process up to 6 living plants. Even though people have the right to store cannabis within their personal property, you as the owner has the right to prohibit the use, cultivation or possession in your rental unit.
As a matter of company policy, we run a criminal background check on all applicants. Once we have done due diligence on an applicant, we ask they either provide a criminal background check or pay for one through our website, so we can include this in our decision making. What type of criminal activity would raise a red flag and give us cause for concern?
When we execute a contract for our owners, we still leave their email information for the tenant to have, but we never provide their mailing address or their phone number. This is done intentionally. Owners hire us to be the buffer with their tenants and handle the day to day management. It would be tempting for tenants to go directly to owners with pleas of mercy if they can’t make the lease payment for that month, or requests of improvements to the unit which the owner is not obligated to make. They hire us, and pay us, to manage their property and free them from this worry. So why do we leave their email address?
Generally, self-managing owners keep the rent for their rental properties below market rents. The reason is either intentional, the owner keeps the rent low to retain the tenants, or unintentional, the owner is either friends with the tenant, or intimidated by them, and does not even try to keep up with market rents. If you don’t raise your rents to keep pace with the market, we find it has 2 consequences: the cost of goods and services increases, and you lose money; or the tenant gets used a fixed rent, and balks when you, or your property management company, finally increases the rent to the market value.
If you are looking for professional property management you may have experienced the confusing world of property management pricing. Unlike real estate, no two companies charge the same fees in the same manner. It can be time consuming and frustrating just to learn the facts about the fees. Why is that? The simple answer is, “It shouldn’t be that way.”, but I do have some guesses why it is: