From: stephen@sprunk.org   
      
   On 30-Mar-15 21:20, hancock4@bbs.cpcn.com wrote:   
   > On Monday, March 30, 2015 at 7:34:34 PM UTC-4, Stephen Sprunk wrote:   
   >> If property taxes go up, the rent has to go up too because the   
   >> landlord obviously isn't going to _lose_ money renting out the   
   >> property; if so, he wouldn't have bought it in the first place.   
   >   
   > But property taxes can, and do, go up faster than rents, and the   
   > landlords do end up losing money.  In the short term, they still have   
   > a mortgage to pay, so they'll have to eat the loss in the hope rents   
   > will eventually catch up.  In the long term, the property will be   
   > abandoned if rents don't catch up.  (Other urban conditions play a   
   > part, too).   
      
   Absent rent controls, rents _will_ go up to keep pace with taxes; the   
   tenants have no choice since _every_ landlord will be raising rents.   
      
   Aside from slumlords, who operate on a very different financial model,   
   landlords _don't_ lose money or abandon properties.  Slumlords' profits   
   come from not reserving money for normal maintenance--and when the bill   
   comes due, abandoning the property is cheaper than fixing it.  It's not   
   as good a long-term return as letting good tenants pay your mortgage   
   off, but it works well enough in the short term, particularly when you   
   _want_ the building to be condemned--or when you need a front to launder   
   money from another shady business.   
      
   >> (The property's value may go up over time and his mortgage payment   
   >> shouldn't, but his taxes and maintenance costs will go up to   
   >> match, leaving him with no real profits until the mortgage is paid   
   >> off.)   
   >   
   > It's quite variable.  In the grand scheme of things it averages out   
   > as you describe, but on an individual basis it's very variable.   
      
   There will obviously be exceptions, but averaged across a diversified   
   portfolio or the whole market, that's what will happen due to general   
   market forces.   
      
   > Sometimes a neighborhood becomes very desirable and rent goes up far   
   > faster than taxes and costs and the landlord makes out very well.   
   > Other times the reverse happens.   
      
   Likewise, which is why one needs to diversify--unless you have enough   
   capital to gentrify an entire neighborhood yourself.  The rules change   
   when you're large enough to create your own gravity, which is why the   
   big developers can consistently rake in huge profits, whereas small   
   developers usually go bankrupt within a few years.   
      
   To give you a sense of scale, Warren Buffet's $1.5B development near me   
   is a mere 433 acres (175 ha), probably too small to assure a profit if   
   he had to get bank mortgages like most developers.  OTOH, my property   
   value went up 10% after it was announced--as did everyone else's in the   
   (smallish) city.  Collectively, we're probably going to make more money   
   from his project than he is, simply because it's too small.   
      
   > In addition, some smart landlords manage to get low cost financing   
   > which keeps their costs down.   
      
   There are no low-cost mortgages for rental properties; the rates are   
   higher than for live-in owners due to the higher risk of default if the   
   owner can't find tenants (or can't get them to pay).   
      
   There are other ways of funding rental properties, such as REITs, but   
   for this discussion, they're equivalent to paying cash.  You wouldn't   
   issue bonds because the rates are even higher than a mortgage.   
      
   > Others know how to keep maint costs low, perhaps by doing the work   
   > themselves.   
      
   Contractors charge a heck of a markup, especially for "emergency" calls   
   at night or on weekends.  If you can cover (most of) those yourself, you   
   can save a lot of money, but that also means you have to be available at   
   all hours, and the money you "save" is really just imputed wages.   
      
   One of the benefits of being self-employed is that you get to count such   
   as "unearned income", which gets taxed at much lower rates (as little as   
   0%, if you do it right) than if you were getting paid the exact same   
   amount as wages by someone else.   
      
   > Then, of course, there are foolish landlords who pay way too much   
   > to maintain their properties.   
      
   I suppose some landlords do pay too much, but I suspect it's far more   
   common to simply not reserve enough to cover normal maintenance   
   costs--especially if you have bad tenants.  Most small business owners   
   take out too much (and too soon) as "profits" and then fail when they   
   hit a small bump, rather than reserving against such events and getting   
   smaller but more stable and more secure growth.   
      
   If you hire a management company to deal with the property, they'll take   
   a big chunk, but they also typically have in-house staff to deal with   
   minor maintenance at below-market costs, possibly even included in the   
   fee you pay them.  Again, you'll probably barely break even, but what do   
   you expect for a business you are adding _no_ value to, other than your   
   credit for the mortgage?   
      
   S   
      
   --   
   Stephen Sprunk         "God does not play dice."  --Albert Einstein   
   CCIE #3723         "God is an inveterate gambler, and He throws the   
   K5SSS        dice at every possible opportunity." --Stephen Hawking   
      
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