Sun 14 June 2009 | -- (permalink)

Three years ago, Newsweek writer Daniel McGinn bought an "investment property" in Pocatello Idaho based on some emailed photos and an assessor's report. He knew he was buying a downscale duplex, but only after after visiting the place he'd bought did he realize he'd unwittingly become a slumlord. He tells the story in an insightful article in the latest Newsweek.

For most of my life, I've thought of landlords as rich people. I assume most people do. After all, if you had as much money as your landlord, you'd own your own place instead of renting.

My mental image of landlords started to change as I dealt with landlord/tenant issues as part of my Lawyers in the Library (LITL) volunteering. I've seen just as many landlords as tenants there, and none of them fit my preconceived idea. Like tenants, they vary. At LITL, I'm seeing the poorer end. I've never asked them how much money they make on their properties though, so it was eye-opening to see how thin the margins are on McGinn's:

Thanks to an energetic local property manager, my two apartments have never been vacant. Many months the combined rent of \$690 covers the \$503 mortgage payment and other expenses. Still, I'm frequently hit with repair bills (a broken stove, a leaking underground water line) that send me into the red. And even after the tax write-offs, my costs have exceeded the rental income by more than \$2,500 since I purchased it.
...
After touring my duplex with my property manager, Ryan Olsen, we promise the tenants we'll fix the heater and hire an exterminator. Bill also complains about the worn carpeting and linoleum, and asks me to replace it. I'm noncommittal. Afterward, I walk Olsen to his truck. He tells me that five of the 60 local apartments he's managing are now vacant, and he's seeing more signs of economic distress. "I've gone from chasing five or six tenants a month [for rent money] to chasing 15," he says—including Will, whom he's been pressuring to find work and catch up on the rent. If Will and Rose move out—they've talked of moving to a trailer home with a separate bedroom for their son—Olsen estimates I'll need to spend \$800 to clean, repaint and recarpet their unit before he could rerent it, draining more profits. What about Bill's request for new carpeting and linoleum? Skip it, Olsen says. The tenants aren't going to move if I don't replace it, and newer carpet won't let us increase their rent. It would be a bad investment.

So in a perfect month, McGinn makes \$183. But lots of months aren't perfect because tenants come and go, or don't pay, or maintenance costs eat up the \$183. Even though he's renting out a slum, he's lost \$2500 while doing it.

Before the end of the article, the writer eventually does the right thing:

The next morning at 6:30 I'm at Lowe's, haggling over the price of carpet remnants. By 7 a.m. I'm securing 12-foot rolls of carpet and linoleum to the top of a rented Hyundai. At 10 a.m. I knock on the door of my property. Dogs bark, and after a few minutes Bill comes to the door, rubbing his eyes. "Didn't I tell you I'd be here?" I ask. Yes, he says, but for years land--lords had making promises they didn't keep, so he didn't expect me to show up. After he dresses, we haul the flooring onto the porch.

Financially speaking, this \$213 purchase is pure stupidity: it doesn't add to the property value and will hurt this month's cash flow. But it seems a small price to pay to improve the life of a rock-solid, longtime tenant—and, of course, to assuage my guilt over owning such a run-down property. My discomfort grows stronger as I spend the morning with Bill, Sarah, Will and Rose. It's easier being a landlord from 2,450 miles away, delegating to my property manager all the tough decisions about rent increases, late-payment penalties and potential evictions, and relating to the tenants only as faceless names on leases.

What's striking to me though, is that the "right thing" means that he goes even deeper into the red. And it's still only a marginal improvement to the property.

There's no easy answer here. His tenants live in really crappy apartments. He could raise the rent to support the cost of improving the property, but then they couldn't afford to live there. Typical governmental responses don't help much either. Tenant protection laws can force a landlord to meet some minimum livability standards, but they can't find a landlord willing to run losses forever.

The poor can only afford cheap housing. But cheap things are cheaply made, and those who sell them often face guilt (as in McGinn's case) or liability for failing to meet minimum statutory standards. Still, the poor buyers must feel that the deal is the best one available to them, and that what they're getting is worth what they're paying, or they'd move elsewhere. The million dollar question is this: when should the government forbid poor people from entering into deals like this, for the person's own good? If the buyer is poor enough, are all profitable deals exploitative?