Sunday, June 09, 2013

Why I Do Not Want To Be a Landlord

I've been doing a lot of thinking about real estate lately.  Some years ago I attended free seminars that were totally worthless.  Lately I've been listening to experienced real estate professionals.  I now have more sources and references for my knowledge base than I could ever use.  One of the more common avenues to success in real estate is owning income-producing residential property.  This means investors have to manage their property and tenants as a landlord.  Once I started learning about all of the responsibilities a landlord must fulfill, I realized it's a poor fit for my negative attitude toward human beings.  The feudal appeal of having serfs as tenants on my land has lost its shine.  Let me describe the ways in which landlording would complicate my life and inconvenience me to no end.

I wish I could charge people an arm and a leg for living under my benevolent protection, but alas many communities have rent control laws that prevent landlords from raising rents on long-term occupants.  San Francisco is one such town.  The City has a rent board that determines what private property owners may do with the property they own.  The City is also home to a very vocal tenants union that agitates for rent control.  The union's symbol is the classic workers' fist smashing a cartoonish landlord.  The clear message is that radicals who believe property is theft and profit is evil will use every means available to destroy the capitalists who provide them with climate-controlled shelter from the elements.  No thanks.  I will not be a landlord in San Francisco if it means I become the target of idiots with no life.

Owning rental property in less restrictive areas means figuring out how much to charge for rent.  Figure extra charges for after-hours service calls, inspections, and non-routine maintenance.  Having a live response to an overnight maintenance call may be worth the expense if it prevents water damage from destroying property.  Watch out for those leaks above the ground floor.  Fees for late rents are of course limited by local laws.  I'd like to charge people double rent for wasting my time and insulting my intelligence but that's probably prohibited by some do-gooder San Francisco ordinance.

Locked-out tenants are a pain in the behind.  I don't want to get calls at oh-dark-thirty from someone who lost their key or left it on the kitchen counter.  Having a locksmith on call is not something I relish.  I can just imagine a nosy neighbor snooping as the locksmith opens the tenant's door, then calling the cops to report a break-in, and then snickering as the locksmith calls me to complain about wasted time.  Yeah, Neighborhood Watch would be all about busybodies watching me lose money.  That is a headache I do not need.

Keeping tenants informed is another landlord task I don't want to do.  Many tenants are dumb enough to need reminders of when their rent is due, so landlords need to time their newsletter publishing so the reminder ends up at the top of the shoebox, or hatbox, or breadbox, or glovebox, or wherever ghetto tenants like to stuff their overdue bills.  Landlords can sometimes use this retardation to their advantage.  If the newsletter contains requests for confirmation of safety measures like smoke detectors or carbon monoxide detectors, keeping proof of confirmations can limit landlords' liability in the aftermath of emergencies.  Furnaces and air conditioning units are among landlords' most expensive repairs, but I worry that reminding tenants to change filters will fall on deaf ears.  Having laundry facilities on site means more maintenance expenses, plus complaints from some tenant who claims a machine ate too many quarters.

Competent businesses consider the cost of acquiring new customers.  Landlording as a business means figuring the cost of acquiring new tenants through advertising.  Window signs might be more effective than lawn signs that get kicked over, and some high school kid on the corner holding a sign and waving might be a source of amusement.  I would give an illiterate tenant a cheeseburger just to see them wave a big sign on the street corner with my name on it.  Selecting new tenants means abiding by HUD's Fair Housing regulations.  Some tenants fall into legally protected classes.  Others that aren't protected don't have to live with me if I don't want them around.  Frankly, I don't want anyone around.  I don't want animals around either and they're not a protected class, so landlords can have special fees and insurance requirements for our furry friends.

I always wondered why the rental applications I've filled out were so detailed.  It turns out that landlords need to collect as much info during the intake process as possible to allow them to garnish wages and collect judgments.  County tax records provide a public record of tenants' true addresses, which makes sending judgment notices easier.  I sure don't want any known drug offenders on my property, because law enforcement could execute a civil asset forfeiture action against me if I rent to them in full knowledge of their activity.  Checking the sheriff's records helps keep the riff-raff away.  I'd rather save myself the trouble and keep everyone away.

I have difficulty believing any of the so-called asset protection strategies real estate professionals claim they use.  I had an LLC structure until very recently for Alfidi Capital until I determined that paying the $800 per year to the State of California wasn't getting me any benefit.  I did not have the time to treat the LLC as a separate entity that would give it corporate veil status.  It also obviously carried my name, and I was the registered agent because I don't need to retain a lawyer for routine business functions.  My LLC was useless and I'm in the final stages of converting Alfidi Capital from an LLC to a sole proprietorship.  I will never again waste time and money using an LLC for anything that I can handle myself, including real estate.  Insurance policies are probably cheaper than an LLC and land trusts are probably more anonymous.  I'm no expert on land trusts but I'm wary of their potential for misuse.  Would a property management company be willing to accept designation as a trustee of a land trust if the named beneficiary is the landlord's LLC, but the landlord has no property insurance?  Who would sue who if something goes wrong?  I don't want to spend time in court just to find out.

I'd rather take a less costly stance with my asset protection posture.  The California superior court system has searchable databases of civil cases online.  I've searched San Francisco Superior Court's records many times for the names of local troublemakers whom I do not wish to have in my life.  It's educational to see who pops up as the initiator of frivolous lawsuits.  I don't want litigation addicts as business associates.  Landlords should beware of having them as tenants.

Landlords also have to manage the cash they receive and spend.  It comes in by check, money order, electronic payment, etc.  It goes out any way you like.  You're the boss and you're running this business.  I'm not.  The process of evicting a bad tenant and preparing a unit for the next occupancy takes time, requiring cash reserves on hand to cover an estimated tenant failure rate.  I suspect that corporate experience with uncollectible accounts receivable would be helpful here.  Credit card companies sell their charge-off accounts to judgment collectors and other miscellaneous investors.  Maybe landlords who don't want to pursue deadbeat tenants are a good source of deal flow for judgment recovery aficionados.

Disaster-prone areas call for their own category of Darwin Awards.  I've always been fascinated by the stupidity of developers who build there, investors who buy there, insurers who underwrite there, and tenants who live there.  I will never buy developed property on a floodplain.  I will never buy property in the San Francisco Bay Area that does not meet seismic code requirements.  I sometimes wonder whether architects who design structures that resist hurricanes and tornadoes have disruptive ideas for real estate developers in the Gulf states and Midwest.  Somebody could make a buck.

Limits on landlording turn me off.  Some paychecks are resistant to garnishment (like Social Security).  Lawsuits and judgment collections can be a landlord's best friend.  Landlords may have to pay interest on the deposits they collect.  Limiting the deposit to cover first and last month's rent may or may not be helpful in avoiding interest charges.  I have no desire to maintain records for thirty years that will allow me to calculate the return of some granny's deposit to her estate's executor once she croaks.

Tenants turn me off too.  Low income properties are full of risky tenants who cause nightmares.  I remember living in a Richmond, California apartment complex near the Hilltop Auto Mall.  The City of Richmond bought it in 2003 to convert it into Section 8 housing while they spent tax dollars renovating the real low-income projects downtown.  Life in my apartment complex soon deteriorated from an already low status.  Tenants would enter the rental office bragging about being late on payments.  Druggies left their detritus in the entryways and tenants left their human waste in the hallways.  These people really were human waste with all of their behavioral problems.  Section 8 of the Housing Act of 1937 now has a devoted constituency in the underclass.  Housing voucher recipients strike me as the equivalent of parolees, people who leave and reenter the Section 8 program through revolving doors that affirm their victimhood.  HUD even goes so far as to provide links to tenants' rights organizations, advocating against property owners whose taxes help fund HUD's operations.  Bottom feeders are disgusting.  I moved out of the ghetto in 2004 and I'll never live that way again.  No way will any low-income tenant ever occupy my radar as a business professional.  

Want to hire a property manager to do all of this work for you?  Well, that requires work too.  You'll have to consider how long they've been in business and whether they have the staff to handle all of the properties they manage.  If they manage property out of your area, that means you're on the hook for long-distance absentee landlord status. If they have judgments against them, well, guess who they pass their bills to for payment.  I'm not paying even a fraction of my income from an investment to someone else.

I had fun as a kid playing fake landlording with the Monopoly board game.  The secret to success in that game is to own everything on a given street to capture renters who are highly mobile.  Owning more properties means reinvesting your rent in improvements (houses, hotels) until you own the board and win by bankrupting everyone.  In real life, the have-not takers will hamstring the landlord makers with regulations and lawsuits.  They will also empower their political allies with subsidy vouchers, non-profit advocacy groups that subsist on foundation grants, and loudmouth activists.  Everyone wants to be on the side of the angels as long as it means a free lunch.  Real landlording isn't like Monopoly.  The real world makes it difficult to win.

Some investors thrive as landlords.  They love tracking all of the daily details and solving human problems.  Good for them.  They have the skills and patience to perform a very necessary market function and deserve handsome rewards for their results.  They are welcome to own all of the income-producing residential property which will never see a bid from me.  There are many strategies available to real estate investors who do not want to be landlords.  I'd rather develop land, manage human-scale agribusiness projects, own oil and gas leases, rehabilitate vacant buildings, own rights-of-way and easements, purchase tax liens, buy REITs and ETFs, or do just about anything else.  Any of those choices are more preferable to me than dealing with live human beings.  Even dealing with dead human beings as a cemetery owner requires adherence to special regulations.  I do not want people on my property, living or deceased.  I can't wait to tell those kids to get off my lawn.  All I need is the lawn so I can start yelling.

Full disclosure:  I do not own real estate at this time.