Some of you may have read a recent LA times article by Steve Lopez on June 4th. It highlights the realities of the housing crisis that has created tight pressures on the current rental market. It covers a lot of ground highlighting the complex issues facing the Los Angeles area.
There was one item that was mentioned that needs a more nuanced look. The article discusses a South Pasadena apartment building and a $600 dollar increase that took place which resulted in financial hardship for the tenants. Without a doubt that is a lot and any such increase should be done with a well thought out plan over a period of time. However, we should look closely as to the reasons why an owner would put forth such an increase. Was it some heartless landlord, looking to tie grandma and grandpa to the railroad tracks? An uncle scrooge just looking to squeeze out every last penny with no regard to the human impacts? Like most things in life, there is a nuance that should be analyzed to get a full picture.
The building in question was owned by the same person for over 50 years and suffered from deferred maintenance. When the owner passed away, it was turned over to a management company which raised the rents to start covering the costs of maintenance. Along with a generally tired appearance, part of the property suffered from significant structural damage, with three uninhabitable units. The building needed paint, new facia boards, a new roof and safety upgrades to the stairways and walkways. Many of the occupied units were in a state of disrepair.
After the owner passed away, the heirs sold the property to a new owner who took out a loan with a $3,000,000 construction component on top of the purchase price to invest in and renovate the entire building. Market rate rents in the area with new and better amenities for 2 bedroom, 1 bath units with a washer dryer were running anywhere between $2,400-$2,600 a month. In order to cover the costs of the repairs, the new owner needed to raise rents. The average two bedroom rent in the building of $1,300 didn’t even cover the operating costs. The new owner did not move rents to market rate but instead to $1,895 to cover the costs of the increased property taxes as well as the upgrades. Asking rents for new tenants seeking the rehabbed property were $2,295.
On the surface it still seems like a lot even if the building needed major repairs but a key calculation is often overlooked, the property taxes. To cover the property taxes alone required an increase $344 a month per unit. Without paying Uncle Sam and Jerry Brown, the average amount of money spent to clean up and upgrade the occupied and vacant units exceeded $20,000 per unit. A fair return just to pay for these improvements needed at least $ 251 dollars per month to make some profit on the work. Although profit is increasingly becoming a bad word, it is the the only way to pay for the building improvements. Once completed, the tenants will have better living accommodations and the whole neighborhood will benefit from the investment in the building.
Since it came under new ownership, the following repairs and updates occurred on the property….
New electrical and plumbing
New exterior and interior paint
New water saving landscaping
New secured entry systems and lighting
Repaired/replaced all walkways and stairways
Replaced the entire unsafe walkway railing system
Pools re-plastered and now usable
All deferred maintenance in occupied units has been repaired with many existing tenants receiving new kitchens and bathrooms while vacant units were completely remodeled to today’s standards at a cost of over $30,000 per unit. This is an example of an owner investing in a building and community. The work to engage in these upgrades are not free, nor should it be. Profit incentivizes individuals to do good work and offer great customer service because you are competing in a market place.
For those savvy enough, you might see a difference between the current rent quoted in the Lopez article and the current rent I quote. Mine is $100 dollars more than the Lopez article. This is because when the owner was made aware of the financial hardship to the residents and through discussion, the owner reduced the final rent from $1895 to $1795. The raise was given in 2 increments and 4 months apart to help give people time to adjust and make personal life decisions. For those that chose not to pay the new rents and opted to relocate, the owner provided significant relocation assistance to help with the situation. This was done voluntarily.
The picture is much different when you look at it that way. We encourage any owner who is implementing a large increase to cover needed costs to create a plan from the outset. Plan on slow and gradual increases that fit the needs of the investment strategy while taking into consideration the human impact large increases may have on a tenant. If considerations are not taken into account, the nuances may be overlooked by those that don’t live and breath multifamily every day.