The other day an editorial in the New York Times entitled Options for Struggling Landlords Whose Tenants Can’t Pay the Rent the New York Times popped up in my social media feed.
While it offered little new information and was centered on New York, two things caught my attention.
First, the author was sympathetic to “mom-and-pop” landlords. Second, there was a venerable maelstrom of commentary stating if landlords couldn’t afford to own the property with tenants not paying rent, perhaps they shouldn’t own it at all.
This implies all landlords are Rich Uncle Pennybags.
And yet, according to data from the American Housing Survey from HUD, in 2015 there were nearly 48.5 million rental units in the United States, which are contained in 22.5 million properties. Of these, 22.7 million units in 16.7 million properties are owned by individual investors. These owners are more likely to own single-family homes, duplexes, triplexes and fourplexes. The remaining 25.8 million units are owned by businesses, which are more likely to own large multifamily inventory.
It was estimated by HUD there are somewhere between 8.6 million to 10.6 million small investor landlords in the United States. In other words, almost as many mom-and-pop landlords as there are tenants estimated to be behind on rent (12-14 million.)
The pushback from the public claiming landlords shouldn’t own rental property unless they can pay for it without collecting rent implies most owners have incredible wealth and can take the hit.
I am confident those who think landlords can take the hit believe 100 percent of rent is profit.
The fact is, however, regardless of size, most landlords, and frankly, most homeowners, use a mortgage to buy property.
Let’s do some math.
A 4 bedroom 2 bath duplex (2/1 in each unit) generates $3000 in monthly rent, or $36,000 a year.
No rental property will be 100 percent occupied 100 percent of the time. Using an annual vacancy rate of 5%, the property’s income is reduced by $1800 (36,000 x .5), resulting in $34,200 in rent.
An investor purchases this duplex for $400,000. She puts 20% or $80,000 down and mortgages the balance of $320,000 over 30 years at 4 percent interest for a monthly payment of $1527.73. Multiply this times 12 months, and the annual mortgage payments are $18,332.76.
Now $34,200 – $18,332.76 in mortgage payments leaves $15,867.24 in income which still seems pretty good.
However, we’ve forgotten a few key expenses.
Property taxes on this property in Hennepin County are 1.28 percent of the property’s value. In this case that’s $5120. $15,867.24 – $5120 = $10,747,24. It’s always a good idea to insure property, and that runs about $2000/year for a rental duplex, which brings revenue down to $8,747.24.
Trash, water and sewer are utility bills that follow the property, not the tenant. On average, that is an additional $150/month or $1800/year. That reduces revenue to $6947.24.
If the property has a single boiler annual heat bills may run $1800 per year or more. $6947.24 – $1800 = 5147.24.
Funds must also be allocated in the event a tenant moves out and the unit requires fresh paint, or san existing tenant needs something repaired or replaced. This may run $1000-2000 per unit per year. Subtract $2000 from the $5147.24 and revenue drops to $3147.24.
If lawn care and snow removal are done by someone other than the landlord, that may run an additional $95/month or $1140 per year, which drops revenue to $2007.04. Of course, all of this assumes the owner hasn’t hired someone to manage the property professionally.
Dividing $2007.04/12 months = $167.25 per month in the landlord’s pocket. And that is providing that something major like a roof or furnace doesn’t need to be replaced.
Given these numbers, why would anyone own rental property?
For most mom-and-pop investors, rental property is a means of diversifying retirement savings, creating an income stream for retirement, and taking advantage of tax savings through depreciation. It’s a long play, not a short one.
As of December, Americans owed an estimated $75 billion in back-rent to their landlords. Congress’ most recent stimulus bill earmarked $25 billion to help tenant get caught up.
Mom-and-pop landlords are small business owners. Lost revenue will eventually result in those businesses shutting down. When a landlord loses property to foreclosure, tenants lose their homes.
More must be done.