Just a Landlord

For years I struggled with setting rents. Too much under market rents and the properties did not perform as well as they could. Too much over market rents, they sat vacant and do not perform as well as they could. There seems to be a theme developing here. 😉

To succeed you need to know what others are charging for rent in your very specific market. To that end, we spent a lot of my time, my staffs’ time and effort trying to collect comparable rents.

Ten, fifteen years ago our team manually enter details from for rent ads in the local papers, Craigslist, Zillow and anywhere else we found them. Then we would combine that information with city property records, trying to get an accurate view of what the market rent was for a particular unit. This was expensive and annoying.

We tried freelance data collectors through oDesk (now UpWork) to collect and correlate the records. Better, but still costly and the results still were not exactly what I wanted.

Then I saw promise in AI and Machine Learning, using tools like BlockSpring. Better results, but then Craigs and others started blocking automated collection tools.

We went back to manual data collection where we had to and automated what we could.

We were doing the rent surveys once or twice a year due to the hassle and costs. Quarterly would be better to catch trends.

I had looked at Rent-O-Meter in its early days. It seemed promising but had far less data than even our rudimentary data set.

Last October I relooked at Rent-O-Meter. Wow. We have been using it ever since.  They have both a free version and a free trial of the “Pro” version that goes for about $200 per year.  Setting one rent wrong will cost you more than that. You may want to take a look.

Note: while this may sound like an ad for Rent-O-Meter, it is not.  I’m just a happy, paying customer of theirs.

A worthy read:

Evictions: They Are Not The Terrible Landlord’s Fault

From today’s Milwaukee Journal Schneider: Desmond’s ‘Evicted’ is a flawed masterpiece

Homes in Milwaukee’s poorest areas often can be bought for as little as $8,000, with rents running upwards of $500 a month. In virtually no time, landlords can own the properties free and clear and the rent they collect is pure profit — as long as they can collect. As succinctly put by one of the landlords featured in the book, an African-American woman named “Sherrena,” (pseudonyms are used throughout the book) “The ‘hood is good.”

Further, despite the book’s grim portrayal of landlords, one can only imagine how far these neighborhoods could fall if landlords weren’t there to keep at least some semblance of order. If housing laws were to squeeze the amount of money property owners could make on their rental units, they may simply abandon these homes altogether, leaving a lawless landscape devoid of structure.

Recently the Milwaukee Journal ran a series “Landlord Games” that inaccurately portrayed LLCs as being used simply to avoiding paying property taxes and fines.  The result is the Milwaukee Common Council is creating a committee to study LLCs and rental housing. Text of proposal. The rental industry is again, noticeably absent from those invited to the table.

View as formatted pdf with footnotes

Let’s agree that all property owners pay a cost when someone fails to pay their taxes or their property is foreclosed and abandoned.

The Apartment Association does not support bad actors. None of those owners featured in the Journal article are members of the Association.

Rather we see the importance of the city, and private investors working together to make rental housing, and therefore neighborhoods, succeed for the mutual good of both.

Rental housing is an important and integral element of Milwaukee. About 58% of the residents of Milwaukee are tenants. In some neighborhoods, such as 53233 the number of renters exceeds 97%. The success or failure of neighborhoods and rental housing are closely tied.

Rental Housing is the largest small business in Milwaukee with over $7 billion invested in Milwaukee. (MPROP assessor records October 2015) Rental properties account for well over a half billion dollars a year of economic impact, starting with $190 million in property taxes, sewer and water charges, maintenance, insurance and everything else that goes into running rental housing. The Census Bureau found the yearly median operating costs per unit for multifamily rental properties vary between $3,600 per unit for small properties and $5,170 per unit for large properties, adjusted to 2016 dollars. These numbers exclude interest and mortgage servicing.

Providing rental housing in older, poorer neighborhoods is difficult, challenging and unappreciated work. Many have failed, some are opportunists or worse, but the majority were simply overwhelmed financially and mentally by the task at hand.

Owners are impacted by the financial and social problems of their tenants, the high costs of maintenance and lack of capital to address those problems. It is not the owner’s lifestyle that contributes to insect infestations or broken windows, yet it is the owner and not the occupant that is accountable both financially and recently in the media.

Not only do private owners suffer these burdens. One only needs to look at the long history of failure among Milwaukee’s nonprofit housing providers. (see excerpt below) These groups had every advantage over the small private investor. They had significant financial resources, typically through Block Grant and other government funding and grants; they had well-paid and well-educated staff; they often obtaining properties without costs, and they had access to the best tenants on Rent Assistance. Nearly all of Milwaukee’s nonprofit housing providers failed financially.

These groups had every advantage over the small private investor. They had significant financial resources, typically through Block Grant and other government funding and grants; they had well-paid and well-educated staff; they often obtaining properties without costs, and they had access to the best tenants on Rent Assistance. Nearly all of Milwaukee’s nonprofit housing providers failed financially.

Or one could look at the Milwaukee’s Housing Authority budget to see the costs they incur housing low-income Milwaukeeans. Here too is an organization that gets Rent Assistance tenants, tenants who risk losing their housing subsidy if they fail to comply with the rules or pay their rent. HACM does not rent to the populations with bad histories, leaving the segment most in need of housing to the private sector.

Milwaukee should strive to encourage a successful private rental housing market in this once great city, but since the mid-1980s’ the city adopted a culture of hatred towards private rental owners. That has not produced positive results, but instead, discourages the right people from participating.

If Milwaukee rental housing became more sustainable, where people willing to invest their time and money were to make reasonable profits, it would be harder for the few charlatans to exist because of increased competition for available properties. An added benefit is more interest in investing in Milwaukee’s rental housing will result in an increase in values and therefore an increase in the tax base.

Alderman Witkowski, who is the co-author of this proposal, created a Local Business Action Team to help small business succeed. Rental housing is the largest segment of small business within the city and one that may have the greatest impact on the well-being of the city. With our half billion dollars a year of economic impact, a similar effort should be undertaken towards making private rental housing more successful.

Let’s look at the recent Journal Sentinel series on landlords.

This investigative reporting – using easily available public records – showed that the individual owners behind LLCs could be revealed and that other properties owned by these individuals or different LLCs could also be exposed. Changes in the LLC laws are not necessary, contrary to the assertions of Aldermen Murphy and Witkowski that bad landlords are operating in secret. The City Attorney’s office has recently been successful in having a receiver appointed for the various ownership entities used by inner city landlord

Within existing laws, the city could have caused most of the featured landlords out of business, through docketing and enforcing code enforcement fines, and foreclosing f tax delinquencies. For whatever reason the city allowed these owners to continue unabated.

Perhaps most troubling is the relentless attack on James H. Herrick, who works for Baird, that went as far as the Mayor calling for the guy to be fired. He is not a member of the Association nor known to us.

The Journal reports that inspectors show up and find basement doors illegally padlocked. In the article, the owner’s manager states he did this in an attempt to keep drug dealers from entering the property.

There is no argument that inoperable fire doors are an unreasonable risk to occupants. Clearly, this was a novice mistake made by someone who did not understand fire codes.

The correct response by DNS would be for the inspector to explain the problem and demand the owner’s rep immediately remove the padlocks. If the owner did not comply, the Department of Neighborhood Services has an essential services program where the city can contract a repair and then bill the owner.

Instead, the inspection supervisor chose to placard the building and force 50 families out onto the street. Closing a 50 unit building would not have been the DNS response had the property been located on the Eastside, Bayview or the Southwest side. In these more affluent neighborhood they would have compelled a solution that kept the tenants safely in their homes.

But this building is in a poor, minority neighborhood.  The city’s response was harsh as it typically is in these neighborhoods. The DNS employees who acted out of spite towards the owners and a disregard of the tenant population, instead of attempting to protect the homes of 50 low income, primarily minority tenants, should lose their jobs.

The 50 unit building remained closed for a couple of months. It is no surprise that the building ended in foreclosure and sold at a distressed price due to this.

The owner’ use of single property LLCs, in this case, were an advantage to the city. Because the owner had his properties in separate LLCs, this allowed only this one to be foreclosed upon, instead of all 13.

It is a lending industry practice in larger real estate deals to require single asset entities to separate liability from one project and others with a similar ownership interest.

It would actually be in Milwaukee’s best interest if every investment property was in a properly segregated LLC. That way a failure at one property would not have a domino effect and bring down perhaps dozens or more other properties that are under similar ownership.

Similarly, what did the city gain by the public attack on NBA basketball star Devin Harris? While it may have been expedient in causing the payment of some fines and taxes, overall it sent a clear warning to others with capital “Do not invest in Milwaukee. If you fail, you will be ridiculed and perhaps lose your career.” Similar results could have been obtained with a private conversation with Harris, thereby not discouraging outside investment.


 Journal article on non-profit failures

West End joins a list of other nonprofit housing organizations that have failed in the last 10 years, including Walker’s Point Development Corp., East Side Housing Action Coalition and Community Development, and the Westside Conservation Corp.

The Milwaukee Journal Editorial based on Matt Desmond’s new book Evicted builds upon some misperceptions about the rental industry.

A NYT reader’s comment on Desmond’s Evicted more closely follows what typical owners see when trying to run lower income housing.

The Journal editorial echoes Desmond’s advocating for legal representation for tenants in most evictions.  If you frequent eviction court you seldom see a day without Legal Action representing tenants.  ATCP 134 provides enticement for attorneys to represent tenants  tenants tin cases where the owner is doing wrong.

Implying tenants need legal representation simply perpetuates a myth that wrongful evictions are common and owners somehow benefits from an eviction. In fact by the time it is over the owner has lost two to three months rent and often more.  Legal representation for tenants in evictions seldom does more than simply let the tenant get another month of nonpayment before leaving.
 
In an average month eviction judgments in Milwaukee County exceed $847,000 – every month.  But this is but a fraction of the losses suffered by property owners.  Of those evictions, only a third of the cases had money judgments other than the court applied fees.  Was this because the tenant did not owe rent?  No, more likely because the owner did not want to waste more time chasing a judgment they will never collect.  Those in our industry as well as those outside of the rental business will tell you that less than a quarter of uncollected rent ends up in eviction court.
 
This is money removed from housing and increases costs for the rest of the tenant population. While some tenants may use the money for real needs like shoes for kids, some use it for other things that further harm the community.
 
Then there is the comments about constructive (illegal) evictions.  While statements like this flame the fires of hatred against landlords, such acts seldom occur and when they do there is adequate remedies for the tenant.  I own two duplexes that a guy walked away from his 1/3 down and eight years of payments after he spent a weekend in jail because he threw the tenants’ belongings out on the front yard and changed the locks.  Seems the tenant did not pay rent and when he went to find out why, he also found they broke the front picture window.  His first stop after getting out of jail was my office to see if I would buy them for the remaining mortgage.  Small owners take these things too personally…
 
Desmond’s book has brought the issue to the forefront. And this is good.  Its is our industry’s job to make sure this does not turn from what it is, the bringing a real problem to light, into yet another excuse to bash the rental housing industry.
 
The part of the discussion that would be helpful to the overall community is increased housing vouchers.  Universal food stamps for people in need was a good first step many years ago. Housing and utilities vouchers for those who need them the most would be a good next step.
 

Bill Lauer writes on the Apartment Association email discussion group:

I have thought about this often from a political perspective.

Why are the Democrats typically the political polar opposite to providers of lower cost housing and the Republicans often more supportive of our issues?  Every proposal that increases costs or decreases competition in that market adversely impacts the lower income residents, a constituency the the Dems purport to be theirs.  If you think about it the Dems should be the allies of rental housing.

As many of you know I like data.  Okay – maybe “like” is a little weak.  Perhaps its love, or at least a dangerous obsession.

Our industry, at least in regard to small properties,  shies away from meaningful data collection and utilization.  However, you can do so much with the right data – from setting your rents in the sweets spot between charging too little and losing money to charging too much, having your units remain vacant and … losing money.  What is that house you are looking buying at really worth and how much rent can you really expect to receive? In many neighborhoods paying assessed value is paying two to three times what everybody else is paying.  In a few high valued neighborhoods assessed value is a steal.  Ask the listing broker how much rent you can expect and some will tell you the sky.

Lately we’ve been looking at a lot of data points from rents, to evictions, to city orders, to special assessments, to tax assessments in general, to foreclosures and a ton of other interesting things.

For example we are developing an internal tool for suggesting rents that is using for rent ad data, including rent amount as well as other thing such as how long the ad has appeared, how many times in the past two years has the unit been for rent and mashes that up with property data – age, size, assessed value, date of last sale, how many units are owned by that owner and a dozen other metrics. Then combine this data with city order data, eviction data, tax delinquency and foreclosure information for the subject property.  While we haven’t finalized the algorithm, we are getting close.

Another fun project is trying to identify properties that will fail.  We look at when they were purchased, if they are tax delinquent, if they are on the DNS monthly reinspection list, if there are evictions, if the water bills have been placed on the tax roll, etc.

We started doing this with database tools, Python scripts and a lot of manual acquisition.  We’ve found a lot better methods since.

One of the tools we use for data acquisition is import.io. Today I was in San Francisco for their Extract conference.  The theme was “Data Stories Worth Sharing”  There were 600 in attendance, with what appeared to be an equal distribution of data scientists, data analysts, and application developers. Oh and there was one landlord.

I wanted to attend the last two but either the timing was bad or the event was in London, which is quite a trip for a one day conference.  Today was so great I regret not attending the previous events.

If people thought I was a pain in the butt before with my data obsession, I’ll be downright dangerous now. 😉

If you want to play with the tools I play with, another one to look at is Mirador, a data visualization tool developed by Harvard and others primarily for things like Ebla research.  This is a radically cool tool  for seeing patterns in data.  Before that we were only testing patterns against assumptions.  Mirador points out the patterns for you.  

To visualize the results there is Tableau or for the more adventuresome there is a Javascript library D3

I think I should call this “Big data about small properties.”

If you are interested in data and rental hosung and want to talk about this more, drop me an email at Tim@ApartmentsMilwaukee.com

I extracted the data from the 28,835 Milwaukee County eviction cases between 1/1/13 and 2/28/15.

Landlords who went to court  lost $22,677,299.01 in these 26 months.  

Remember this was only Milwaukee County And only a small fraction of cases end up in court or are pursued to a money judgment.  Most owners I’ve spoken to tell me that less than a quarter of their non paying tenants end up in eviction court. 

Some sad facts:  

• Only half the cases resulted in a money judgment against the tenant (14,424 of the 28,835)
• 12066 were dismissed either by the court or on stip
• Largest judgment  $243,255.95 (commercial)
• Largest residential eviction judgment:  $24,348.00
• Smallest judgment $1.30
• 4,020 judgments under $200
• 6,846  judgments over a grand ($1,000-243,255)
• 4,194 judgments over two grand  ($2,000-243,255)
• 2,106 Judgments over three grand ($3,000-243,255)
• 1,068  Judgments over four grand  ($4,000-243,255)

This past week, taking advantage of the moderate weather, we began our annual exterior survey of our properties a bit earlier than normal. We walk around the exteriors of all the properties to set a prioritized project list for spring/summer 2015.

The neighborhoods we operate in are the near Southside, from just north of National to Cleveland, 1st to 36th.

While the primary focus is reviewing our properties, we also get a good sense of what is happening generally in the neighborhoods.

If this was a rock band I would have called this the “Fresh Mud and New Green Board Tour” It was absolutely surprising how many properties have been bulldozed and how many more properties are boarded and abandoned since doing the fall review in Sept/Oct of last year.

Anyone who tells you the real estate market on the near Southside has or is rebounding from the 2008 housing bubble hasn’t been out much. 😉 I wrote about what I was seeing in the past  and again here.  It is much worse now.

Many of the new board ups are nice looking properties. However as they accumulate city “reinspection fees” and fines they get to the point they cannot be sold and languish until they are stripped of all value, foreclosed upon by the city for taxes and ultimately razed.

But at least the city was able to tack some fees on it. Fees that they never collected because when the City becomes the owner the only thing left to do was bulldoze  them. (The one pictured in the link is now a mud lot).  Many of these are Zombie Houses

We are seeing sale prices in Milwaukee that make Detroit almost look like a healthy market.

The sales below are listed in the Journal’s Recent Deals sales listing

$11,000: 2356 W Becher St – MILWAUKEE (01/06/15)
$4,000: 2328 S 4th St – MILWAUKEE (01/15/15)
$1,000: 1962 S 16th St – MILWAUKEE (01/02/15)
$3,375: 4624 N 29th St – MILWAUKEE (01/13/15)
$2,850: 323 E Chambers St – MILWAUKEE (12/05/14)
$2,625: 2904 N 16th St – MILWAUKEE (11/24/14)
$37,000: 3410 S 1st PL – MILWAUKEE (01/16/15) — a pretty nice neighborhood.

Let’s assume the “broken windows” theory is correct.  It makes sense – order begets order, chaos and disarray breeds more chaos.  It makes sense logically, whether or not you can quantify the results I’ll leave to those much smarter than I.

However,  Milwaukee attempts to repurpose the theory as an argument for greater rental housing code enforcement and nuisance enforcement aimed primarily at rental housing.  In doing so our city has undermined the true message, which is: For the broken windows theory to produce results an entire neighborhood must be held to a standard.  The researchers use “neighborhood order” to describe the goal.

The article is primarily about police and neighbor intervention into petty crime creates order that reduces other petty crime and larger problems.  The words landlord, rent, code enforcement, building inspection do not appear anywhere in the article. Yet, to hear Milwaukee officials speak of the broken window theory, they frame it as a landlord’s responsibly.

A walk down 5th Place, the original target for the expansion of the RIP (rental inspection program), will show a far greater number of owner occupied housing in serious disrepair* than rental houses.  Milwaukee senior assessor Mary Hennen stated under oath a couple of years ago similarly that owner occupied housing in these neighborhoods are often in worse condition than rentals.

As an apparent precursor to the RIP proposal , on September 3rd and 4th,2014 DNS sent a squadron of five inspectors down Fifth Place for a block sweep.  Although the inspectors were able to see and write up some fairly minor problems on rental homes, amazingly when it came to the owner occupied houses on this street these five inspectors missed a dozen failed roofs, half a dozen failed porches, a couple of chimneys that looked about to fall and one house that is failing structurally.  Sixteen owner occupied properties in total that were as bad or worse than the seventeen rentals on the street that received orders. They also missed the two abandoned structures that should have been sent to raze, properties with actual broken windows.  My first two trips down the block had city lots strewn with trash.  I’ll guess that they were afraid someone would point that out in a RIP hearing.  They were clean on my third and forth trip.

Of the two properties that I saw blatant drug dealing coming from on three of my trips down the block this fall, one was owner occupied and the other owned by a guy who lives in the district on 15th and Cleveland. Far from the stereotypical absentee landlord.

If the RIP as well as other code initiatives are truly about stabilizing the neighborhoods, then plans must be in place to address the owner occupied and city owned properties that also drag down the neighborhood.

Tim Ballering

Tim@ApartmentsMilwaukee.com

*I consider serious disrepair as failed roofs, dangerous porches, crumbling chimneys and structural failure.

On Nov 30, 2014, on the ApartmentAssoc Yahoo Group  Bill Lauer wrote:

The previous article entitled “Broken Windows” really isn’t about broken windows.  It is about a theory that first showed up in the early 1980s [Link] and influences many of today’s social policies that impact our businesses every day.  Researchers in New York parked a car with no license plates on it, on a busy street. In a very short period of time, everything of value was stripped from it. Likewise, if a window in a building is broken and is left unrepaired, all the rest of the windows will soon be broken. They concluded that somehow the disrepair brought more disrepair.  Likewise, if crimes like jaywalking and panhandling are allowed, then more felonious crimes will follow.

The recent public hearings on the expansion of the Rental Inspection Program indicate several inner-city alders believe that because certain neighborhoods are run down, that crime is attracted to those neighborhoods.  But if memory serves me correctly, these same neighborhoods had huge crime problems before the neighborhoods were runned down.  Could it be that something else attracted the criminal element? Could it be true that because criminals do not maintain property very well that over time, neighborhoods end up in disrepair? They see the disrepair as the fault of greedy landlords, instead of seeing the landlords as the victims of the criminals.

One Alder literally said that the RIP was a tool to break up these “hot spots” of criminal activity. This strategy scatters criminal activity into surrounding neighborhoods rather than deal with the problem where it is. The mayor’s budget hires more building inspectors and reduces the number of armed police, which is contrary to the original research which says that police presence was needed to make positive change.

For the last 20 years, as “hot spots” break up and houses get bulldozed, and criminals need housing, they move into unsuspecting neighborhoods. That is why we are seeing crime increase (again) in Bay View, West Allis, Sherman Park, St, Joe’s area, just to name a few. The strategy employed in the RIP has not worked. But a new generation of politicians refuse to learn the lessons of the past and want to try this stuff again with a new name. They continue to make the buildings the problem rather than the people who live there.

The article is a long read but makes very interesting points that are useful in our discussions with our politicians.  It gives some insight into the crazy policies that are coming from city hall. But most importantly it points to the need for landlords to organize and become vocal about our experience working in Milwaukee.

 Bill Lauer