Apr 29

What is missing from the MN tenant advocates’ demands below is the cost of operating rental housing includes far more than mortgage expenses.  There are taxes, which are mention, but not asked to be forgiven by the tenant groups, insurance, maintenance, management costs, utilities

I’m sure most of the proponents of this are still expecting to still be able to take a warm shower, which is not possible it the owner can’t pay water and utilities as well as other “luxuries” like having the trash emptied weekly, the sidewalks shoveled, the lawns mowed, to have someone answer their calls, and have someone repair what breaks, etc.

In many cases the mortgage cost is less than half of the operating costs.

And why are property taxes the sacred cow? If governments are supporting the nonpayment of rent, then they should also support not receiving property tax and other payments such as sewer, water, municipal electricity, garbage pick up fees, etc.  Tenants and municipalities alike should not expect properties to be maintained or improved if they sanction rent abatement.

The world is changing.  If we are not at the forefront of these changes, many folks in our industry will be bankrupted.  

While today’s tenants benefit from such actions in the short term, they and future tenants will pay a large price in the unavailability of housing and the higher costs of what is available as seen in the years post-2008.


Subject: Letter to residential landlord

Some tenants organizations in Minnesota prepared the following letter for their members to send to their landlords.

I think you might enjoy reading it. Dale
Dale A. Whitman Professor of Law Emeritus, University of Missouri

To Whom It May Concern:

We hope you are all staying healthy during this time. We are reaching out regarding our rent for the upcoming months. A State of Emergency has been declared in the United States of America and the State of Minnesota due to the COVID-19 global pandemic. As a household, we have lost income due to forced work closure, reduced hours, and insufficient or unavailable unemployment insurance.

We are emailing you to inform you that though we had been able to pay rent on April 1st due to careful planning, we will be unable to pay rent on May 1st. Until we are able to leave our home and return to our jobs, which is impossible under the stay at home order, we are all holding on by the skin of our teeth. In addition, we are unable to accrue the May rent as a debt. Due to our inability to work, we are all facing limited resources and increased financial instability for the time being. We love this house, and we’ve enjoyed being your tenants. We would like to continue living here long term.

We understand that our ability to pay rent will affect your ability to cover your expenses as well; likely, our rent at least covers the mortgage payment and taxes on this house. Having a stable home is a critical part of the healthcare infrastructure that protects us all from illness. It is our collective responsibility to stop the spread of COVID-19 during this time of emergency, in order to keep ourselves and our communities safe.

We believe that mortgage and rent moratoriums at the state or national level are real possibilities at this moment, and we hope that our government steps in to support you and us, but again: we cannot take on this rent as debt. We need a rent freeze, and we support you in seeking a freeze on your mortgage. Some people in our networks are already receiving this support from their landlords.

The social and economic effects of the global pandemic are predicted to last over a year. We encourage you to join us in contacting elected officials to call for an immediate Universal Suspension of Mortgage and Rent Payments.

Representative Ilhan Omar (612) xxx-xxxx
Governor Tim Walz (651) xxx-xxxx
Senator Tina Smith (651) xxx-xxxx
Senator Amy Klobuchar (202) xxx-xxxx

This is a very stressful and uncertain time, and we are all trying to do our best to stay healthy and afloat. Thank you for your support and understanding,

Tenant names removed

Apr 19

There are a lot of articles predicting that many companies will continue the work from home experiment long after Corona is under control. Here’s three of the more interesting ones:

I was predicting in 2017-2019 BC (Before Corona) that commercial space, other than warehousing, manufacturing or social engagement, was a risky investment. Corona simply accelerated the move to remote business.  My daughter has worked from home for AT&T for probably close to ten years,

If this was s 70s pandemic remote work would not have occurred, nor the shut down. We did not have a capacity for it. And we would be talking about it on a Party line Yea, it was a real thing when I was a kid. 

I was having a conversation with a friend about this. He asked “Are there any other sectors that will (May) win you’re thinking about?”

My reply (edited to make it more readable)

There is only one in R.E.  Residential.  You can’t sleep in a virtual bed, in a virtual house.  You can’t work from home, without a home.  While many business properties can be replaced with virtual assets, a house cannot.

The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.

Warren Bennis ( ~ 1989)

Boil it down to the essential.  To live you need air, water, food, shelter, clothing, companionship and … the internet. 😉  

Provide any of those and you will both survive and be very well regulated by the government.  And of course entertainment.  Without entertainment and engagement, why live?   Entertainment is music, travel, hiking, bars, boats, reading, TV… and a huge amount of other things,  People often would rather spend on entertaining themselves than the “necessities” making that more of a necessity than the necessities. 

Air is freely available.  If it isn’t, nothing else matters. Water is a municipal service, a well, or a river.  Food can be delivered from unmanned warehouses via internet orders.  Today I get my food from InstaCart and have not been inside a store since 3/18  Clothing can be purchased online. Companionship can be provided in Zoom meetings, online chats, video church, FaceTime, etc. 

This pretty much shelter and entertainment. Entertainment has changed as people are hesitant to go to the movies, restaurants, and not so much bars and casinos.  We watched the new release of Trolls this past weekend on TV for $20.  Going to a movie theater would have cost twice as much, used twice as much time, and exposed us to an infinite amount of unknown germs. Remember back when you were young, unattached and looking for a mate?  That will exist for as long as humans do.   It will be the driving force behind social gatherings, bars etc., well into the years A.D. (After Disease)

Shelter though is not replaceable. It may change form, and ownership models, but it remains a basic need.

People want their own space.  Even at home, I’m sure you want your own space, be that a desk, a lazy boy recliner or the left side of the couch. This is regardless of how much you like/love your spouse, offspring and or roommates.  We are by nature both communal and territorial. 

So if I vote for one, it is shelter, followed closely by entertainment and social venues But entertainment and similar venues are risky as they will be the first to be closed when the virus strikes.

So those of us in residential are lucky. But we need to survive the next six to 24 months.*

*Modeling study suggests 18 months of COVID-19 social distancing, much disruption.

Opportunities will abound for those that see opportunities. Failure will abound for those who see only failure. 

Apr 09

As an industry, rental housing providers must be present to PREVENT harmful legislation, because it is much more difficult to be made whole after the fact.

If the government does something that causes a large number of owners to fail, those owners will not have financial resources to fight back. They will be merely trying to feed their families.

This is not just bad for the owners that lost, but bad for tenants as well. In the years after the 2008 crash, there was a significant consolidation of rental ownership in Milwaukee. The city went from around 36,000 individual owners down to ~23,000 at a time that homeownership plummeted. Today Milwaukee has 41.8% owner occupancy. Nationwide that number is 65.1%.

Consolidation and owners doing what they could to survive the ’08 crisis has driven rents up significantly.

Those owners that come out of 2020 intact will likely be stronger than today. But not necessarily as municipalities will suffer more financially this go-round than in 08.

Owners that don’t fare well in the next few months will continuously be looking over their shoulders, hoping Jeff Bezos’ latest robot doesn’t take their job at the Amazon warehouse.

Or our government can keep printing trillions of dollars of new money and when end up like Venezuela where a quart of milk costs 4,200 bolivares, 11% of the monthly minimum wage. In 1990, a VEN bolivar was nearly equal to USD.

Hyperinflation, while bad for working folks, is good for those who enter it with assets and debt. Your debt remains in old dollars that you are paying off with new, cheaper dollars. Your assets acquired before the inflationary cycle will rise in value.

Look at what happened in the US during the late seventies and early eighties with annual inflation and interest rates on standard bank loans hit 18% in 1980. I was buying everything I could get my hands on. It was a risky, but good play when interest rates corrected and I could refinance at low rates like 12% APR. Yes, you can make money on rentals financed 90% at 18% APR. But you do have to pay almost nothing.

Look at average new home prices Dec 1977, when I started in real estate, $52,700 to Dec 1987 at $111,800.

Then look at historic interest rates. They were “cheap” in 1975 at 8.8% and cheap again in 1986 at 9.3% with a belly of 18.6% early 1981.

Yes, I do laugh when I hear investors fretting over half percent fluctuations in rates.

I’ll end this overly long post with there will be a huge risk to some, but also huge opportunities for others in this economy that we’ve never seen before and have no idea how it will turn out.

Feb 20

An amazing story of the lead up to the housing bubble

http://www.workingre.com/interview-appraiser-who-brought-down-countrywide/

Among the many firms and individuals who acted irresponsibly, and maybe criminally, perhaps none did so with such flair and recklessness as Countrywide Financial.  Before its rescue-sale to Bank of America (BOA), Countrywide was the largest mortgage lender in the United States.

Feb 04


For many reasons I’ve felt that much of commercial real estate is a poor investment. From Amazon keeping people out of stores, to increasing work from home arrangements. My daughter does an important job for AT&T. She has worked from her living room for many years, since they closed their main Brookfield office.

Now there is one more reason for companies to abandon commercial space – pandemics .

“It’s a good opportunity for us to test working from home at scale,” said Alvin Foo, managing director of Reprise Digital, a Shanghai ad agency with 400 people that’s part of Interpublic Group. “Obviously, not easy for a creative ad agency that brainstorms a lot in person.” It’s going to mean a lot of video chats and phone calls, he said.

Bloomberg 2-2-2020

Dec 14

The is a great, worth the time to read, article on landlord regulation over at BiggerPockets.

Dec 04

Over on the ApartmentAssoc@groups.io email discussion list Mike writes:

Fortunately the facts are not as laid out in the post.  The article makes this clear.   “Property taxes” would not go up 64-128% under the proposals being considered.  The MPS portion of the property tax bill would go up by those percentages, not the whole bill.  The increases are still substantial – I estimate 25-50% of the whole bill.  If we landlords want to be involved in the political process we must arm ourselves with facts to avoid embarrasing ourselves and damaging our cause. 

Mike is correct, the percent of increase is the school portion. The original Journal article, which I based my comments on, stated:

“For a home assessed at $300,000, that would push property tax bills from $2,874 to $4,716 on the low end and $6,723 on the high end — increases of 64% and 134% respectively.”

Milwaukee Journal article as it appeared on 11/19/19

The Journal article has since been rewritten to “school property tax”

This represents an annual tax increase of $921 to $1925 on an average Milwaukee home.

I stand by my original comments of the dire consequences this will cause to our market.

Nov 30

In 2006

Everyone: “The market is high, aren’t you going to sell and make a killing?

Me: “Nope, don’t know where I would put the money if I did sell.

In 2009

Everyone: “Wow! you must have lost a lot of money due to the real estate crash!

Me: “Nope, I did not sell, I’m not selling, occupancy rates are the highest I’ve seen and rents are going up.

If you are in this for appreciation or flipping, the fluctuations in real estate values directly impact you. If you are a buy and hold owner, then the market does not impact you as much.

My buddies who sold out in 06, 07 and thought they made a killing, lost a lot when the stock market corrected, plus paid taxes on the sales. Those of us that stayed in the rental game did okay.

Property values and rental returns do not move in unison.

In forty years I’ve seen the worst housing markets being the best rental markets, as long as you bought right and financed right. In 05 and 06, when anyone who could fog a mirror was given a mortgage, we saw double digit vacancy rates.

So strong housing markets can actually be bad for the rental market.

Nov 13

There is talk of national rent control, with maximum rent increases of 3%, as well as only just cause evictions..

If your rents are below market, they could remain so forever. When it comes time to sell and you are getting $600 a month and the neighbor $800, the value of your property will be gravely diminished.

This punishes owners who allow long term tenants to remain below market. Eventually this will punish those tenants as well.

In some markets perhaps owners are evicting to gentrify, but in our market when an owner uses a 28 day no cause notice it generally means there is a behavioral problem. This will result in bad tenants staying and annoying their neighbors longer as well as more contentious relationships between owners and people that are problematic.

https://www.bisnow.com/national/news/multifamily/whats-in-aocs-national-rent-control-proposal-101041

“The economists are right, and the populists are wrong,” the Washington Post wrote in an editorial. “Rent-control laws can be good for some privileged beneficiaries, who are often not the people who really need help. But they are bad for many others.”

Specifically, the Place to Prosper Act calls for a cap of 3% or the annual U.S.. Consumer Price Index increase, whichever is greater, for rents in housing markets nationwide.

Jan 20
Note, this began as a discussion between myself and another well known Milwaukee investor.
 
I have been an investor in Milwaukee real estate since the seventies. I have seen the market roller coaster many times. My belief for the coming months is:
 
In the next 12-18 months, we will get to near 2008 levels of correction both the mid-upper end of the market and the lower end, with the middle being less affected. Trump could make it worse, or Trump could make it better. It is not in Trump’s nature to not be involved an issue of this potential magnitude.
 
Mid-upper, 350k-1.5M range depending on the location, valued home sales will suffer as interest rates rise and the limits on tax and interest deductibility make them less affordable for those who are currently, marginally able to have such a home. In some markets, such as south FL and NYC, we’ve already seen discounting in the upper segment. It will get worse. Not many people, including politicians, feel sorry for the overextended Yuppie with the leased BMW in the drive of his McMansion that is filled with furniture bought on credit while working at a job he got with his degree that came with a significant college loan debt.
 
Low value (sub 100k) homes will take the hit as wages have remained static and interest are rising. We have been returning to “soft” underwriting. This is a segment where homeowners are more likely to quit when it gets hard. Those owners will fail. Unfortunately, no one in power truly cares when a poor family loses their home. The Dems say they care, but many secretly rejoice as each failure allows them to increase their political base by verbalizing outrage and empty promises of help. The Reps loyalty is more to the bankers than the homeowners. Rand Paul cannot change the world by himself.
 
Learning from the 2008 debacle, the government will prevent the full-on implosion of the middle. Too much economic and political damage if the voting class loses their homes again. But I still expect a 10-20% discount when owners must sell.
 
Throughout my career, when owner-occupied housing has suffered, rents and/or occupancy rise. Beginning in 2008 and continuing to this day, we’ve seen the most robust rental market of my career. In 2005-2007 we had our worst vacancy rates as every good tenant was suddenly, and temporarily, a homeowner.
 
When the economy is terrible opportunities abound.
 
In Carter’s 1980, prime rate was 21% at one point. Nobody was buying, well nobody but me and a few of others. I bought a hundred fifty units in the ten years between 79 and 89 when owner-occupied mortgage rates were consistently over 10% and rental mortgages near impossible to obtain.
 
In 79-89 we bought properties that worked at the 10-12% interest we were paying. I structured my buys so that I survived and made enough to support my family. When rates fell, values increased. Interest rate chart.
 
The longer the downturn goes on, the higher number of tired landlords, or their estates, will be seriously motivated to sell. They will create ways to make to make sales happen. Much of my purchases in 79-89 were owner financed because banks were not even enthusiastic about lending to owner-occupants at the time.
 
The combination of Amazon and remote working arrangements killed most commercial property value. My daughter does something important for AT&T corporate. She has worked from her living room for the past five years, and AT&T sold her former office.
 
The Chinese are selling off their US holdings.  WSJ: Chinese Dumped $1 Billion of U.S. Real Estate in Third Quarter, Extending Recent Retreat (Dec. 4, 2018)
 
Millennials don’t buy homes. They live in mom’s basement, or they rent. 
 
My three-year view:
 
I have good feelings about residential rentals across most segments. This will only hold true if:
• You have fixed rate financing; or
• You structured your purchases so that they still cash flow at 12% interest.
 
I think flipping will be a flipping foolish thing to do for the foreseeable future. Even if you are buying well today, you are buying higher on the price curve than you will be selling at three to six months from now.
 
Keep your powder dry for the next six to twelve months, i.e., hoard cash. Opportunities will abound.
 
Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful.”
 
Jimmy Buffet: “If life gives you limes, make margaritas.”
 
Further reading: (A lot of WSJ pay-walled articles, but they do some of the best research.)
 
 
 
 
 
 
preload preload preload