California Landlord Woes – Sounds Like Toronto

January 9th, 2018 · Tell Me What You Really Think Here · Personal House, Property Management

I completely stole this post about a California Landlord from Reddit. It just really goes to show that the problems we have in Toronto are not unique.

There’s another aspect that hasn’t been touched on, California’s landlord/tenant laws. I know a little about this because I’m a lawyer. I’m also an accountant and a landlord with a few properties in California and more in Arizona.

California makes it difficult to evict non-paying tenants. I know this is not a popular topic, but please hear me out. If you want people to invest, they need to have a return. I’m not talking about the profit. The income is necessary to make mortgage payments, property tax payments, insurance payments, utility payments, management payments, pay for maintenance and repairs, and much else.

Also keep in mind that anything left over is taxed, which often winds up being about 50% of the profit. Further, the IRS often wants quarterly payments from businesses. It’s slightly worse than that, though. The IRS estimates your income and expects quarterly payments of that estimate – which includes money that you may not have received. Think about that. Imagine the IRS expects you to make $50,000 in a year, but with all hours worked, it’s more like $40,000. But you still have to pay the IRS taxes equivalent to earning $50,000. The difference will be worked out later when you file, but the IRS wants the estimated tax NOW and you’re in deep shit if you don’t pay what the IRS thinks you should be paying. (The California Franchise Tax Board is a pain in the ass, too, but I won’t get into that.)

OK. Everything we listed are what we call fixed costs. That is, you have to pay them every month and these costs do not vary based on your income.

The rub is that rental income is variable. You will have vacancies. You will have unexpected maintenance costs. And then you have tenants who do not pay.

California makes it difficult to evict a tenant who doesn’t pay. The procedure can be dragged out over three or four months. That is three or four months of having to pay fixed costs (including tax on income the IRS thinks you’re getting when you are not) without any income. In contrast, I can boot someone in Arizona who doesn’t pay in 3-4 weeks. Yes, that includes full due process under the law.

So when you develop apartments, you have to figure in the costs for people who don’t pay. That’s the reality of the business. Some people won’t pay and you’re still going to have to pay your fixed costs. The IRS doesn’t give a rip if someone didn’t pay you, they still want their estimated taxes. The mortgage holder gives zero fucks, as well. And try not paying your property taxes and see what happens. You need to either have deep pockets or you have to raise rents to cover your fixed costs in case of nonpayment.

I’ve run the numbers on developing and renting in California. It ain’t pretty. I can’t make the numbers work for me. No, that doesn’t mean I can’t afford a fractional share of a jet and a Ferrari payment. It means not breaking even and probably losing money. As in I’d have to hold a cardboard sign at an offramp and hope to get enough change to buy ramen.

Simply put, it’s not worth it. I am not going to put time and money into something with no return. I don’t work for free. I drive a ten year old car and a treat for me is hitting a local Mexican place where I can get a $10 dinner. But I couldn’t even afford that by investing in LA.

Something has to change. It will have to be a radical change, because there’s too much wrong to have an easy solution. In the short term, people should leave. I did. I managed to buy a 1,500 square foot house with a pool for $106k down here. It’s an older house and I’ve torn it down to the studs, but it’s affordable. Something like it in LA would be at least $700k or $800k. As much as I love LA, the numbers no longer work.

This is very similar to the problems landlord in the GTA have and certainly a problem with creating additional housing stock. You might not care about losing money if you used to live in the house, or a speculating on capital increases. The point is as an income property it’s just not worthwhile as a business. And it doesn’t scale… and what that means is you can afford one or two money losing properties, but you can’t afford ten or twenty or 100. That’s what we need in the GTA, more affordable housing and we’re not going to get it, unless house prices get a lot more reasonable.

Happy Renting!

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