Some people have noticed a strange thing about housing in many low-income neighborhoods. Houses may be selling for virtually nothing, but rents for an even minimally decent house or apartment are still too expensive for a poor family to afford without spending 40 to 50 percent, or even more of their income in rent. Why is that?
Operating rental property is a business, and at the end of the day, if an owner can’t cover their costs and make what they consider a fair return on their investment, it simply doesn’t make sense to be a landlord.
Even a moderately responsible landlord needs to cover five basic costs: 1. operating costs, including maintenance, insurance, and any landlord-paid utilities, like sewer and water; 2. setting aside money for major repairs and replacements; 3. taxes; 4. an allowance for vacancies and rent non-payment; and 5. mortgage payments and/or return on equity investment. Landlords spend money to buy properties, and they reasonably expect to see some return on that money.
What does that amount to? These are typical costs for a small landlord in a lower-income neighborhood who buys a house for $40,000 and puts an additional $10,000 into it:
Eight percent may sound like a lot, but it really isn’t, given the uncertainties of being a landlord and the time that property management takes, as well as the uncertainty about whether the property will still be worth what it costs 5 or 10 years down the road.
There are properties in low-income neighborhoods that do rent for less. That can be for many different reasons. The landlord may have spent less to buy the property, or taxes are lower, or they are skimping on maintenance and reserves—or in extreme cases, just milking the property and perhaps not even paying property taxes, because they plan sooner or later just to walk away from the property.
But there are very few properties that rent for much less, and that is because every landlord has some floor, some minimum amount they need to make—based on their business model—to stay in business. The same rules govern affordable housing like tax credit projects, where there’s a capital subsidy but no operating subsidy. As a result, across the country most tenants in tax credit properties, strictly speaking, cannot afford their homes. Instead, the majority of Low Income Housing Tax Credit tenants fall into one of two categories: They spend over 30 percent of their income on rent OR they have a voucher that fills the gap.
Neither the market nor existing affordable housing programs will solve this problem. The only thing that will is the creation of an entitlement housing allowance to enable all very-low-income families to find basic, decent housing at a price they can afford.