Rents Will Only Go So Low, No Matter How Much We Build

Market rate apartment
Photo by Knight725, via flickr, CC BY-NC 2.0

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:

Landlord costs

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.

Alan Mallach
Alan Mallach, senior fellow at the Center for Community Progress and the National Housing Institute, is the author of many works on housing and planning, including Bringing Buildings Back, A Decent Home, and Inclusionary Housing in International Perspective. He served as director of housing and economic development for Trenton, New Jersey, from 1990 to 1999, and teaches in the City and Regional Planning program at Pratt Institute.

9 COMMENTS

  1. There is another model that we are initiating in Georgetown, TX. We are building the property with subsidies and keeping operating expenses low by owning and operating it as a non-profit. We avoid property taxes and the need to make a profit on our investment. With our below market rents, we also have a 2% average vacancy.

    • So with your model you “avoid property taxes.” Can we try a thought experiment here? Let’s say a foundation like Gates gives you a grant to buy up all the private market housing units in Georgetown which rent for less than $1,000. You then make these a part of your housing portfolio and operate them successfully, likely being able to reduce rents because you don’t have a real estate tax bill. But how does your city government then cover the cost of police, fire, rescue squad, etc. services which your residents generate? As the comment by Brandon Kovnat below points out, your tenants – whose reduced rent no longer includes an amount for property taxes – are sending their kids to school for free.

  2. It is not merely a housing problem it is an income problem. for low-income areas and low-income households, the greatest improvement in housing will come from improvements to income. Weh ave people who work 40+ hrs a week multiple jobs long commutes and they still can’t afford rent. The policy solutions are focused on how the government can pay for housing. why not make employers ay a higher wage?

  3. The residents still use city services. Kids still need schools. In essence, the government is still subsidizing the residents.

  4. This article explains why even though I am much more pro-market and pro-YIMBY than most readers and commenters here, I still favor public housing.

  5. I wonder how a housing entitlement program would work? What would it look like? If it is providing direct payment to the recipient to reimburse for their housing it may be something that can address the affordability problem that exists in most markets today. The downside to direct payments is insuring they go to housing and not something else. This would do nothing to help address the stigma that exists within the landlord community to any sort of housing assistance.

  6. Allan, from your ears to our council representatives who basically construct the terms of the Land Banks RFPs. Subsidies should almost always be a part of RFPs in distressed and/or low income neighborhoods. Otherwise, nothing will get built and opportunities for a development project that includes “affordable” housing will not happen.

  7. Meanwhile, the bumper-sticker, faux-gressive Democratic leaders in Oregon have adopted an idiotic statute that does away with single-family zoning in a way that will increase costs and cause displacement in poorer neighborhoods. A great gift to outside, rapacious “commodity” real estate investors.

    Jobs and progressive taxation and fees that can subsidize housing for the most in need.

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