I’ve enjoyed living in Portland over the last 21 years, but a lot has changed over those two decades. When I first moved here, Portland felt like a quaint small city. Now, it’s more like a big busy city with all the problems (and benefits) that come along with it. The traffic is terrible, homelessness is a big problem, and the cost of living is rapidly increasing every year. The cost of rental housing in particular has been a huge concern to renters and landlords alike. Portland is still the most affordable big city on the West Coast, but it’s definitely not cheap to live here anymore.
Recently, it’s been very difficult for low income families because the cheaper areas are getting gentrified. Apartments that were once very cheap are being taken over by new owners who need to raise rent to recover their investments. New owners are also anxious to fix up and improve property conditions and they need more income to do that. I just read about 2 buildings that doubled the rent after being sold to new owners. Low income tenants can’t afford that kind of increase and they’ll probably have to move out of the city.
The rental housing crisis
It’s not just the renters that are feeling the squeeze because landlords are now facing more restrictive rental rules.
In 2016, landlords needed to give a 90 day notice to the tenants if we want to increase rent. This was fine with me and I raised rent about 12% at the end of last year. Our tenants are still paying below market average so I didn’t feel too bad about raising rent. Besides, we need to fix up a few more things at our small duplex. The previous owner deferred a lot of the maintenance and we have been updating the property over the last few years.
- 2014 – New roof and updated the electrical wiring.
- 2015 – New toilets, new sink, fixed drainage, new paint in one unit, and new hardwood floors.
- 2016 – Siding repair, new water heater, and minor landscaping.
- 2017 – External paint and ???.
One of the problems we have in Portland is that landlords can issue no-cause evictions and raise rent as much as they’d like. Tenant rights happens to be the current hot issue and the new mayor and a city commissioner ran on that platform last year. Now, we’re starting to get new restrictive laws and landlords are going to feel some pain, too.
On February 2nd, the Portland City Council passed a bill requiring landlords to pay a relocation fee to tenants when they evict them without cause or raise rent more than 10%. (Effective immediately!)
Here’s the actual flat fee schedule landlords would be required to pay under the ordinance:
- $2,900 for a studio or single room
- $3,300 for a one-bedroom unit
- $4,200 for a two-bedroom unit
- $4,500 for a three-bedroom unit or larger
WTF! Small landlords can’t afford that. I think the 10% increase cap is fair if you own the property for a few years and raised the rent to keep up with the market rate, but this is a big problem for new owners. The price of real estate is expensive here and it’s already hard to generate positive cash flow. If you can’t raise the rent to market rate, then it’s not going to be worth investing in a rental property. I wouldn’t want to fix up our duplex if I can’t raise the rent. The previous landlord deferred a lot of the maintenance and he didn’t raise the rent annually. Repair and maintenance cost a lot of money.
This is just the beginning of more restrictive rules. Some Democratic leaders are championing renter protections and they are pushing for a ban on no-cause evictions and rent control. I agree that renters need some protection, but I don’t like swinging to the other extreme either. Luckily, I have a very good relationship with our tenants and they are responsible renters. I haven’t had to deal with an eviction yet, but my good luck probably won’t last forever.
For clarification, I researched evictions a bit. Here are some reasons to issue a for-cause eviction.
- The tenant is not paying rent.
- The tenant violated the term of the lease agreement. This could be bringing in a pet, adding another tenant, or damaging the property.
I think that’s it for the for-cause eviction. Now let’s see some reasons for no-cause evictions.
- Tenants are bad neighbors – noisy, not taking out the trash, etc…
- Landlord wants to sell the property.
- Landlord wants to remodel the property.
- Landlord wants to move into the property.
- Landlord wants to rent the property to someone else.
- Landlord wants to raise the rent a lot…
Okay, the no-cause evictions favor the landlord quite a bit. They are the owner, though! They are the ones assuming the risks when the market goes down and dealing with problematic renters.
Our situation is pretty good at the moment because we have great tenants. They pay the rent on time and we work together to fix the inevitable maintenance problems that crop up. Currently, we have 3 rental units. Two of the units are a little bit below rental market price. One is actually much lower than market price because the tenant has been there for 10 years and the previous owner did not raise the rent for the first 7 years.
We are doing okay as a landlord, but I really don’t want more restrictive rental laws. We plan to move into our small duplex within the next few years and I’d hate to pay to move our tenants. Hopefully, we can work something out when the time comes. One of our tenants is planning to get married so I think they will move out at some point. This will give us an opportunity to move into our duplex. I think we’ll be satisfied with one unit for a few years, but eventually we’ll need both units for our family. My mom is staying with us about 9 months out of the year. She is sharing the room with our kid right now and that’s okay while he’s small. Once he’s older, he’ll want more personal space. Also, we’ll be able to minimize the tax if we turn the duplex into a primary residence.
If we get more restrictive laws like banning no-cause evictions and freezing/capping rent, then we might have to get out of the rental business entirely. The property price in Portland has risen quite a bit since the housing crash. Now, local real estate makes up about 25% of our net worth and that seems like a bit too much. The market can’t go up forever, right? It might be time to take some profit and diversify. Real estate has been a great investment for us, though. I really don’t want to put a lump sum in the stock market right now because the market seems too high. How can we get out of the local market and still invest in real estate?
- Invest out of state. I can figure out how to invest in real estate remotely. The price in Portland is too high and it’s hard to generate positive cash flow. I read that other locations offer much better cash flow, but not as much appreciation.
- Invest in REIT. This is probably the easiest way to invest in real estate. We already have the US and international Vanguard REIT index funds in our portfolio and it is a stress free way to diversify.
- Real estate crowdfunding. I signed up with RealtyShares earlier this year and invested $8,000. The projected ROI for the commercial property in Arizona is 17% annually over 3 years. Frankly, that kind of ROI is amazing and we’ll have to wait and see if they can deliver.
Landlords in rent control cities
So I’m a bit of a conundrum right now. I don’t want to raise the rent too much, but we may get a 2-3% rent increase cap at some point. Should I just increase the rent 10% every year to head that off? More restrictive laws will just put small landlords in a bind. Are you a landlord in a rent control city? How do you deal with rent control? I assume you just don’t fix anything until a unit turnover. They really should exempt landlords with 4 units or fewer.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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