Housing Provider Response
What actions should we take as rental housing providers to respond to the pending onslaught of taxes and regulations?
1.
Get your rents to market!
Rent control kills housing providers who think they are doing right by their tenants to keep rents low. Because buyers may be unable to realize market rents for years they are only willing to value existing buildings using in place rents. Property owners with below market rents are getting hammered on pricing when they go to sell. The time to be Mr. Nice Guy is over. You must serve notice properly and use the maximum increase allowance if your rents are low!
2.
Review and challenge your property’s tax assessor valuation.
Building values continue to get pushed down not just as a result of rent control but because of high supply, high interest rates, and operating cost increases outpacing rent increases. Review your property valuations and consider challenging the values, especially if you have below market rents.
3.
Understand tenant credit quality.
Tenant credit quality is more valuable now than ever. Renovated units in South Lake Union, Queen Anne, and Fremont attract high income residents who pay rents on time and will not qualify for the EDRA 80% AMI requirement. Buildings just outside of those areas, while still in good location, attract younger people just entering the work force or lower income residents. Lower income residents not only will qualify for the EDRA fees but are more susceptible to job loss in a recession. Tenants in Washington are provided with taxpayer funded attorneys to help them in an eviction lawsuit and it can take 9-12 months to evict a tenant. It is extremely risky to rent to people with low income and marginal credit. Don’t do it! You are better off waiting for a qualified tenant and paying some extra vacancy.
4.
Buy Right.
Buy in great locations that attract high quality tenants. Understand how to identify and avoid surprise deferred maintenance issues. Understand how to identify and avoid problem tenants! Only pay for in-place rents or have a clear plan to bring rents to market in compliance with the current and future legal landscape. Plan for higher property taxes.
5.
Consider diversifying to different markets.
I hate to say it because I love Seattle and think we are lucky to live in the most beautiful city in the mainland 48. However our voter base is totally hostile to housing providers and believes in price controls. Lowering the rent cap will always be popular. On one hand the increase in taxes and regulatory burden must result in a decrease in supply which will drive up rents on existing buildings. On the other hand rent caps make it difficult to keep up with rising expenses and are driving building valuations down even further. We are still investing in Seattle but are working to diversify into other markets. I’m not just talking about lower tax and lower regulation markets either. California is much richer than Washington. If I’m going to be taxed and regulated on the same level as California, why wouldn’t I move my money to California instead?
Are you anticipating any tax or regulatory changes not listed here? What actions are you taking to respond?