High Credit Borrowers Get Punished and New Landlord Laws Put Tenants First

Dave:
What’s up everyone? Welcome to the 100th episode of On the Market. James Jamil, Kathy, Henry, thank you all so much for being here, and congratulations on yet another milestone. I feel like we’ve had a few of these recently.

Kathy:
Woo-hoo.

Jamil:
It feels pretty good.

Dave:
Yeah.

Henry:
I’m super excited. It went so fast.

James:
I feel like we’re aging quickly. We’re already at 100 episodes.

Dave:
Yeah, it really has gone fast and it’s incredible also that James has had technical issues on 98 of those episodes, and is calling in from an iPhone for this. 100 tries, still hasn’t gotten us there for our technical setup somehow.

James:
Practice does not make perfect.

Dave:
How many laptops have you gone through in the process of recording this show, and microphones?

James:
Legitimately, I’m on my fourth one. I’m just waiting for her to get put in. I’m a technology killer.

Jamil:
I think the problem is that microphones don’t work well in yachts and airplanes James, that’s why.

Dave:
Yeah, it’s amazing when I don’t leave my office that mine just works all the time. It’s quite easy.

Kathy:
Maybe the car that you live in James, maybe you didn’t just put the studio in there.

James:
You know, at one point I did have … Mark Wahlberg gave me the inspiration to get me a mobile office at one point. I was watching his documentary and I saw that he had Suburban converted into an office, and I bought one the week later because I was so … And so I had one of those, I should get another one of those. We would roll around in traffic and-

Jamil:
The Sprinter dude, get a Sprinter. I don’t have one, but a friend of mine does and they’re phenomenal, especially traveling around with the fam too. If you can kind of modify it a little bit and put stuff away and hang at Audi again, do it.

Dave:
Maybe it’ll have better technology than James’s office somehow. All right, so we’re going to do a fun little thing today in honor of our 100th episode. We are first going to go around and everyone, panelists, including myself, is going to share their favorite episode of On the Market, and we would also really appreciate and love if you shared your favorite episode of On the Market with the people you think would be interested in this. We greatly appreciate you and you all have been instrumental in helping us reach 100 episodes, and we would love if you shared it out on social media with your friends. And in exchange we will pick one lucky winner who shares out an episode, and they will get a free coaching call with any panelist of their choice. All you got to do is share on social media, take a screenshot of that share, and then DM the BiggerPockets Instagram account and you’ll be entered to win a free coaching call with either Kathy, Henry, Jamil, James, or even myself. Everyone’s like, “Oh, that’s too bad.”
All right. Well, Jamil, you seem very excited to share your favorite episode, so what was it?

Jamil:
Well, interestingly enough, my favorite episode is the one I got to host because it was fun. It was cool to be in the driver’s seat and to see everything that goes behind managing who’s going to talk and what it’s all about. But really it was because I did win the debate at BPCON 2022, and so I deserved it.

Henry:
I mean I think your definition of win is debatable, but I’ll allow it.

Jamil:
The audience spoke Henry.

Dave:
I think he just said he won loud enough and we all just went with it.

Kathy:
I think that’s how I remember it.

Dave:
That was good enough.

Jamil:
Okay. Whatever.

Dave:
All right. Henry, what about you? What’s your favorite episode been?

Henry:
My favorite episode was episode number 62, it was called Home Buyers are Getting Crushed: Our Landlords the Cause? I loved this episode because we really had an honest conversation about landlords and owning rentals and buying real estate and the impact that’s having on the common everyday person who wants to own real estate. And I think if you haven’t listened to it, you should because I think you’d be surprised at some of the points of view that we all take. But it was more just a great discussion about being upfront and real about how investors do add value and then being upfront and real about what we think it would take to solve some of the economic housing issues that our country’s facing.

Dave:
That was an excellent episode and one of the cooler episodes we’ve done, and a little bit different, just talking more about some of the ethics around real estate investing. So yeah, definitely love that one. James, what about you?

James:
Well, this is an easy one for me because I am a die hard NFL fan and a Seahawk fan.

Dave:
Oh, of course.

James:
But not only was it because we were interviewing NFL players, but mine is episode 76, Why NFL Players are Buying Real Estate During the Recession versus Lifetime Income After the NFL. We got to interview Cliff Avril and Devon Kennard, and it wasn’t just because we were interviewing NFL players, it’s because they were doing the thing on a daily basis. They are doing the same steps that every investors are doing. They were super disciplined and they were so articulate with what we were talking about. It was just by far my favorite episode. The hour went on like that. I think we should bring in Michael Jordan next though. I’m going for Jordan.

Dave:
Do you have a connection?

James:
Sure.

Henry:
James just wants to talk to somebody on his financial level.

Dave:
Yeah, he’s bored with us. I mean if you could get Michael Jordan, we will absolutely have him on the show and talk about whatever you and him want to talk about.

James:
I will do my best to get Michael. I’m pretty sure we got a shot at the jump man.

Dave:
That would be awesome. All right Kathy, what about you?

Kathy:
Oh, there were so many but I really liked show number 92, that’s one of the deal shows, and it was just so interesting. It was live coaching with people doing real deals and getting different input from all of us and we all had such different ideas and input because we come from different perspectives, so I loved it. I learned so much from the deal shows.

Dave:
Awesome. Yeah, those were very fun. If you guys didn’t listen to those, we did two of them, one with residential properties and one with commercial properties, just a couple of weeks ago, so you should definitely go check those out if you haven’t already.
My favorite episode, I had a really hard time choosing for this one, but I think it was recently we had Mark Zandi on to talk about Silicon Valley Bank and it was a great episode, but it was also just sort of surreal for me because if you’re a nerd and economist, Mark Zandi is pretty famous and I was a little bit starstruck and I was like how the hell did I get here? A year ago, I had never hosted a podcast before and now we’re talking to people who I’ve been reading and following for years and it really just is sort of a privilege to talk to all of you on a regular basis and the incredible guests that we get on this show. So thank you all so much for being a part of this show. Thank you all for listening and we again encourage anyone listening to the episode right now to share their favorite episode of On the Market. Take a screenshot, send a DM to the BiggerPockets Instagram account and we will pick a winner to get a free coaching call.
So we do have an actual episode for you today we’ve we’ve already recorded, it’s a lot of fun. And we are going to be talking about some really interesting headlines impacting the world of real estate investing, some sort of controversial, I don’t know if you’d say controversial, but there’s a very good debate about these topics and I think you’re going to learn a lot about some of the really important things that are impacting investors around the country.

Henry:
So Dave, are you saying we’re going to keep it 100 for the 100th episode?

James:
Nice.

Dave:
Yes, exactly. Well done Henry. All right, well we’ve got an episode title now.
Our first headline today is about recent changes that came to the loan level pricing adjustments, also known as the LLPAs, for Fannie Mae and Freddie Mac. And before I ask you all questions about what’s going on here, I just kind of want to explain a little bit about what’s going on here. Every year, Fannie Mae and Freddie Mac, which are basically managed by a government-backed entity, come out with new fee schedules and it varies based on how much money you’re taking out, the LTV, it varies based on the credit score, it varies whether you’re doing a cash-out refinance versus a purchase or a second home. There’s basically all these different fees going on.
And something happened that was pretty shocking, which is that fees for low credit score borrowers were decreased while fees for higher credit score borrowers went up, and this is very, very unusual and I want to talk about this in just a second. But there has been some commentary that now the fees for low credit score buyers are actually lower, but that’s not actually true. What happened is the changes were relatively new where the fees went up higher for high credit score borrowers and they went down for low credit score borrowers. But just to be clear, your total fees are still lower if you are a high credit score borrower. Did I that make sense to everyone?

Kathy:
Kind of.

Dave:
Okay. So anyway, Kathy, now I’m going to pick on you. What do you think of what’s going on here?

Kathy:
Well, really the bigger issue is how do you get more renters to become homeowners? And I’m all for however that can happen. I’m a big proponent of that. I think there’s other ways to do it that doesn’t maybe hurt the person who spent their whole life really working on their FICO score, paying their bills on time, and so forth. I would love personally to see something where lower income people and renters could get the education that they need to really understand the value of home ownership and how to take care of a home. I personally think a no money down program would be really good for high FICO score, maybe they’re low income but they pay their bills. So there’s other ways to address it. I don’t know if this is my favorite, but if it results in more low income people and renters owning their home, then I suppose that’s a great thing. That’s a great thing as long as they can hold it, as long as they can hold on.

Jamil:
Dave, I think for me the piece that’s troublesome is that personal accountability. This is attached to credit score not income, so if we’re doing it by credit score then we should just rename this, “Let’s lose personal accountability,” because that’s what this is really talking about. If your credit score is low, it’s because you’re not personally accountable to the way that you’re managing your credit. If your credit is good, you’re managing your financial situation. And people with low income can have great credit because I did. So when I had a low income, I had a great credit score, it had nothing to do with how much money I made. So I think we got to really take a look at the metric here and why the credit score and income are not the same. But credit is your behavior, your income is how much money you make. That’s maybe education level, but your behavior, that has to be accountability.

Henry:
Yeah, I mean I hear you Jamil. When you talk directly about credit, sure, it is related to personal accountability. What I don’t like about this is kind of the way that it’s being portrayed or put out there because what it sounds like is what we’re saying is we want to penalize people who have made good decisions to help people who may have made poor financial decisions, but that’s not how I view this. What I think they’re trying to do is to give people who may be in a more difficult financial situation the opportunity to save some money or the opportunity to get into home ownership. Yes, they’re tying it to credit score, but a lot of the times when policies or things like this come out, we hear like, “Yeah, people made bad decisions, they shouldn’t get a benefit,” but we don’t always take into account the social or economic factors that might have put them in a place where they had to make financial decisions that may have put food on the table but may not have been great for their credit.
That’s a privilege that we as people who earn a great income don’t have to think about. And so I’m all for trying to provide a better path to home ownership for people, I think the way it’s being presented as, “We want to do this for you but we are going to pay for it out of the pockets of people who have made better financial decisions,” probably isn’t the best way to portray policy like this. But as a whole, I understand it and it doesn’t really bother me that much.

James:
Yeah, and that’s the issue is it kind of incentivizes mediocrity, and that’s I think the issue right now in general. Before, I remember when I was 22 years old and I bought my first property, it was like you had to have good credit and it was something you were motivated to work on as a person and an individual. It was like, “How do I get better credit? How do I get enough?” Well, back then there was a wire loan, so you didn’t really need income, you just need a good credit.
But I think the issue I have with this is just incentivizes mediocrity. People just are not going to want to have to push harder. Owning a home is a privilege. You have to work hard, everybody can do it, and I feel like how they structured this and how they rolled this out was just in the wrong way. There was a lot of other things that could have easily been implemented to really help the lower … Because there’s kind of two messages in here. It’s like either low income or bad credit. Well, those aren’t one in the same. Some people might have great credit and they’re responsible and they take care of things, but they just don’t make the money, so let’s incentivize them with maybe assistant down paying programs, maybe ways to buy down the rates. That will help move the needle in getting renters and homeowners like Kathy said, but just rewarding people that don’t make payments is just a disaster and I feel like it’s going into this nasty cycle that will never end.

Dave:
I think there’s also a thing though, just before we move on, that a lot of, at least when I was reading about this proponent of this, say that it’s not that necessarily people have bad credit, it’s that they have no credit too. It’s really difficult for people with low income to establish credit in the first place because you need money to take out a loan or qualify for that first loan. And something that I was reading about that they’ve done to help improve that I think makes a lot of sense is adding on-time rental payments to credit scores, which makes total sense to me. If you pay your rent on time, that should count towards your credit and then hopefully help you build towards your future home ownership.

Kathy:
Absolutely. That’s what’s been painful to see some people for years paying high rent where their mortgage payment could have been much less. I mean that’s why we own rental properties, right, because usually there’s cash flow. And I would love to see more homeowners getting into that. So I couldn’t agree more that if you pay your rent, that should absolutely count towards your credit.

Dave:
For our second headline, I think James, Kathy, and Jamil might have something to say here, we have a headline that reads, “Celebrities are fleeing LA due to a mansion tax,” and I’m picking on all of you because you live in California. But what this is saying is that the LA City Council passed a new law that says that any home that sells between $5 to $10 million, there is an additional new 4% tax, and any home that sells above $10 million has to pay 5.5% as a new “mansion tax”. James, how much is it going to cost when you sell your house?

James:
Well, that’s why I remain a renter in California.

Dave:
Of course you are.

James:
I believe in owning real estate in Washington state. But I think what’s happening is as you look at all these … There’s a lot of west coast cities or a lot of these metro cities, they’re trying to figure out how to get more affordable housing into the market, and that is taxing the wealthy. And I think this is something that’s going to be a big deal for six months and then it’s just going to kind of disappear. We saw the same thing happen in Washington state where when we sell a property, we have an excise tax or a transfer tax, and it used to be 1.78% every time you would sell a property, and so we pay a ton in buying and selling in taxes every year. And then what they did is they switched it to a tier to where if your property was say was below 250,000, your actually tax went down to 1%, and then as you went above higher and higher, it went all the way up to I think 3.1% when you went to sell. I think it was above $3 to $4 million and it was a huge deal for about four to five months, and then it just becomes the new normal.
It’s because it’s just a cost of doing business in those kinds of deals. Now for me as an investor in the luxury market, if I’m looking at doing high-end flips, that’s going to have some impact. When you’re losing 4 to 5% off your bottom line, that is a huge deal, which could be a lot of the profit in that deal in general. So people are going to have to re-look at deals, build in these costs. But at the end of the day, I don’t really have a problem with it. It’s just each city, they can name what they want to do. And I’m a capitalist, I believe in market growth, but we’ve seen these markets grow substantially in the last two years, and as long as they can take this tax revenue and actually put it somewhere good, I have no problems with it.
Now, if they burn it, like sometimes tends to happen, that’s going to be not good for the market in general. But I do think there’s going to be impacts on people doing high-end flips. I think that there could be some impacts on people selling these properties. But at the end of the day, if you have $10, $20 million houses, you’re not really worried about eating the tax. You’ve already paid so much in taxes, you’re just going to sell that same property. I don’t think it’s going to have that much actual impact in the market. I think just California’s policies in general are making people with money leave, not the mansion tax.

Jamil:
Yeah, I think James made a ton of great points there, and I’m actually for it. I think that really if you look at the situation in California right now, especially with the homeless situation there, if they take the money and they do something productive with it, I believe that there’s a really good way that they could take this money and help a lot of people that are suffering in Los Angeles. It’s hard. It’s hard to live in Los Angeles. It really is. And so as long as, like James said, you’re using that money towards the right things, I think that it’s a great thing. Now the other point to that though is $4 million isn’t a mansion in Los Angeles. That’s a thing. It’s not. Guys, look it up. It’s not a mansion. It’s like 2,400 square feet, but it’s nice. So they got to get real about what’s a mansion in LA versus not, because it’s like that’s pretty dang middle class, I don’t know, upper middle class, sorry.

Henry:
Jamil, I’m 100% with you. That was my exact thought is because the way it’s worded makes it sound like it impacts only the elite. But in California, that’s just a regular person half the time. And everybody, unless you’re super wealthy, this economic conditions have been impacting you financially on some level. So yeah, this is one I’m not a big fan of. I don’t live in California anymore, and when I did, I didn’t pay the bills.

Dave:
It’s interesting to think about that, that there could in theory be people who have a fairly regular income whose house has appreciated to that point. And yes, they have a ton of equity, but it could just be some normal people who have enjoyed the huge appreciation that has gone on in LA over the years. How many properties, I’m going to do this right now while we’re talking about it, how many properties on the market right now do you think are for sale over $4 million, $5 million in LA?

James:
Oh, 100s. Like 40%.

Dave:
Really?

James:
LA’s a pretty big area. It stretches a ways, but I mean you got to be I would think-

Henry:
I bet it’s 25%.

James:
Yeah, 25, 30%.

Dave:
Okay. Currently on Redfin, there are 528 homes in LA that are above $5 million, and that’s out of 5,100, so it’s actually about 10% that are on the market right now. That’s a [inaudible 00:21:22] load. 10%, that’s crazy.

James:
It’s also $4 to $5 million, so how much is it if it is $4 million though? That’s going to get us closer to 20.

Dave:
It’s 746, so yeah, it’s like 15%.

James:
Yeah.

Dave:
Yeah. Woo. I pulled up one for $44 million.

James:
That’s a mansion.

Henry:
That’s a mansion.

Dave:
I’m looking at this one. This one is sick. That thing is awesome. Anyway, all right. Anyone have anything else to say about this headline?

Kathy:
Oh, definitely. I have a lot to say about this headline. I’m really not too worried about the mansion tax. If you’re talking about celebrities with $50 million homes, it’s not going to make that big a difference. And honestly, I think most people really want to see a change in LA. If they’re going to continue to live there and especially in a mansion, they’d like to be able to drive down the street and have it be safe and beautiful, and that’s not how it is.
So there’s a couple of real big issues with this tax. One is that within it was hidden that it’s also commercial property and apartments. Now, that will impact the situation a lot because with a celebrity selling a $50 million house or a $10 million or whatever, the extra few hundred thousand dollars in taxes isn’t going to make the difference, but on a commercial property it could, and on apartments it could too. So all the while you’re saying you want more affordable housing, you’re making it less affordable with this tax by putting it on apartments. So that’s a big problem I have with it right there.
And second, it’s kind of what you guys have all been saying, but I was born and raised in California and I know that there’s a mentality here that it’s hard to change. It really has to start with the education of Californians on how to take care of our homeless people. And there’s been more of a push to they have rights and absolutely they do, but are we taking care of them in the right way? And when we’ve really got evidence that most of the people on the streets have either mental illness or addiction issues, you can throw as much money at this as you want and as much affordable housing, it’s not going to fix it.
We already voted for $1.2 billion to take care of it, and we ended up with studios and one bedroom apartments that cost $800,000 to build for homeless, and we still have 41,000 homeless. So a few million dollars that we’re going to make on this is just not going to help. The real issue is how do we help people with mental illness and with addiction issues and maybe not make it so easy to fuel that when … This is very controversial issue, but it goes much deeper than this and I really don’t have much faith that this mansion tax is going to help. I think it’s going to hurt it.

Dave:
Well, hopefully, I mean I honestly don’t know that much about it. I haven’t been to LA in many years. But whether this or something else, hopefully something will help address the terrible homeless situation that’s going on there.
All right, our next headline is about a startup that has been backed by some really high profile people, including Jeff Bezos, and it allows you to buy fractional shares in real estate. It is called Arrived Homes, and it allows you to buy shares in single family rental properties for as little as $100. Basically, investors can come and they can pick individual opportunities that they’re interested in buying in, and it has attracted over 100,000 investors so far. It’s been making a lot of news because yes, Jeff Bezos and some other really high profile people have also invested in it, so it’s been making news. So I am curious, Henry let’s start with you would you invest in something like this?

Henry:
Well, me personally, I wouldn’t, but only because I have an established business where I can source my own deals and I don’t just invest for passive cash flow. I invest for the positive impacts it has on my community and I get to see, touch, and feel those things. I don’t really get that with a passive investment like this.
But I am all for more avenues that make being smart and investing your money no matter at what level you’re at more accessible for people because the more accessible it is and the more education we can have out there for people to make smart financial decisions with their money, I think you’re going to start to see the wealth gap close. And I just think it’s of benefit. The only thing that you want to caution people is to make sure you truly vet these companies and these funds that you’re going to put money into just to make sure that you’re not putting money into something that’s going to go under and take all your finances with it. There’s a lot of fine print that comes along with investing in these things, and I would encourage anybody who’s going to start throwing their hard-earned money into something like this to just pay a real estate attorney to go read that documentation for you and let you know what true impact it’s going to have to you from a personal perspective. And that doesn’t cost a ton of money to do.

Jamil:
I agree with Henry. I think once you get past that whole legal situation and make sure that it’s a good document and hasn’t been written in a funky way, I think it’s great because look, you might be able to take advantage of depreciation. You get other advantages. You get cash flow. There’s benefits that come with real estate beyond just owning real estate and saying, “I’m a real estate investor.” The thing is that the average American right now is investing in their 401k or the stock market or it’s both, and I have no confidence there. Guess what I’ve never seen a house go to? Zero. I’ve never seen a house go to zero, but I’ve seen companies go to zero. I’ve never seen a house be a Ponzi scheme, but I’ve seen many companies be that. So I love this. I love the fact that we’re giving people an opportunity to get into real estate at whatever level they are. It’s accessibility. It’s great. As long as that document’s right, I’m all for it.

Kathy:
I just would caution people of the overhead in these types of things. There’s so many costs. I was just looking at invitation homes, which really I don’t know how it’s really that different, you can invest in invitation homes as well, and they have rental properties and their return was, let’s see, 0.26, so like a quarter per share. You’d have to look it up, but the returns are really not that high. So if you’re going to invest in real estate, I would just say really do it yourself if possible. Start with an FHA loan. You could put very little down, rent out rooms, house hack, there’s a lot of ways where you can make a much bigger return.
With that said, the Reg A model is a model that any one of us could do. Any of us could do something like this where it’s expensive, it costs $50,000 or so to get a Reg A kind of fund going, but you can also do that and take $100 or $1,000 from investors. There’s so much management though of that paperwork and the payouts that again, the overhead I think is going to eat up all the returns. Anyway, I would say I don’t know about investing in it. Invest in your own property, do it yourself if possible, you’re going to get a much better return that way.

James:
Yeah, there’s a lot of waste in those funds. I would say if you’re a newer investor, I would stay clear from this personally. Because A, if you’re a newer investor, your whole purpose is to grow your gun powder, grow your liquidity, maybe stick 100 bucks in a fund that’s going to pay you a quarter percent, you’re not going to make anything. So grow that liquidity.
The next thing is there’s so much waste in these funds where it would be better … I think the concept of investing in a single family housing fund’s a good idea, you just want to make sure it’s very segmented to one market so you get efficiencies in there because the more spread out they are, the more healthy they are, the more liability and risk they have with construction, permits, leasing, and systematic breakdowns. The more systematic breakdowns, the less the return. I would just focus on smaller markets. I don’t see this going anywhere. Single-family homes across the nation is a nightmare. You got to stay in a geographical location because once you start spreading out from west coast to east coast, I mean I’ve seen these managers that are running these things, they’re not running them efficiently.

Kathy:
Yeah, the big concern I have besides just someone investing is this is the plan. You’re going to see a lot more of this kind of institutional investing. They’ve already said they’re probably going to get up to 40% of the rentals out there will be owned by institutional funds like this. So don’t sit around and wait to buy your share because it will get bought up by somebody else.

Dave:
All right. Well, if people don’t have the money to put down on a full home, it is an option that you can get into real estate. But like some people mentioned here, there are other options to getting into real estate if you don’t have a full down payment. Fund Rise, which is a sponsor of the show full disclosure, is an option. You can also buy REITs, for example, on publicly traded markets. So if you are interested and want to get into real estate, you can do it a little bit there.
All right, for our last headline today, we have news coming from Colorado where there is a new bill coming out that is proposing something called just cause evictions. This bill would allow tenants to have the opportunity to stay in their homes after their lease has ended. Basically it would be on landlords to offer a renewal of the lease, provided that the tenant has followed all the rules with “substantially identical terms”. The landlords would be allowed to raise rent in a, again, “reasonable sense”. And if they failed to do so, renters could keep paying rent under the terms of the previous lease and would be protected from eviction.
There’s also a provision in there that if the tenant leaves or is forced to leave because the landlord either wants to move into the property, renovate it, demolish it, whatever, the landlord would be required to pay moving costs for the tenant, which would be up to two months of rent. So, obviously this is still proposed, this has not passed, but I think it brings up some really interesting questions about the relationships between landlords and tenants and basically who is responsible for helping tenants stay in their homes and potentially relocate to new homes when they have to move.

Kathy:
I don’t really see a problem with this in the sense that if you’re a landlord, you really should be treating your business like a business. And you really should be renewing your leases, so what’s the issue here? You know what I think it’s trying to protect people from is suddenly not knowing where they’re going to live. And so I like the idea, it’s like the landlords should be proactive and they should have a new lease and the tenant should know what to expect. They gave one example of a man who had lived there, in the article, lived somewhere for 20 years and all of a sudden got booted, and we don’t want to see more homelessness for sure. So I don’t have a problem with it personally.

Henry:
I agree with you Kathy. I read this as, “Oh look, they want landlords to be good landlords.” I think landlords get a bad rap, but you’re supposed to run this business in a way that protects your tenants and not in a way that causes harm to them. And so these are things you should be thinking about as a landlord anyway. You should be proactive about what your rent raises are going to be and when you’re going to inform your tenants about that. You should understand when you might be looking to do a renovation or when you might be looking to sell a property.
Now I get it, sometimes things change, right, like the interest rates have changed. I have two properties right now where the interest rates have killed my cash flow and I’m going to sell those properties, but I’m not just going to put a tenant out with five days notice, right, because I’ve decided I’m going to sell those properties. I’m going to have to eat the cost of making sure that we give them the proper amount of time to locate and find a new place. So I think something like this will just force landlords to run a better business, and I’m okay with that.

James:
So we’ve recently … I personally don’t like this bill at all. I think what Henry and Kathy talked about is completely realistic in that yes, landlords should have to run their business and there should be a minimum notice when people need to move out or vacate the property. The issue that we’ve had in the Pacific Northwest is a bill starts like this and then it evolves into this massive change, which becomes very detrimental to landlords, to the point where people don’t even want to buy housing in Seattle right now. Because we had very similar kind of processes going, and then all of a sudden about two years ago, it just evolved to where it wasn’t just give the tenant notice of 60 days to vacate out. We have to give them four months notice to move out at that point.
And if they opt to move out, we have to pay two to three months rent on the way out the door, in addition to we can’t raise their rent more than 10%. And some of these properties are substantially below market rent. We’re not talking like they’re 5, 10% below. They’re 60, 70% below market. And not only that, they’re in properties that are very dangerous. There’s a lot of really old buildings in some of these cities that have old wiring, old plumbing, and they’re not safe for tenants to be in. And we’re dealing with this right now in Seattle where we have 30 people in a building that is a fire hazard. It’s such a fire hazard, insurance won’t even give us insurance on the building and we had to get it through a back door from the previous seller. But during this time, we’re now dealing with 30 people that we have to move out and pay them four months rent.
And so what this does is it starts to substantially erode the market, right? The first thing we had to do was offer that seller who had owned that building for 20 years substantially less money because we got to wait for a year to get through this process at this point. So it’s driving pricing down on people that want to sell their property later, in addition to it just kind of creates this … All the people that we’re moving out of there are very aware of this law and they’re expecting this check immediately.
So the issue is it just can get abused and then all of a sudden it starts a snowball effect where it starts locking the whole market in and becomes very detrimental for sellers, for investors, landlords, and you lose all the power to where you don’t want to buy property anymore. And what that’s going to start doing is it slowed down these buildings that need a substantial amount of renovation are no longer getting buyers that are going to fix these properties, and we’re going to have a bunch of old housing that’s not safe. And you get stuck in this kind of this slow grinding wheel. And so I am not a fan of this legislation at all. I think it actually slows things down and makes it worse rather than improves.

Jamil:
I 100% agree with James in that perspective there just because I’ve seen the same thing happen in Los Angeles, especially with multifamily property. And so when you’ve got apartments that have tenants in it that have been in there for a long time and they do need substantial upgrades, they can’t have it done. And that’s dangerous. It’s dangerous for the people, it’s dangerous for the neighbors, it’s dangerous for the community. There’s got to be a better way to do it. I’m all for people being good landlords, but I think that they have to have look deeper into the situation and give us just more opportunities for things like that. How do we deal with this? How do we deal with upgrades? How do we deal with real situations that occur when you have these types of things needed in a property?

Henry:
To wrap this up, I totally agree with points that James made and also with the point that Jamil just made, and I think it goes to show that real estate is a symbiotic environment. What we do as investors affects tenants, what tenants do affect investors, what we all do affects our local city and the economy as a whole. And so making changes to something that one side or the other has to abide by affects everyone. And that’s why I think it’s so important that we all are involved in the conversations that are happening around making policy like this because Jamil, you’re absolutely right. I’m sure there are situations that are going to come up where if this was in place here in Arkansas where I would want to make a change to my property and feel like my hands are tied and I can’t run my business the way I want to.
And that’s probably in part due to the people making the laws are only thinking of either serving one party or they don’t understand those situations from landlords. And so we have to be more involved in going to city and community meetings and speaking up and asking for a voice, but not a voice to say, “Only serve me,” but a voice to say, “How can we all work together?” And that may mean that some parts of running my business gets a little uncomfortable for the benefit of the people who are paying the rents, and that’s okay, but it’s got to be all of us working together.

Dave:
Well said. Yeah, I totally agree Henry. I think these types of policies have very good intentions in my mind, and it really comes down to the details because it’s easy to look at this from one perspective and say like, “Oh, it’s so easy. Just let people stay.” Or if you’re a landlord you say like, “Oh no, you can never do that.” But there probably is a way that you can help people stay in their homes and have mutual benefit for both real estate investors and tenants alike as long as those conversations are happening.
All right, that’s all we got today. Everyone, we’ve done it. We’ve done 100 episodes now.

Henry:
Yay.

Dave:
Congratulations-

Henry:
I love it.

Dave:
-Everyone. If you like this episode, please share it. This could be the one that you choose to share with everyone. Screenshot and send a DM to the BiggerPockets Instagram account. And we will also ask to please give us a review. If you have been listening to this show since the beginning or if this is your very first time listening to On the Market, if you do appreciate the information and perspectives that you got here today, we would really be grateful if you gave us a review either on Apple or Spotify. It really does go a long way. For Kathy, Henry, James, and Jamil, I am Dave Meyer and we’ll see you for Episode 101.
On The Market is Created by me, Dave Meyer, and Caitlin Bennett, produced by Caitlin Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.