California Is Trying To Drive Landlords Out of Business
Which is bad news for anyone hoping to rent a place to live.
What do the state's insurance and housing crises have in common? Obviously, homeowner policies have an impact on housing costs, but I'm referring to something different, namely the concept of open-ended risk. Insurers are exiting the market because state policies limit their ability to price policies to reflect the risk of a major wildfire season. They rather pull out of California than risk the destruction of their assets.
I'd argue the same thing is happening in the rental market, thanks to a fusillade of pro-tenant laws that subject landlords to an incalculable level of risk. Landlords have freely entered the business and understand the various ups and downs. They can calculate the costs of mortgages, taxes, insurance, and maintenance. They expect to, say, replace carpets and paint between tenants. They know the cost of the eviction process in those instances where it's necessary.
But the Legislature's anti-property-rights crusade—done in the name of protecting tenants in a tight housing market—has not only increased those easily calculated costs, but also the costs that are potentially devastating. It's one thing to realize it might require x-number of legal fees to remove a bad tenant and quite another to wrap one's head around the possibility of someone staying in a rent-controlled unit forever.
And it's impossible to calculate the emotional drain of, say, fighting with highly sophisticated squatters who have illegally moved into your temporarily vacant home, exerted some right—and are going to strip the place to its studs while you scurry for a legal remedy. I know plenty of would-be landlords who wouldn't dream of renting out their home for those reasons. Most mom-and-pop landlords I know are discussing an exit strategy.
That's reducing needed rental inventory. Why does San Francisco, which has some of the strictest tenant laws in the country, have 52,000-plus vacant rental units? Some of the explanations are ordinary (units are in process of renovation or are on the market), but a major one often is overlooked—especially by city politicians who recently passed an Empty Homes Tax that essentially blames property owners for the situation.
Many owners are afraid if they let strangers rent their units they'll never be able to reclaim them. They rather forego $3,300 a month in rent than take that potentially devastating risk. That's because the risk is not calculable. Investors can navigate their way around costs they understand (extra property taxes, higher insurance rates) but will exit if the risks are too high.
We've seen the news stories. Someone moves into a short-term rental then refuses to leave. In Oakland, a group of organized homeless women commandeered a vacant house. In Los Angeles, alleged squatters turned an empty mansion into a party house. If housing is a "human right," then owners no longer have a right to their property.
The number of incidents has soared, so much so that one entrepreneur has started a business helping landlords retake their own properties. In a sane society, no one should have to worry about this. Other states have passed (or are considering) laws to expedite the removal of these home invaders, but California requires an overly drawn-out process, leaving owners at the mercy of progressive judges.
Does that situation make you more or less likely to invest in rental properties? What's your tolerance for risk? Same questions regarding Assembly Bill 2216 by Matt Haney (D–San Francisco) that's moving through the Legislature. It requires landlords to accept pets and forbids them from charging extra rent or security deposits. Landlords can expect obvious costs (carpet cleaning, various repair costs), but they can't calculate the less-obvious ones.
The landlords would not be allowed to ask tenants if they plan to have a household pet until after they've accepted the application. They would be allowed to impose "reasonable conditions" on the pets, but "reasonable" is ill defined. For instance, the bill refers to "common household pets" but is not limited to cats and dogs. Apparently, that means a tenant could have large aquariums with heat lamps that can cause incredible damage. There's no limit (beyond local ordinances) on the number of pets. It keeps owners from dealing with tenant pet disputes.
Sure, the Assembly analysis explains that a "reasonable condition" includes the right to limit potentially dangerous pets, but it does not allow a prohibition based on breeds, such as Pit Bulls and Rottweilers. Yet insurers typically use a list of potentially vicious breeds that they forbid owners from allowing. If a landlord allows such a breed and it mauls a neighbor, the landlord won't be covered. If this bill becomes law, lawmakers will force landlords to accept an unlimited amount of risk.
I love pets, but don't be surprised when landlords exit the business and invest their money into, say, a mutual fund that doesn't bite toddlers or call them about unplugging a clogged toilet.
This column was first published in The Orange County Register.
