January 2018
BREAKING UP IS HARD TO DO
By Tamara Simon
Like most relationships the beginning was full of hope and promise. I was smitten by the potential of our long term future and you providing for me in my retirement years. I was aware of the pitfalls, after all I was a professional property manager and had seen all the problems my clients had endured as Landlords. Evictions, property damage, unwelcome pets and additional roommates that appear that are not on the lease, floods, fire, vacancy, the list goes on and on. Yet like every relationship that you want to succeed, you overlook the flaws and overcome the problems. If I just try harder we can make it work you tell yourself. Until one day you come to the realization that this is an abusive relationship and no matter what you do this relationship will no longer meet your needs.
That is what happened to me and why I sold my rental property in Seattle. When I purchased the property over 20 years ago I was very clear about my goals as an investor and Landlord. I was self-employed and knew that unless I planned for my future retirement there would be no retirement for me. I would say this is the main reason most people become Landlords. It was true for 90% of my clients and other Landlords I know. It is an investment that has risk (like all investments) and you focus on the rewards to outweigh the risk. Yet like any relationship there are unseen challenges as time goes by. In my case the turning point had nothing to do with challenges related to tenants or the property. The relationship turned toxic because over the years the Seattle City Council had become anti-landlord.
Back in 1990 most of the laws the City of Seattle had to protect tenants made sense to me. Then as the years passed and Seattle’s population exploded problems developed. The normal problems with traffic and housing to accommodate all our new neighbors. To deal with the housing problem the Seattle City Council kept making it harder on Landlords to protect their investment and run a successful business. After all that is what most private Landlords are small business owners. We have a Single Family Home or a duplex and after 20 or 30 years working to take care of the property we hope to see income when the mortgage is payed off or when we sell the property. Yes Landlords have been rewarded with tremendous equity building in this market for the past 5 years. However you can still have a negative cash flow or just be breaking even, the reward is only on paper not money in your bank account. There is also the risk of a down housing market. Who remembers 2008 to 2012 with lots of inventory on the market prices spiraling downward and vacancy rates as high as 18%. Yet the City Seattle Council has taken the attitude that there is always another Landlord to take your place, someone with deeper pockets then you. The new landlord can deal with rent control and First in Time Laws because the equity building is the only reward they need or care about.
This anti landlord posture from the City Seattle Council may seem like a victory to some tenants, however it does not solve the housing problem or create affordable housing. It has the opposite effect. The risk begins to outweigh the reward for the average investor. Let’s say your rental investment is a Single Family home worth $500,000. After taxes, mortgage payments, insurance and maintenance expenses you net $200.00 per month for the property. Not much money right now but in 15 more years that house will be paid for! Then you may have a monthly income of $2000.00 a month and the house will be worth One Million dollars. When (and if) this happens the risk was worth the reward.
What if the new laws like First in Time and a cap on deposits limit your chance of success? We know that 90% of success in this business is keeping a long term tenant that can pay their rent on time and not damage the property. The First in Time law no longer allows me as a Landlord to protect my investment properly. What if a person had $500,000 dollars saved for their retirement. The bank manager says don’t worry we are going to give your money to the first person who wants a loan today. Yes this person does not have a good job history, yes they may have a poor credit history, yes they may have a criminal background (but we cannot check on that) and yes you take all the risk if they disappear with all your money. No one would keep their money in that bank and risk their retirement savings.
The average Landlord spends decades of time, hard work and money into building and maintaining their rental property. Just like any relationship owning rental property is an investment in the future. It is hard to predict the future however there are some elements that help establish a positive long term outcome. A relationship that is based on mutual respect, mutual goals, trust ,honest communication and a level playing field for both parties encourages the desired positive long term outcome for a real estate investor (private landlord). The Seattle City Council is not interested in this kind of relationship with Landlords. So I chose to stop the abuse and protect myself. I sold my rental property (Single Family Home) and did a 1031 exchange in another state. I do not expect to see double digit equity building like we have in Seattle. I do like the Landlord Tenant laws and the lawmakers’ attitude towards real estate investors. I was able to increase my monthly cash flow by $1,000.00 dollars (that is net income for me). It is a new relationship I am hopeful once again. I believe the rewards outweigh the risk with my new investment. I am also a seasoned Landlord, I still love living in the Seattle area and struggle with having someone else manage my property that is out of Washington State. I am beyond grateful that the equity built since 1994 in my Seattle property gave me the opportunity to purchase property in another state that produces a greater monthly income. The return on my Seattle investment was a reward, I just could no longer justify the risk. I had to remind myself why I was in this relationship to begin with. The answer was retirement income with less stress (risk). I did the 1031 exchange in January 2017. This is still the honeymoon phase of my new relationship. For now I am confident that this was the right decision for me.
Tamara Simon offers over 25 years of experience in the property management industry. Tamara is the founder of Rental Property Guru and has successfully managed investment property for hundreds of clients. Tamara is also a private landlord and licensed real estate broker. Rental Property Guru provides coaching, resources, and education for landlords and rental property investors in the areas of purchasing investment property and property management throughout the United States. You can reach Tamara at [email protected] or by phone at 206-850-3630.
