The Threat Facing Real Estate Investors Today and Why Tenants Should Be Treated as Clients

In This Article

When I first started investing in real estate around 2006 (yeah, I know, not a great time to start), the biggest dangers to the industry were things like interest rate hikes, too much competition for properties, and of course, a looming, real estate-driven financial crisis. 

After the dust settled, the biggest problem by far was obtaining financing, as every bank was shell-shocked. As the market clawed back but new construction lagged behind, finding quality properties to purchase in an overcrowded market became the biggest challenge. Then, the COVID-19 pandemic hit and exacerbated that problem dramatically (although, helpfully, it sent real estate prices through the roof).

Now, however, our industry is dealing with a new problem we haven’t faced in a long time: politics.

The Political Threats to the Housing Industry

During her campaign, Kamala Harris proposed a law that would strip investors with over 50 single-family homes of the mortgage interest deduction or the ability to offset income taxes through depreciation. While such a law won’t pass under a Trump administration, it most certainly might at a later date when the pendulum swings back to the Democratic side. 

States and municipalities throughout the country have passed numerous anti-landlord laws, amongst which are some that bring back the failed policy of rent control. They have also passed laws prohibiting landlords from discriminating on source of income (24 states and about 150 localities have done so, as of this writing), and Minneapolis went so far as to all but ban the use of credit checks in tenant screening. 

Many other such laws have been passed or proposed. And let us not forget about the eviction moratorium during the pandemic. 

Not all of this is bad, of course. We should recognize that landlords have greater leverage in negotiations with tenants. After all, we write the lease. There should also be some governmental protections for tenants against bad landlords. But the trajectory right now is going way too far in the tenants’ direction, and the rhetoric coming from many activists is even worse.

While you can brush aside loud minorities like the various Maoists yelling to “hang landlords,” there are other, more serious challenges coming our way. One group called People’s Action wants to  “decommodify” housing. It proposes “taxing the appreciation of privately owned homes.” How much of the appreciation would be taxed? All of it, of course. 

Many more organizations are making advocating for tenants their primary mission. The Urban League has been around for a long time, but many others have started, such as Partners for Dignity (formerly NESRI), which wants to “advance models that ensure community control over the use of land and other natural resources and are not reliant on private profits,” or The Eviction Lab at Princeton University that investigates the (overblown) “eviction crisis” in the United States. 

In 2016, Peter Marcuse and David Madden published the popular book In Defense of Housing, where they argue, “Everyone needs and deserves housing. But today, our homes are being transformed into commodities.” And so on and so forth.

It’s gotten to the point where the pro-market Forbes writer Roger Valdez (who has done a lot of good work debunking anti-landlord claims) has predicted, “The United States may see the nationalization of private rental housing by the end of this decade.”

I think this is certainly hyperbole, but it underlines a distressing and deteriorating situation. There are many causes for this, including some rabble-rousers and the mistaken notion that landlords just pocket the rent and make enormous profits.  (This false notion can be partly blamed on the godawful real estate gurus BiggerPockets is at least a partial answer to.) 

Unfortunately, as housing prices have skyrocketed predominantly due to insufficient building and, to a lesser extent, large-scale immigration in the last decade, many younger people cannot afford to buy. Homeownership rates have plummeted amongst the millennials and Generation Xers because housing affordability is about the worst it’s been in American history. 

This chart quite tellingly illustrates what has happened:

The Counterproductive Antagonism Between Landlords and Tenants

While this understandably can cause resentment against landlords, I believe another major component is the completely unnecessary antagonism that has developed in recent years between landlords and tenants on both sides.

One major flaw in theories of class conflict is that classes in a market economy are not fixed. Of course, there’s corruption and nepotism and other issues like that, which can harden the boundaries between haves and have-nots, but such problems are anathema to the functioning of a market economy and can be addressed without resorting to outright socialism.

One of the best illustrations of this point is that virtually every landlord I know was once a tenant. I lived with my parents until graduating from high school, then rented out a place during college, briefly moved back in with my parents after college, and rented for the next five years before moving to Kansas City, where I lived in the basement of our office for two years before moving into a house our company owned before finally buying my own place 12 years after I graduated from college (and seven years after I officially became a landlord). 

My experience is admittedly quite odd. But being a tenant before being a homeowner and then a landlord is standard.

Indeed, 65.6% of Americans own their home, but for those under 30, it’s less than 40%. “Tenant,” “homeowner,” and “landlord” often describe the same person in different seasons in their life. Being anti-tenant is like being anti-your younger self, just as being anti-landlord is—in many cases—being anti-your older self.

There are, of course, terrible tenants. We’ve had multiple tenants do well over $10,000 of damage to a unit. We just had one inherited tenant from a portfolio we bought who decided to cook meth in the house. Fun times. 

There are professional tenants who inspire posts like this one on Reddit, who “had tenants in a rental property ($2,400/mo rent) and have not received rent for 15 months” by taking advantage of absurdly liberal landlord/tenant laws in places like New York. And maybe there are even a few who have reached Pacific Heights levels of duplicity. 

At the same time, we all acknowledge that there are bad landlords. They have a name: slumlords. As investors, I’m sure you’ve seen these places. Sometimes, it’s the tenant’s fault: dog feces on the floor, hoarding, etc. Other times, it’s the landlord: mold, leaking roof, furnace that doesn’t work, etc. 

One particularly egregious example is here in Kansas City at the Independence Tower, which had, according to numerous tenants, “holes in our walls with rusted pipes exposed, vermin falling out of those holes, water creating soft spots in the ceilings, and mold.” The tenants began a rent strike before a judge removed the manager, and the city convinced Fannie Mae to provide $1.35 million to update the thoroughly dilapidated, roach-infested property. 

Of course, overall, most bad tenants and landlords just made bad decisions or got unlucky. They’re not malicious. Most bad tenants just can’t afford to pay. The same goes for most bad landlords. But of course, there are terrible ones in each group. 

We should keep this dynamic in mind as we attempt to rebut the often dubious claims from anti-landlord activist groups. I remember a seminar I attended a long time back where the speaker was talking about tenants as if they were “monsters who live in our properties” or some nonsense like that. From time to time, I see discussions of bad tenant laws where the rhetoric starts to get directed at tenants themselves.

And then there’s this meme I saw floating around, which, to this day, I can’t figure out whether it’s meant to be satire or serious.

I mean, we certainly provide an important service, but give me a break.

One anti-landlord subreddit posted this abomination, which the poster said was found in a pro-landlord group on Facebook.

I sincerely do hope this was the meme equivalent of a “false flag.”

Now, of course, I don’t believe many landlords actually view their tenants this way, and even the harsh rhetoric that pops up when “pro-tenant” groups propose damaging legislation is mostly blowing off steam. But I do think we all need to be careful about how we talk about and view our tenants. We really should look at them like a real estate agent looks at their clients.

I’m sure many agents thought the $418 million settlement for the class action lawsuit against NAR was absurd. But they didn’t view it as being emblematic of a hostile relationship between agents and clients. Nor should we deal with either bad tenants, hostile tenant groups, or deluded Maoists. (Okay, maybe with the deluded Maoists). 

The vast majority of tenants have nothing to do with those people, thinking more in terms of “good landlords” and “bad landlords” and do not hold some broad anti-landlord ideology.

Sure, the relationship is different from that of a real estate agent, as the relationship lasts longer (although real estate agents should see each client as someone with whom they could do multiple transactions, even if the next may be many years in the future). Furthermore, the tenant needs to pay you on a consistent basis instead of with one lump sum that comes out of the proceeds of a sale. It’s very rare that a client would be unable to pay their agent, whereas it’s unfortunately quite common amongst tenants.

But every sort of agent-client relationship is different. Attorneys have different relationships with their clients than do engineers or financial advisors, accountants, personal trainers, etc. Thinking of our tenants as clients, treating them that way, and talking about them that way will go a long way toward reducing the tensions between tenants and landlords, in the same way, that building more housing will reduce the cost of housing from becoming a permanent impediment to homeownership. 

The Business Reasons for Treating Your Tenants as Clients

A study conducted a while back showed the more a doctor talked with his or her patient, the less likely that doctor was to be sued for whatever reason. The key lesson is that when people feel respected, they are much more likely to be amenable to you and your interests.

There are several major ways this can apply to your real estate business. I wrote a piece a long time ago about how my brother (who was our property manager at the time) not only talked a tenant out of suing us but got her to ask if we would rent another property to her…in one conversation! He did this by putting himself on the tenant’s side: 

“Make something other than yourself the ‘enemy.’ It could be the lease, the law, company policy, or even the owner. But the enemy is certainly not the property manager. No, you as the property manager are the tenant’s ally. So, for example: ‘I appreciate how hard this is; however, we have to follow the lease, and the lease mandates that we charge these expenses. We legally can’t make an exception for one unless we make it for all.’”

In my humble opinion, this should be the textbook example of how to treat your tenants as clients.

Another key point to remember is that happy tenants renew their leases. Depending on where you live, the biggest operating cost you will have is either property taxes or turnover, which is both the vacancy and repair expenses. There’s only so much you can do about property taxes, but there is a ton you can do to increase how long your tenant stays.

By far, the biggest thing you can do is to provide high-quality maintenance. People rarely renew their lease if their sewer line keeps backing up or the heat never works in the winter.

Second is good communication, especially if a maintenance issue is taking longer than expected. Next is to be fair and respectful when there are issues. 

Yes, you should be firm, of course. Being a pushover will get you nowhere in property management. But there’s no need to take lease violations or late payments personally. Feeling respected is important to everyone, especially people in a difficult and embarrassing situation, like being behind on their rent. 

And then you can even go beyond those basics. The guy who has mastered this is Jeffrey Taylor, or “Mr. Landlord.” His book The Landlord’s Survival Guide is definitely worth reading and takes many successful concepts from the hospitality industry into property management. Taylor has gotten his average stay up to over six years (double the national average) with these techniques, which has substantially increased his profitability (and reduced his headaches to boot). 

Treating your tenants as clients is good for the bottom line.

Final Thoughts

I certainly hope this didn’t come off as a lecture or affront to other real estate investors and landlords. I don’t think genuinely anti-tenant attitudes are particularly common, and I’ve slipped on this from time to time when dealing with a particularly awful tenant or while being berated by some activist group as well. 

That said, I do want to emphasize we should all be highly cognizant of our attitudes and behaviors in this respect, especially as the natural reaction to criticism from anti-landlord groups is to become defensive. This defensiveness can manifest itself as an attack on tenants in general when it’s a relatively small group of activists who are making most of the noise. Even in its more mundane forms, such defensiveness can create a sense of “us versus them,” which, again, doesn’t make a lot of sense, given we’ve all been tenants ourselves at one point or another.

By the same token, thinking of and treating our tenants as clients will not only reduce any underlying antagonism between tenants and landlords but also make for good business and will improve our industry’s service and profitability on the whole. 

It’s all upside to take the tenant-as-client approach to being a landlord.