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The landlord’s lament

The demise of the small-time landlord hurts affordable housing

The future of renting in Philadelphia will be controlled by Big Rental. Small-time landlords are disappearing from the city, for a variety of reasons. While some may rejoice, the change augurs a future where low- to moderate-income housing gets scarce and families struggle as corporate policy stays inflexible.

Small landlords have been squeezed by higher taxes, more regulations, and the complexity of following every new change to stay compliant – but the pandemic made their problems worse. Many tenants couldn’t afford to pay full rent, and the lack of revenue going to the landlord put them in a financial bind. Then, when federal relief did come, it mostly went to large companies. Many landlords didn’t qualify for earlier rounds of relief, and when relief finally did arrive, few small landlords were made whole.

As a result, landlords are deferring maintenance that would keep housing stock viable long-term, or selling to get out of the market entirely.

A report from Harvard’s Joint Center for Housing Studies and Penn’s Housing Initiative drives the point home: In 2019, 3.5% of landlords who responded to the survey said they had a rental property listed for sale. By 2020, it jumped to 21%.* Deferred maintenance jumped from 5.4% to 36%.

While tenant evictions also went up, from 18% to 26%, extensions on rent payments drastically increased, from 19% to 69%.  These increases don’t mean that small-time landlords (or larger ones) are exiting the market yet, but it does show dissatisfaction and a trend that could be a problem in the near future.

Small-time landlords are “very, very disappointed with the federal government. And we’re also disappointed with the state as well,” Greg Wertman, president of HAPCO, said. “It’s been well-publicized through many, many, many studies and it was the mom-and-pops and your low-end renters that took this whole thing on the chin.”

One big problem from COVID was that, when federal relief money came, it prioritized large rental companies. The first round of federal relief disqualified landlords who filed 1099 tax forms; aid went to landlords who drew a salary from their rentals. But if a landlord only has a few units, the revenue isn’t enough on which to draw a salary – small-time landlords lose out on federal aid, but large companies reap the benefits.

But the problem wasn’t only COVID-19. The pandemic exacerbated problems that had been building for years.

“Philadelphia had the luxury of having a bunch of small people, mom and pops, they would scrape together a couple dollars where they would inherit a property and they became a landlord,” said Jim Sims, a former landlord who sold off his properties a few years ago. “Back in 2010, it wasn’t very hard to comply. Basically, you just had to get a rental license.” But after that, landlords needed more licenses, then the lead laws hit, he said, and the real estate taxes kept changing – doubling, sometimes tripling for some landlords within a few years.

Another fee or a new rule or two, in isolation, aren’t too bad. When they happen all together, within a short time, though, the cost and difficulty to maintain a rental unit goes up. 

“No one is looking at the complexity of what they’ve created,” Sims said. “Basically the small mom-and-pop landlord started losing money or just squeaking by.” When those units leave the rental market, it’s hard to replace them with another small landlord.

“If you have one unit, you cannot believe the hoops you jump through” to stay compliant with city laws, Wertman said. Many people don’t bother, and prefer to sell a unit rather than renting it. 

The landlord business was “becoming too costly, too unpredictable, and I got out. And that is going to happen to a lot of small people now,” Sims said. “Philadelphia is destroying these small guys.”

The small guys, as a Pew Charitable Trusts analysis noted, make up a majority of landlords in Philadelphia, though they don’t own a majority of rental units. Roughly 73% of landlords in the city own one or two units, 18% of the city’s rental stock. About 25% of landlords own three to 24 units, about 30% of the rental stock. And 2% of landlords own more than 25 units, but they own more than half of the rental stock.

In a housing market getting more expensive, with less federal or state relief for smaller landlords, and more rules and regulations on every rental unit, the future looks bright for Big Rental. Smaller landlords can’t absorb an economic hit like large companies, nor can they spread costs across their units.

Some safety rules are necessary, even if they carry a high cost. The benefits can be worth the extra burden. The problem is when so many rules and regulations make it impossible to keep housing affordable. It may be wise to reassess the rules and cut what’s outdated or minor. The HAPCO handbook for landlords is more than 360 pages – it’s a sign of the hard task landlords have to stay law-abiding.

When a unit is sold instead of rented out, this puts pressure on low- to moderate-income housing. When the supply of rental units falls but demand doesn’t, prices go up. For poor or struggling renters, small landlords provide more housing in their price relative to larger companies, who tend to own newer or larger buildings. 

If small-time landlords disappear, this also makes it harder for the city to reach its affordability goals. The city’s plan heavily relies on preserving and renovating the existing affordable-housing stock, rather than building new units. If landlords sell off their units and exit the market, what was once for low-income renters will now be for better-off buyers.

Revising the plan to build more units, though, will be a tough one. City Council gets the vapors and faints when they see plans for a four-story apartment building. The city government is run by people who fear new construction, even Habitat for Humanity wants to build affordable housing on a parking lot. Even if the city makes the construction process less complex and lowers the cost of doing business to get low-income and moderate housing built, complaints from neighbors could derail it all.

In Philadelphia, the demand for slightly-more-convenient parking options overrules the need of a poor family getting an affordable apartment. That is the status quo, and that is the tradeoff that City Council prefers. The short-sightedness of this vision should terrify anyone who doesn’t want to force the poor out of Philadelphia.

“I want to see low- to moderate-income housing succeed, but I don’t see the tools there to help it succeed, and that’s the problem. My biggest complaint I have is there are no tools to help us increase, in the private sector, low- to moderate-income housing,” Sims said.

The struggles of smaller landlords aren’t simply a result of unwise City regulations, either. The financial system is at fault, too.

“The big banks do not want to lend on a small portfolio,” Sims said. “Federal laws changed after 2008 when everything started to collapse; new laws came into play and it put requirements on big banks where, if they were gonna lend money to someone like me [small time landlords], they had to keep certain reserve requirements.” 

Those changes meant that if banks lent money to small landlords, they couldn’t lend out as much money as they could with car loans or other financial products. Denying loans to small landlords in favor of larger companies or other loans meant that they could make more money.

The disappearance of the small-time landlord, from a tenant’s perspective, can be a mixed bag. Anecdotally, Stephanie Dorenbosch, Director of Advocacy for the Tenant Union Representative Network, noted that larger companies tend to be more inflexible. If a tenant is short on rent for the month, a rental company is less likely to work with the tenant on a compromise than a landlord who only owns a few units.

“On the other hand, I also don’t hear about any large companies doing illegal lock-outs or illegal pop-up evictions, or physically throwing tenants out on the street,” Dorenbosch said.

“The larger companies seem to be, generally, more by-the-book. That cuts both ways. The nice ones are less flexible, but the bad ones are less bad because they’re at least following most rules.”

The small-time landlord is not perfect. Nor are they always a sympathetic figure. The class-war fight over seeing landlords as expropriators misses the big picture, though: The way to get better landlords is by giving them competition. When tenants have more choices, cruel landlords lose tenants.

Unless dramatic change happens in City Hall, the Pennsylvania General Assembly, or the federal government and the problems of small landlords are taken seriously, the future of Philly is a future of Big Rental and poorly aging low-income housing. Ignoring the plight of the small-time landlord ends with poor families forced to leave the city and higher rents for everyone.

*CORRECTION: A previous version of this story noted that 3.5% of listed rental properties were for sale, rather than 3.5% of landlords who responded to the Harvard-Penn survey had rental properties for sale.

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  • Anthony Hennen

    Anthony Hennen is executive editor of Philadelphia Weekly. He is managing editor of expatalachians, a journalism project focused on the Appalachian region. Previously, he was managing editor at the James G. Martin Center, a higher ed think tank in Raleigh, North Carolina. Anthony grew up on the Ohio/West Virginia border. @anthonyhennen.

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