April 1992
Vol 15 No 6
Every four years in America we come into the never never land of re-election politics. H. Ross Poirot was in town a short time ago with his new political movement called T.H.R.O (Throw the Hypocritical Rascals Out). His point is that, most people go into public office with a genuine desire to make things better, but by the time they’ve had a taste of the fruit at the top of the power structure, their sole objective is to be re-elected in the next election so as to never be forced to live under the laws that they pass. Every decision, every vote, every concession and compromise is made with an eye to the votes garnered or lost as a result of their actions. I agree!
During election years, citizens get the best government money can buy. Think I’m exaggerating? Stop right now and look up any office holder’s telephone number and try to get him or her on the telephone to express your views. I don’t mean the President. You won’t be able to get Senators, members of Congress, or even your own state Governor, Mayor, Judge, Dog Catcher, and Sheriff. You’ll probably get some ‘assistant’ who will send you a form letter signed by a machine. UNLESS you’re making a campaign contribution. Then you’ll discover real representative government. The larger the contribution, the larger the representation. Or maybe you’ve heard of Lincoln Federal Savings and Loan.
What has all this got to do with the single family house business? Everything! Two things influence the way our country is run right down to the precinct level. Money and power. Usually they go together, but not always. The key is television exposure. If you can’t afford to spend millions on saturation television advertising you have to find ways to get free TV exposure through publicity. The current tax bill is a case in point. Almost anything an official says about taxes gets him publicity, putting his name in front of the voting public. If the public makes the mistake of giving him enough support in the polls, he qualifies for taxpayer financing of his TV election campaign.
A sure fire way to get free TV coverage is by making emotional pronouncements which incite envy, fear, greed, hatred – you know – the things voters hold most dear. And what better group to focus this on than the ‘rich’ who got rich at the expense of ‘the poor’ (spelled voter)? Who are the ‘rich’? They’re not politicians whose net worth runs into millions. They’re not rock stars and athletes – everybody loves them. They’re not people who invest in securities – no emotion there. No, they’re people everyone can hate, fear or envy: ‘Big Business’! ‘Environmental Polluters’! ‘Landlords’!
While you’re taking your own political surveys, notice how often you hear about the plight of the ‘poor homeless’ in political pronouncements. Our leaders never quite get the big picture that the more they victimize landlords, the less investors will be willing to spend money on housing. The more the risk of owning property is increased, the higher the return that prudent investors will demand in order to take money out of which will offset risk can only be met by higher gross rents.
As cities and counties scramble for more revenues with which to subsidize the ‘poor’ (so local politicians can also win elections), they increase minimum wages, property taxes, user fees, court costs, state income taxes, sales taxes, costs of sanitary services, water and sewer charges. All these must be passed on to the tenants by those hated landlords. It never occurs to the homeless that they were put on the street by the very same people who now promise them lost cost housing.
Nor does it occur to the politicians that, every unit of low cost housing will increase the pressure on landlords to wring every last dollar out of their rentals to pay the increased taxes this low cost housing will require. So the cycle continues. Even though billions will be spent for housing, the numbers of homeless will increase. But the tax/rent increase cycle is only part of the picture. Landlord suits are rising.
LAWS ONLY PROPOSE, COURTS DISPOSE . . .
Speaking of representation, who represents landlords in the court system? In some areas evictions are handled by Magistrates. In some others, Justices of the Peace preside. And in still others, one might appear before a county Judge. Some of these will be elected, some appointed. In 35 years as a Landlord, I’ve never encountered a judge who represented my interests. On the contrary, I’ve seen them run roughshod over the Landlord/Tenant laws with wild abandon.
Where the law clearly states that nonpayment of rent is grounds for eviction, and that any response to a complaint cannot be considered unless the unpaid rent is paid over into the court registry, I’ve never seen that enforced. For some reason, tenants aren’t obligated to meet their minimum duties under the law in the same way that Landlords are. Of course there are exceptions: commercial tenants. With them, at least the owner and tenant are playing on a more or less level playing field. This has its effects.
Take a look at the big jury awards that have been handed over as a result of lawsuits between Landlords and tenants. It seems to be a universal law that these awards can only be made in suits which involve multi-unit residential lodgings. Not commercial non-residential space and not single family rentals. Multi-family apartments and condos! Is it any wonder that the multi-family housing stock in this country is rapidly shrinking? I’ve had a few brushes with multi-family dwellings over the years, none of them positive. But I’m spoiled. I’ve been a single family and commercial Landlord too long.
Commercial space is the most trouble free under a net lease arrangement, but, when a building is vacant, it tends to remain vacant for long periods in any kind of downturn. It goes without saying that single family housing oriented to the middle class rental market can produce the greatest total return in terms of time and expense of management. Oh, there are slum landlords who can make a real case for the el cheapo marginal housing that can be bought for less than $25,000 per house or $10,000 per apartment or duplex/triplex unit. These properties always produce a higher rental cash flow yield than the middle class residential units. But they rarely show much appreciation over the years, and they can run up some spectacular surprise expenses.
Keen observers of the Landlord/Tenant scene will have noticed several items that might detract from low income unit’s cash flows. For instance, a jury recently awarded $84 million to the family of an eighteen month old infant who wandered out of the apartment in which her mother was sleeping and drowned in an apartment complex pool. The fact that the mother routinely allowed the child to wander around outside without supervision and that the fence and gate around the pool met city standards and that the complex was not negligent didn’t sway the jury.
Another case involving sexual assault cost a management company and an owner of an apartment complex $1.8 million when they settled out of court rather than placing their fate in the hands of a jury of their peers, especially in view of the fact that similar cases in recent months had resulted in a $17 million and $14 million awards. Presumably, a jury of a Landlord’s peers would include Landlords too, but that’s rarely the case. In the three cases cited, one involved a low income apartment, while the others occurred in a rental condominium and in a townhouse. Each was a completely different kind of property, but they were all multiple unit complexes.
It’s almost impossible to defend yourself when strangers bent on theft or assault can blend into the throng of residents, cleaning and maintenance personnel. The jury is convinced that the multi-million dollar awards they give will be paid by ‘Big Business’ insurance companies, not the hapless owner. They’ve been programmed by political posturing that Big Business is responsible for the plight of the poor homeless.
Juries don’t realize that driving owners out of business and into bankruptcy victimizes many of their innocent creditors, employees, residents and other business people. It reduces the supply of housing just that much more and causes rents to rise because of increased insurance rates needed to cover these awards. Ultimately, high jury awards cost each of us something in the form of higher taxes needed to pay bureaucrats to administer the programs to care for the poor homeless. And we’ll all pay higher insurance rates which eventually get translated into higher rents.
Next to single family houses, mobile home spaces are my next favorite kind of rentals! Sure, they’re multiple units when clustered together in parks, but the tenants think of themselves more as OWNERS than as tenants. And it shows in the way they meet their obligations. Here, again, a case can be made for high rental cash flows which can be realized by also renting mobile home units. By using rigid tenant selection screening to keep out the transients and losers, this can be a rewarding experience. I’ve had a small park for 7 years now, and it has worked quite well with elderly tenants who have no pets, kids or bad habits. The catch is that owners realize what a good deal these small parks are, so they’re expensive. It’s hard to find distressed mobile home park owners who are willing to sell at prices and terms the average person can afford.
One bright note that has emerged from the court systems this year involves Proposition 13, California’s tax-limiting law which prevents property taxes from being raised until a property transfer takes place. Suit was bought by one party based upon the fact that she, a recent arrival to the neighborhood, was paying many times more taxes on her home than her neighbor in a similar house (envy). Proposition 13 allows rents to be adjusted more or less to market when a house is purchased, and this creates a bias in favor of the older, more stable owner. The suit alleged that there was unequal (and unconstitutional) application of the tax laws because of this bias, but the Supreme Court ruled that Proposition 13 is constitutional. This could affect tax laws in other states.
TAX REFORM IS BEING KICKED AROUND AGAIN . . .
The operative phrase is ‘kicked around’. First the President (Republicans) proposed a bill and called for quick passage. Then the House (Democrats) booted it around on C-Span for a couple of weeks (while everyone got free publicity) and drafted their own Tax Bill. Now everyone can get into the act with lots of free TV panel shows, but there probably won’t be any bill that will do many of us much good prior to the election.
Just to hedge my bet, let me tell you about H.R. 1414 introduced by Michael Andrews (D) of Texas. It already has 325 sponsors in the House and 40 in the Senate and is a part of the overall tax package. It’s hard to find anyone who doesn’t support H.R. 1414 on Capital Hill. Even the President. It would have the effect of repealing the passive loss rules for anybody who spends more than 500 hours per year in ‘real property operations’. It shouldn’t take a genius to figure out some way to spend about 10 hours a week in ‘real property operations’, especially when they haven’t been defined yet. I’d urge you to indicate something about like that amount of time on any tax return you file for 1991 just to establish the precedent ahead of the Bill.
This should re-open real estate write-offs to all you ‘paper’ people out there. You ‘Personal Service Corporation’ types should start thinking S Corporations which would allow you to drastically reduce your tax burden with real estate just like in the good old days. The almost 200 people who attended the Options course couldn’t have timed it better. Passage of this bill, coupled with the lowered interest rates, is going to jump start the construction trades, putting millions of people to work again just in time to vote. Got the big picture yet? Everyone gets re-elected. Damn the torpedoes, full speed ahead.
Prices will start to rise, and those who Optioned either property or mortgage ‘paper’ are going to make a bundle. There are some downsides though: They expect to fund this Bill by cutting deductions for home equity loans. Solutions: sell into the rising market and pay them off, then put a brand new acquisition loan on a new house. If you buy one now, taking advantage of builder and lender distressed prices, then waiting for the market to rebound prior to selling your current home at higher prices, you’ll have 2 years before you have to sell your old home, and still be able to take out the cash and pay off those old loans, tax free. There will be some other big winners too.
Remember all those Limited Partnerships that everyone wanted out of? There are some Vulture Funds that started picking these up for pennies on the dollar back in 1987-89. There are still some of those partnership interests lying around. If H.R. 1414 gets made into law, those shares are going to zoom in price. And what about all those ‘suspended passive losses’? NOBODY KNOWS! We might have a terrific free-for-all tax season if they pass the bill but don’t get the IRS regulations written. Everyone might decide to take their accumulated losses in this election year, since this open tax season might well be curtailed once all those government jobs have been secured.
If you’re overcome by the complexities of the IRC, you can order the updated 1992 Codes on computer diskette ($69), all the Regulations ($99) or Publications ($99) on diskette from Tax Analysts, 6830 N. Fairfax Dr., Arlington, VA 22213.
WE’RE ALREADY BEGINNING TO SEE THE GLIMMER OF A TURNAROUND IN SOME AREAS . . .
Forestry products, home construction and furnishings are rising at a fast clip. The market prices in Connecticut leveled off in December and started to round the bend in January. Reports are now that the calls are beginning to come from home buyers. It’s still spotty. The widespread plant closings of General Motors and others will keep some locales depressed while others begin to prosper. Bear in mind that all national statistics should be taken with a grain of salt. Actual market conditions where you are investing must set the stage for what your best course of action should be now.
The one thing that we can all be certain of is that none of those seeking reelection are going to deliberately rock the economic boat if they can help themselves. There could be one more interest rate cut, but that shouldn’t affect home mortgages much. We’re looking at the bottom of the interest rates right now, with some variation in each area. The German government may have to cut its own rates soon, and this will enable rates to come down globally, including here. Be alert to the first upward market movement in your area, and then re-enter the market using prudent leverage.
I’ve seen renewed activity in RTC loan and property sales in several areas of the country. This is just one more way for government to create housing and jobs without seeming to increase the deficit. They merely sell at a lower price to the private sector, which uses lower interest rate loans, block grants and low income credits to created jobs and housing. When entrepreneurs can take over RTC loans or real estate, they need help in shaking the properties down, foreclosing, repairing, upgrading, managing and marketing. This puts people to work, creating spending power and consumer confidence. That’s the type of economic activity upon which recoveries are built. It also alleviates the plight of the homeless and takes the pressure off the local politicians who also need love and affection in this election year. Don’t we all!
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
