Lowering The Rent Creates a Permanent Income Reduction for Landlords

The pandemic has caused unprecedented migrations from metro areas and rent declines nationwide, but San Francisco property owners have been hit especially hard, with rents decreasing by nearly 27% between early 2020 and early 2021.

Lower Rents, More Incentives, and Less Money for Landlords

While many renters have struggled to get by, so too have many small landlords. Many have experienced nonpayment of rent, coupled with eviction moratoriums that have prevented them from evicting overdue tenants. Desperate to place renters, many landlords have tried to incentivize their vacant properties, with offers of lower rent, free rent, free gym memberships, and hundreds of dollars’ worth of gift cards.

One San Francisco landlord stated that there was a time when potential tenants accepting the asking price for her rentals; now, nearly every tenant offers less. To make matters worse, lower mortgage rates have turned many would-be renters into first-time homebuyers, leading to a drop in potential tenants and more competition for filling empty units.

And for everything that is reduced in price or purchased as an incentive, that’s more money out of landlords’ pockets. On top of that, they may be struggling to pay their own mortgages. Smaller landlords have even more expenses to consider, like electrical, sewage, garbage, repairs, maintenance, property taxes, and insurance.

“There are some landlords that will struggle to pay their bills because they aren’t receiving rent from tenants, or have units sitting vacant,” said Jeff Tucker, a Zillow economist. “It’s not like a larger property management company that can manage units and mostly muddle through. For a smaller-scale landlord with only a handful of rental units, they could easily be forced to sell their rental units or be foreclosed on if they have a mortgage on it.”

David Levy, a San Francisco real estate agent, noted that the property owners who have been most impacted during the pandemic are those who are paying off their mortgage and seniors who live on a fixed income who rely on their rental payments to make ends meet. “A lot of tenants assume that because someone owns property or multiple properties, they’re millionaires, and they can afford to rent this place out for free,” said Levy. “That’s plain not true. A lot of people who rent out their property rent it out because they need money to pay the mortgage or bills or expenses.”

No Easy Answers

While lowering the rent is a good tactic for those who can absorb the losses, it may put other landlords on track for just barely staying afloat – or losing their properties entirely. With the statewide rent control, landlords are generally only able to impose a 5% rent hike annually, plus the price of inflation as determined by the consumer price index (CPI). For those who have dropped their rent by more than 5%, it could take some time before they reach their pre-pandemic prices again. And in the meantime, the price of goods and services continues to rise.

The state plans to provide some relief to landlords, using 2.6 billion in federal assistance funds as rent subsidies to pay landlords 80% of unpaid back rent from low-income tenants for the period between April 2020 and March 2021. In exchange, landlords must forgive the remaining 20% and agree to halt evictions. While this presents a lifeline to some landlords, many others must deal with what will likely be a permanent loss of income that could have lasting financial consequences.

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