The NYC Landlord Who Says the "Golden Age" of Being a Landlord Is Over

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1:27Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, I'm not sure if you remember, but we did an episode recently in the outro and like someone tweeted about this. I think your final line was, it's pretty good to be a landlord. Like we were talk about rent and you're like it seems good to be a landlord i stand by it i can't believe i'm getting criticized throwing out these uh truth bombs it's good to be a landlord no i don't think it's even a criticism it's like sometimes the truest things are the obvious things that no one says directly and that someone just has like it seems pretty good and like rent prices as we've been discussing like they never seem to go down there are all kinds of tax advantages it seems like to owning real estate.

2:14It's hard to build more of it. It seems pretty good. It seems good. I guess my question is, was it always this good? And will it always be this good? Because, I mean, the reason we're talking about it is because it does feel like there is a backlash at the moment or more of a backlash. I guess landlords are never an especially beloved social class. But with prices being what they are at the moment, with rents going up, particularly in places like New York City, it does feel like there is this question of whether or not maybe the government, the state could do something to attenuate those higher rent prices.

2:50I guess there's like two questions to my mind about the sort of like whether it's good to be a landlord. And one is like, OK, we do know that like probably like rent growth is going to slow. And we talked to the guy from Apartment List, Chris Salviati, several weeks ago. And he's like, Like, OK, probably like rents are going to come down a bit, maybe, or flat or maybe not grow. But like that's just a cycle thing. Right. And then there's the question of like, is there something deeper that's not just about like the macroeconomic cycle, but is something going to like change about the business? And, you know, like one thing that I sort of still kind of believe in markets is that like if there's like alpha somewhere, if there's above market returns, it can't stay forever.

3:34Eventually, like, it's got to get armed away, right? I think maybe I'm a little bit more cynical than you. I think people will try to hang on to their price advantage as long as they possibly can. Yeah. No, I mean, I agree. It's just like, they can't be like some business that's just like permanently better than all the other businesses, right? Like, it's not how markets or capitalism are supposed to work. Like, capital is supposed to flood in or supply is supposed to come on. And eventually the returns from asset A on a risk adjusted basis should equal the returns from asset B also, you know, on a vol adjusted basis or something.

4:08Well, I guess this is where we start talking about real world constraints and policy constraints again. But yes, in theory, it should change. Right. And so we have been talking about real estate quite a lot. And I do think that in this sort of pandemic slash post-pandemic environment, lots of anxiety about real estate, not just high costs are a huge aspect of it, availability, the types of real estate that people want. And so it's a good question to how good has the landlord market been? And if we're in a period where a lot of things are changing, rates are reversing. I was about to say, I think interest rates are going to be the big factor here.

4:50Leverage, huge aspect of the real estate business reversing. Can the golden age of being a landlord persist if many other macro things and political things are changing? Is it still good to be a landlord? Is it still good to be a landlord? All right. Well, I'm very excited about our guest. We're going to be speaking with Ben Carlos-Typen. He is a real estate investor and broker in New York City, and he has a lot of views on this question and why maybe the golden age is coming to an end or will. So, Ben, thank you so much for coming on OddLots. Glad to be here. Thanks for having me. So before we can even ask the question, is the golden age of being a landlord coming to an end, we have to first establish, was there really a golden age?

5:36And I guess the question, the way I think about that, is it true that real estate owners, landlords, people who rented out their units, enjoyed a period of unusually high and stable returns? Yeah. So, I mean, first, I think it's important to make a distinction between different types of real estate owners. So there's residential rental landlords and commercial landlords and even homeowners. I'm going to talk today mostly about residential landlords and homeowners. And you are a residential landlord. I am a residential landlord in addition to being a commercial landlord. And I'm also a broker that deals with a lot of other residential landlords and investors on a daily basis.

6:17So what is this goal? Establish for us that there, in fact, has been a golden age. So I think in order to understand there's a golden age, you have to understand the history that preceded it. So, you know, there's this great paper by this professor, Katerina Knoll from the University of Bonn, that looks at the housing prices over time from 1870 to present. And she studies 14 countries, including the United States. And what she found is that up until around 1950, depends on the country, in the United States, it was probably the late 60s, housing prices were relatively flat. And then after that, they've exploded.

6:58And housing data, rent and otherwise, is notoriously difficult to capture because it's such a disparate distributed market. But that backs up with qualitative observations as well. So there's this great book that I recommend everyone read about the history of these New York City real estate families called Skyscaper Dreams. And there's a recurring theme in this book of sort of the residential, the families that specialize in apartment buildings, complaining about not being at getting as rich as quickly as the office developers or the office landlords because, you know, partly because of rent control, but it was just a sleepier business.

7:37So what changed in the mid 20th century? A couple of different things. We're all familiar, I imagine, with the story of like the subsidization of homeowners and single family homes in the suburbs. And, simultaneously, as that was occurring, in terms of the public's investment in the apartment business and rental housing, it shifted from public housing to private sector solutions, whether it's, you know, Freddie Mac subsidizing multifamily developers or even, you know, nonprofit developers. simultaneously with that land use controls were implemented to protect the investments of homeowners that that's sort of the the best the most generous way to describe it it also did things like enforce de facto segregation and and school segregation and all sorts of other less less noble things so in the late 70s after all this had happened for a decade or two What you had is this coalition form of homeowners and conservative interests, both business and otherwise, teaming up to pare back rent regulations where they existed, ban them where they didn't exist, and generally implement a set of policies that discriminated against renters either directly via things like a property tax policy or indirectly because most renters at that time were of some sort of market.

9:05marginalized status socioeconomically. So they also pared back the state's ability to regulate landlords, both in practice, but I'd say more crucially in terms of state capacity to actually effectively punish landlords for misbehavior. So for instance, in the original rent stabilization program in New York City, there was a way for the buildings, if they were violating certain standards, to be, their rents to be, you know, pared back and the state could take control of these buildings in a more assertive way that was then removed. So let's, you know, before I get to like the more specific consequences, let's talk about like what that actually created from a market structure perspective.

9:52Homeowners become this very powerful political bloc, their relative permanence increases their propensity to vote, and they team up with conservative interests to weaken the state. The idea that everyone becomes a homeowner becomes gospel and homes become used as investments. But this was always sort of a Ponzi scheme because you're protecting the investments by putting up barriers to entry. So one generation buys in, gets rich off of it, and then housing prices get too expensive so that the next generation can't buy in. Or if they do, they're buying in a much more vulnerable terms. Burdensome.

10:27You know, they're higher loan to values. The values themselves are arguably inflated. So all this leaves the rental market as a market with essentially unlimited demand, a growing pool of participants on the demand side. And, you know, unlike other utility markets, which is basically what housing is, it's vastly and wildly unregulated. So it would be like Enron in the early 2000s and late 90s that was just going wild on deregulated energy markets, except we've been doing it all over the country for decades.

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13:12Can I just ask a really basic question, but like if you're a landlord, how are you making most of your money? Is it by getting the monthly rent or is it by building up a real estate portfolio and then selling it or flipping it at some point in time? Like what is the mix? And I know you made the point about the difference between mom and pop landlords versus the big corporations. Can you just talk a little bit more about the different business models? Sure. So partly that depends on the business model of the landlord, but also depends on the market. So New York City is much more of an appreciation-based market than a yield market.

13:49Whereas someplace in the Sun Belt might be more yield-focused than appreciation-focused. So in New York City, you typically make your money selling or refinancing or by generating scale. Scale obviously helps in every market, whereas in other less core markets, more of the return is in the yield. And this is a good segue into sort of the other dynamic that produced this situation is that we have this vast unregulated rental market. And simultaneously, we have an institutionalization of the business of multifamily. And this is kind of a broader economic trend that happened with corporations in the latter half of the 20th century and even with other sectors of real estate.

14:36So like 20 years ago or 30 years ago, the self-storage business was a very mom and pop business. But now it's this hugely institutionalized business. So this has happened in a particular acute way in multifamily because of just how big of a market it is, how longstanding of a business it is, and how relatively homogeneous the product is. Well, I was going to say, too, I mean, I know like if there is this inherent challenge of creating new units and we talk about like the, you know, the sort of barriers to entry, I have to imagine that scale becomes a very big advantage in knowing how to navigate these permitting certain like how do you do construction in New York City?

15:19the entities that have done it over and over and over again have to have a pretty significant advantage over a smaller, less institutionalized. I mean, I get there's a difference between developer and landlord, but it just feels like with all of these things, there must be quite a few advantages to scale on this type of stuff. Yeah. I mean, there's definitely a difference between landlords and developers, but I think your broader point is correct, which is, and this has been particularly enabled by technology, this used to be a very inefficient business. And the institutionalization has sucked all of the inefficiency out of this business through technology that has been implemented to price rents more efficiently, the disaggregation of functions.

16:07So historically, the apartment owners where everyone was sort of in the same company, and now all these different roles have been distributed into other companies. They're specialists that provide third-party services. It's become a business where everyone is getting their cut, and scale puts you in the best position to reap the benefits of economies of scale. So your argument is that a process beginning, I guess, in the 1950s of deregulation combined with institutionalization of the rental market starts to change the profit dynamics for landlords. Can you talk a little bit more about exactly how that happens and how it sort of develops up until, I guess, today?

16:54It's really demographic driven. It was designed to serve this growing class of homeowners, a growing class of college graduates enters the real estate business. Historically, it was a business that a lot of people without that much education could get into. and they start applying modern business processes to pricing units more efficiently, to operating the buildings more efficiently, just picking at every possible part of the business to extract profit out of it. That has served the industry very well, but it has not served, arguably, the greater public very well. And I think that's sort of where these dynamics that these twin dynamics of demographic change prompting policy and technology prompting institutionalization are now going to flip back the other way.

17:48And we're starting to see the beginnings of that. So I want to obviously like talk about this flip and some of the demographics and all that. But before you do, can you just expand? You made one point about disparate property tax treatment that you said, like put renters at a disadvantage. Can you clarify, like, what is in the code that is so advantageous to landlords? Sure. So as a general matter, around the United States, homeowners are viewed as the most important political block in any jurisdiction. And their property taxes are kept low, and particularly the increases in their property taxes.

18:28So municipalities really have very few levers for generating revenue in this country. So they need some place to make up the revenue. So as a result, apartment buildings start taking on a larger and larger share of the burden. This works different ways in different jurisdictions. But in New York City, for instance, buildings over 11 units make up an increasing share of the revenue for taxes. This also applies to commercial properties, whereas buildings of one to three units have artificial caps on the amount that their assessment can grow every year. And even buildings of four to 11 units, excuse me, four to 10 units also have caps, although albeit it's not as good as the one, the three families, which is sort of a reflection of the same political dynamic in that the people that, at least policymakers believed, own these small apartment buildings are closer to a voter.

19:27It's sort of your yeoman, your landlord, not the big bad landlord. So these groups have been given preferential property tax treatment and the apartment buildings and in turn their residents have been getting increasingly unfavorable property tax treatment. So the landlord business, what exactly are the risks that landlords are taking on and how should they be compensated for that? Because when I think of a landlord, it's like, okay, maybe you have a bad tenant who doesn't pay their rent on time. That's a little bit of a risk. But in general, it feels like there are a lot of protections around the business.

20:06And it also feels like there's a tendency for real estate prices to mostly go up, especially in New York. Right. So dealing with problematic tenants and also operational increases. So let's talk about the tenant side. The tenant side, that varies widely from landlord to landlord. So So our tenants, generally speaking, are pretty wealthy. I have never had to evict someone. And we rarely have issues. Whereas there's lots of landlords that have tenants that have a more marginalized socioeconomic status. And that's trickier. However, the demand for that is very high. And the yields that those properties trade for are generally higher.

21:00So landlords are compensated for that risk. And furthermore, with the institution and the growth of Section 8 rental subsidies, a lot of the rents being paid by marginalized tenants are effectively underwritten by the government. So how much risk is a landlord really taking on a Section 8 building from a tenancy perspective? From the perspective of operating expenses, as we talked about, property taxes are being constrained in some cases, but in other cases they are not. And that's where operational efficiency comes in. So operational costs are the most important costs for landlords to control.

21:44And in some ways they're in their least amount of control. So at least with financing costs, you have some decision over when you make that, when you incur that cost. But for, you know, fuel, maintenance, like you really don't, I mean, maintenance to a lesser degree, but fuel and other more recurring costs, you don't have as much control. So I want to ask about financing because, of course, you know, we sort of talked about in the intro, lots of things are shifting. And one thing that seems to be shifting is like maybe this 40-year steady decline in interest rates. Can you talk a little bit about from your experience, like your mix of like equity, borrowing, etc.?

22:23And if there is, you know, this like sustained reversal, what does that do to your economics? Well, it doesn't do that much or won't do that much to my economics because I'm going to get out of this business. But you're going to stop being a landlord altogether. I'm going to stop being that bad. I'm going to stop being it's not so much. It's bad. We can get into the reasons why further. But like, I think going forward, certain types of players in this business are going to make money, are going to make sort of above average returns. And the rest will make, you know, utility or bond like returns.

22:57And if I'm going to buy a bond, I'd rather buy tips. And if I'm going to invest, you know, I'd rather invest in real estate that is less management intensive than residential. Well, OK, just before we get because this is the heart of the question, why you want to get out. But before we get to that, were you staying in? Can you talk a little bit about the effect? So on financing, I think, as you pointed out, we've been coming out of this 40-year period where interest rates have been very low. And a lot of business models have been built on very cheap capital. And as a result, yields have become very low in certain markets, really most markets.

23:38And I think that's a particular challenge in markets that were depending on one of two things, regulatory arbitrage and appreciation. So we talked about the difference between markets in which the main component of the return is yield versus appreciation. The yield markets, they're going to not be as challenged from a sort of being able to sell for the right price perspective. Certainly some people will. But a market like New York City, that's a little more challenging because if you buy at a 5 % return and you finance that at a 3.5 % return, and you're assuming that you're going to be able to sell that at a four and a half, or you were when you bought it four years ago, that's not a realistic assumption anymore.

24:29So depending on your leverage level, you have a different set of options to either continue on or extricate yourself from that situation.

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26:50Learn more at chase.com forward slash business card. Chase for Business. Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank and a member FDIC. Can you talk a little bit more about what you see changing now other than the higher interest rates? It's like, what is the mix that is going to pressure the rental business? Sure. So, you know, we have this, the demographic decisions, the demographic driven policy decisions that were made in the mid to late 20th century are now coming home to roost. You have this growing class of renters.

27:27You know, you have increasing rent burdens, evictions are destroying lives, just like foreclosures are. And I think most crucially, this crisis is now including people from that very powerful political block insofar as people of my generation and our generation, really, who would have been homeowners 30 years ago are now not going to be homeowners. Or if they are, they're going to pay much more for it and become homeowners much later in life and view it more as a housing cost stability vehicle. You know, there's this joke about the 30-year mortgage being a homeowner rent control. And I think that sort of logic is now seeping into the homeownership market and it's becoming less of a, slowly, becoming less of a gambling market.

28:12So you now have this big demographic of people that are concerned with rental costs. So this seems really key, which is that politicians have this idea of like what a good voter is, what a good citizen is like. And for years, that person was a homeowner. Right. And now the basic idea is that there is becoming a meaningful voting, politically influential bloc that is much more likely today to be a tenant than a homeowner than they were 30 years ago. And so the political winds are over time just like, oh, the voters, these like this ideal voter is not necessarily a homeowner. Right. And it's also, you know, that sort of new renter block is teaming up with the old renter block because it's not like we didn't have renters and they weren't organized before.

29:05It's just that, you know, politicians could sort of ignore them because they're of a marginalized background or because they are perceived to not vote as much or whatever reasons they came up with. So this is manifesting itself in two and a half different ways. One is the YIMBY movement, which for those who are not familiar is the Yes on My Back Yard movement, which advocates for building more housing, particularly in high demand areas. Arguably, it's a successor movement to the fair housing movement from the late 20th century. I was one of the founders of the biggest group that does this in New York City called Open New York.