By Roderick Wright, California State Senator (retired)
Consider the family history of Norman Johnson, a retired probation officer in his 70s and his wife. He retired from Los Angeles County as a supervisor after more than 40 years on the job. He married his college sweetheart, who became a teacher, then promoted to primary school principal before her retirement. The Johnsons have two adult children, who have left home and are living happy lives.
The Johnsons initially lived in a small apartment when they first married. Their plan was to save for a down payment to buy a house. They drove a modest car and cut down on other expenses. Their friends often teased them about how cheap they were. They wore simple clothes and made frugal financial choices.
After three years, the Johnsons had saved enough to start considering buying a single-family home. However, they choose instead to buy a duplex which, after taking into consideration rental income and tax deductions, their monthly outlay is lower than what they had in their old apartment. After buying the duplex, they continued to save and after five years they had saved enough to make a second home purchase.
This time, the Johnsons decided to purchase a four-unit apartment building, which qualified under Federal Housing Administration (FHA) financial regulations. So, in just eight years, the Johnsons had a total of six cash-flow-positive units. In 1978, the state of California passed Proposition 13, which reduced property taxes but exposed the Johnsons to more income taxes. So they decided to buy a house with the extra income and rent out their unit in the duplex, giving them both more income and tax deductions.
By then, the Johnsons had officially become “mom and pop” rental property owners. Now the effects of the Wall Street war on landowners were beginning to be felt. In the late 1970s, Wall Street began its assault on the real estate market, particularly the rental housing market. Their goal was to shift investments from rental real estate to 401(k) type investments. One of their first salvoes was the elimination of accelerated depreciation on rental properties. By extending the depreciation period, owners of rental properties have lost valuable tax deductions. It was costing the Johnsons thousands of dollars a year.
Without much fanfare, the government then eliminated tax deductions for owning more than two properties. So again, this tax code change cost the Johnsons thousands of dollars, as they lost the deduction for their third property.
Then the City of Los Angeles and other cities passed rent regulations in an effort to “stabilize” rents and protect tenants from rising rents as private investment in housing began. to decline, in part because of the manipulation of Wall Street. Now, at this point, we had started to see housing shortages and homelessness. Rent regulations such as rent control created new costs and limited income, so the Johnsons once again lost thousands of dollars. Most members of the public don’t understand or care about these losses to rental property owners, especially when it comes to “mommies and pops.”
The Johnsons have made investments in real estate and other areas as part of their retirement planning. Many “mom and pop” rental owners have actually purchased their property to supplement their retirement. These owners have retired and depend on the rental income generated from these investments to survive and pay for things like food, medical care and even their own housing costs. Today, many “moms and dads” are considering selling their property because they are no longer achieving the cash flow they had anticipated for their retirement years. Plus, very complicated new tenant rights and protection laws are proving to be more than the average independent rental landlord can handle without professional help and a lot of added expense.
The current rental housing system has become very unbalanced and unfair to landlords, especially small landlords. When the government can put moratoriums on evictions and tenants don’t have to pay rent while landlords still have to pay taxes, mortgages, insurance and maintenance and other costs that continue without relax, this situation is just terrible.
If that’s not enough, there is a movement underway to provide free attorneys to tenants in unlawful detention (eviction) court that is paid for by all of us, the taxpayers. There should be a similar service for “mom and dad” owners as many of them also have limited financial means. The current one-sided legal system is completely unfair to landlords, especially small landlords. Even before the eviction moratoriums, the cost of evicting a tenant could easily cost a landlord over $30,000 and take months to decide! We should create an arbitration system where both parties are represented by an arbitrator, as opposed to unilateral legal aid.
Since the government does not seem to believe that small rental property owners are in business, the government should offer to buy their properties at market rates and sellers should not be required to pay capital gains taxes . This is what we do when the property is taken by eminent domain. Then they could allow tenants to stay in the units for whatever rent they can afford. Los Angeles is losing nearly 6 rent-controlled housing units every day due to this Wall Street manipulation and one-sided regulatory environment.
Currently, the Johnsons owe more than $85,000 and that matters because two of their tenants have not paid rent for some time. With the moratorium in the city of Los Angeles still in place, they can’t evict these non-paying tenants and because the tenants had no real losses, they weren’t signing the rental assistance forms that required them to state that they had lost income due to COVID-19, which they did not have. Additionally, the Johnsons are prohibited by law from inquiring about their tenant’s financial status and obtaining evidence of their alleged COVID-19 impacts. So the Johnsons also lost state rent relief funds under the Housing is Key program. However, as you’d expect, the Johnsons are still responsible for ALL property expenses, including taxes and building maintenance!
The Johnsons are seriously considering selling their properties to one of the real estate investment trusts (REITs) or private equity firms. Some owners actually sell their property and return the paper to avoid taxes. Rental property owners have been reviled by the government and the political process. The reality is that the government is being unwittingly manipulated by the folks on Wall Street. Soon home ownership will be a thing of the past. Real estate was once considered a good investment. Changes in tax policy and the burden of student loans have made it a good investment for the small investor. Families like the Johnsons have been the clear losers in all of this.
Progressives and conservatives fail to address housing issues. What were the programs that worked before? We have created opportunities for ordinary people to invest in housing. Besides FANNIE MAE and FREDDIE MAC, we have written tax laws to encourage private investment, creating wealth across a broad spectrum. Now we see a widening of the wealth gap.
The last 40 years have been a direct attack on rental property owners, especially mom and pop rental property owners like the Johnsons. This onslaught came from all levels of government, local, state and federal, manipulated by Wall Street. Repairing the private housing market will require changes at these same levels.
This war on rental property owners by Wall Street is partly responsible for the housing shortage we see across America today. Real estate was once seen as a way to achieve generational wealth. Soon we will be back to the old feudal system where the wealthy, Wall Street, own all the land and therefore they will become the landlords while the rest of us will become serfs, the tenants. May God help us?