There is talk about controlling rents resulting from the very substantial increases recently. Are those increases justified is the real question. Though we like to think of a residence as being a fixed asset that once paid for has little to no costs, that just isn’t so. Houses represent one-third of the rental stock so I will explain those costs, something that we will all understand.
A lot of parts of that house last years, but not forever. Some parts of the house might last as long as a hundred years or more, but most of the expensive stuff won’t. It costs a lot more to tear off a roof, dispose of the debris, then install a new roof than it did to install that roof when the house was being constructed. The same is true for everything in that house that ever needs replacing. Not only does it cost a lot more to remove and replace things, that work must be done at current prices, not the price charged originally. The price of removing and replacing has gone up as fast, or even faster than, the price of rents.
Every year, the landlord must factor in long-term maintenance costs that just don’t show up to most people. This includes 10% of replacement for appliances, carpet, vinyl flooring, water heater, paint interior and exterior, mirrors and shower doors. Another 7.5% of replacement cost per year for stucco, faucets, shower heads, shower doors and more. Finally, 5% of replacement cost for roofing, furnace/air conditioners units, windows, exterior doors, cabinets, countertops, vanities and tops and more.
Then there’s all that niggling stuff that adds up. A tradesman doing a minor repair is very expensive. The plumber who comes out to fix a single faucet or replace a flapper in a commode tank or failed refrigerator water line, or the electrician who comes out to replace a failed GFI receptacle or the furnace technician who comes out to replace a failed sensor or circuit board: These are very expensive repairs considering the two-hour minimum for work that may take less than an hour.
As a general rule, one can figure about 5% of the current replacement construction cost – does not include the value of the lot – of the house annually to cover all those long-term maintenance costs. Without being able to raise rents to cover those costs and make a fair profit, the rental stock decays, new units do not happen and shortages become the norm.
When the market was overbuilt during the housing bubble, keeping rent rates flat for 10 years, tenants weren’t complaining about their landlords losing money.