Rental Accommodation is a Business – Business Needs Profit
Rent is not an arbitrary number picked out of the air. Rent is a compilation of all expenses encountered by the landlord and includes mortgage, interest, taxes, services, maintenance, losses, improvements, administration and hopefully, profit.
Consumer Credit Scores.
Federal governments keep statistics on FOR, Financial Obligations Ratios, which measure the ratio of debt payments to PDI, personal disposable income. Disposable income is generally defined as personal income after taxes. Homeowners and renters are separated into different categories. For homeowners, they separate mortgage debt from other consumer debt. If you are a homeowner who earns $5000 a month after taxes, and owe $2500 monthly towards mortgage, car payment, insurance, property taxes, and consumer debt, your total debt to disposable income ratio would be 50%.
“The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.
The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments to the debt service ratio.
Homeowner and renter FORs are calculated by applying homeowner and renter shares of payments and income derived from the Survey of Consumer Finances and Current Population Survey to the numerator and denominator of the FOR.
The homeowner mortgage FOR includes payments on mortgage debt, homeowners’ insurance, and property taxes, while the homeowner consumer FOR includes payments on consumer debt and automobile leases.”
Source: US Federal Reserve Board -Household Debt Service and Financial Obligations Ratios.
Without excluding rent from other consumer debt, and without property value as part of the assets, renters have had a consistently higher debt obligation ratio than homeowners, therefore a lower credit score, and are often treated less favorably in dealings with financial institutions which often leads to paying higher interest rates on loans and credit cards. Rental companies will often evaluate a prospective renter by a credit check which looks at an applicant’s credit score.
Here is a case example which catches up many rental companies. An applicant owns a home in another community which he rents out to cover his mortgage. His credit score is good, mortgage payment not included, when in actuality it should be rated as poor. His total payments not including the rent he collects is more than his disposable income. If his renter defaults or moves out and it takes two months or more to find a new tenant, he will be defaulting on his payments. Guess which payment defaults first. It won’t be his truck lease or the loan on his wide screen tv. His mortgage is auto-paid from his account so that leaves the rent. Apart from beating out another applicant who has an actual better credit score, the default rent payment is a loss to the rental company and is made up by increasing the rent to his neighbor renters.
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Rents will reflect losses from defaulting renters.
Not including young singles and couples who have yet to obtain the means to purchase a home, renters tend to be lower income earners than home owners. Many renters who are earning enough wages to be able to afford a mortgage are unable to do so by circumstances such as job fluctuations, divorce, medical expenses, etc. but on the other hand, many are renting due to the inability to manage their incomes. There are roughly 20% of renters who are consistently behind in rent payments. Provincial and State governments have Landlord-Tenant laws which partially protect tenants against eviction. Loss of rental income caused by late and unpaid rents, are in general passed on to the renters who do pay their rents on time. Rental laws need to include a better means of collecting rent losses from defaulting renters. Most often the costs of collecting back rent is too expensive and time consuming to be practical, if possible at all.
Municipalities, with government support, offer low rent subsidies for people with low to moderate incomes. Forms of subsidized housing include direct housing subsidies, non-profit housing, public housing, rent supplements or a form of co-operative and private sector housing, often in complexes managed by service organizations. Often these subsidies come with an agreement to perform maintenance in lieu of partial rent.
Renters who find themselves in financial distress can apply for rental assistance from social services which is limited to an amount usually the subsidized rental average within the community. Very seldom will it cover the actual rent. The applicant may be placed on a waiting list for subsidized housing which could take 4-5 months before a unit is available. The Landlord / Tenant Laws most often will prevent the landlord from executing an eviction while the tenant is in waiting. The rental losses to the landlord are very seldom covered under the Social Housing laws. Therefore the losses, often quite substantial, are passed on as rent increases to the other tenants.
The fear of fraud by unscrupulous landlords hinder the laws in many jurisdictions from changing the laws to cover rental losses and prevent them from being passed on to other tenants. Meanwhile, paying tenants are being disadvantaged.
Renters pay higher taxes than homeowners.
A greater help to renters would be for municipalities to tax rental accommodation at the same rate as residential. Approximately 20% of rent is municipal property taxes. Add on a higher rate for metered water, garbage collection and other usage fees and taxes, renters pay on average all but double the tax per square foot of living area than do homeowners. Because rental housing is a business, higher rates of taxation will be charged, even though taxes and levies are passed on dollar-for-dollar to the tenants. A rental complex will be classed “non-residential” and taxed and levied either commercial, light industrial, or at best multi-residential.
By leveling the residential tax field, rents could be lowered by roughly 10% which would not only help renters with real disposable income which in turn benefits the community in which they live, it would be a huge help in saving for down payment and eventually allow more renters to become homeowners.
The anomaly is that if a rental company owned and rented out 20 detached homes or duplexes scattered across a residential taxed area, they would pay residential taxes. But because 20 units are purposely built as rental units on a single property, they are classified at a higher tax rate. Who pays the difference? – the renter.
Which costs less for a municipality?
- Collecting residential tax on 200 individual homes from 200 individual homeowners or collecting 200 unit taxes from one landlord?
- Collecting garbage from 200 individual homes or collecting the same amount of garbage at one address?
- Street cleaning or snow removal at 200 individual home addresses, approximately 40 blocks, or from the 4 blocks surrounding one 200 unit residential highrise?
- Why is water provided for residential homeowners, who have a far higher lawn and garden to building ratio, at a residential rate (if not free) when water is provided to rental apartments at non-residential or even light industrial rates?
Why then are these same services provided by the city for 100 individual homeowners in a 100 unit condominium at the residential tax levy and identical services for the 100 renters in the apartment building across the street at a higher non-residential tax levy?
Remember:
Rent is not an arbitrary number picked out of the air. Rent is a compilation of all expenses encountered by the landlord and includes mortgage, interest, taxes, services, service fees, maintenance, losses, improvements, administration and hopefully, profit.
The landlord is in business to make a profit.