I came across a Tiktok the other day about a guy who purchased a building that had an elderly male tenant who was paying $450/mo for a unit that should be rented out at $900/mo. The tenant has lived in this unit longer than the new landlord has been alive. He stated in the video that he has since owned the property for 4 more years and has not increased this tenant’s rent. The comments section was full of people telling him he was doing the right thing. That he was honoring his elders, that this is how it should be. They are wrong, and so is he.
Note: This creator chose to share this information with the world. It’s his building and his money. If he chooses to do this, that’s his business. Likewise, if he chose to burn the building the ground it would also be his business. I’m commenting more on the peanut gallery cheering him on and the mindset behind this, than on his specific actions.
It’s an Act of Charity:
Charity in and of itself isn’t a bad thing. What’s bad is not having a thoughtful strategy on how to best deploy your charitable giving. The true value of the product is $900/mo. If every month you are giving this product to someone else at $450 per month, than it is an act of charity worth $450/mo, that’s $5,400 per year in charity. If you were to give $5,400 in cash each year to charity, would it all go to the same individual? Would you then give the same $5,400 donation to that same individual every year for 4 years, and presumably into the future? To the same individual who has received a similar charitable donation every single month for most likely over a decade? The average yearly giving for someone earning between $100,000 and $500,000 per year is just over $5,000. $5,000 is a lot of money.
Unless you are earning millions per year, this is not being intentional with your giving dollars and it isn’t creating any positive change! It’s enabling someone to live a lifestyle that they shouldn’t be.
It’s Creating A False Reality:
The elderly man doesn’t realize he is being given the money. He likely has no idea that market rate rent should be twice what he is paying. Presumably the previous owner had the same mindset of “He’s a good tenant and elderly, I’m not going to raise his rent”. Rather than adjusting his budget and lifestyle a little bit each year for the past 20 years, he is now in a position where he is paying half what the market rate for rent is. Rather than several modest increases, he is in a position where if the reality switch is turned on, he is in for a world of hurt.
If he wanted to move, he can’t. If you sell the building and the next owner wants (and rightfully so) to maximize the profit of his investment, he will either have to come up with $450 more dollars per month, or find another living arrangement, which will likely cost closer to $900/mo than $450/mo.
It Takes Away From His Pride:
As a man I don’t want anyone subsidizing my life, and I would guess this desire gets stronger, not weaker as we age. This man may be very offended to learn that someone was paying his way. I think it is morally wrong to take away his right to be self supporting, especially without him knowing you are doing it. It sounds like he never asked to have his rent reduced, and likely does not want to be in this situation. The landlord likely does not know all the details of this mans financial world either. Perhaps having rent at $450/mo allows him to do nothing all day, whereas if his rent was the market rate of $900 he would be inclined to get a part time job. At $20 an hour, which is the defacto prevailing minimum wage these days, he would need to work only around 6 hours a week to afford this increase. The added socialization he would get from working and the added pride he would get from knowing he is self supporting, would be great improvements in his life.
Maintenance Will Suffer:
Typically if a tenant does realize he is getting a great deal he will do everything he can to not be a bother. He will not tell you when the sink has a leak, or when there are bugs, or when a window broke, or when the roof leaks, because he doesn’t want to rock the boat. Magnify this over 20+ years of subsidies and you have a unit that ends up being completely destroyed.
If this building is being ran as a business because the rent is so far below market rate, there is not enough money to properly maintain the building. This building likely already has substantial deferred maintenance and will likely continue to have deferred maintenance in the future.
It’s A Wrong Direction Generational Wealth Transfer:
The whole idea that the younger generation should support the older generation is steeped in a mindset from the great depression. Today’s elderly are not those people who lived through the great war and struggled through the great depression. These are the people who lived through the greatest economic expansion in the history of civilization. The notion that millennials, who have been handed the destroyed economy from them should in any way subsidize their living is misguided.
Presumably The Building Sold At Market Rate:
If the building was sold at market rate, then the previous owner has shown that he did not desire to continue this goodwill. He sold the property to let someone else do his dirty work. Had he desired for the tenant to continue being subsidized, he either would have sold the property at a steep discount with a clause to not evict or raise rent for X number of years, OR he would have sold at market rate and continued to write a check for $450 each month to subsidize the old mans rent, as he has been doing for many years.
Assuming this $450/mo is all net profit, $5,400 a year of lost income at a 9% cap rate (which is high), means that the value of the building should be $60,000 lower than if the rents were at market rate. Are we going to write this tenant a $60,000 check solely for being old?
What Is The Right Thing To Do?
The right thing to do would have been for the previous landlord to always keep the unit at or at least close to market rate rent. After buying the building as the new landlord, there are several right courses of action, and subsidizing this guys rent to the tune of $5,000 a year is not it. 10 years from now if he’s still around his rent will still be $450 when market rate is $1,500 a month, then the subsidy will be over $1,000!
Option 1: Explain to the tenant the position he is in that the previous landlord put him in, and offer to make the transition as painless as possible. Provide a scheduled rental increase of $150 in 3 months, then $150 every 6 months until the market rate is reached. This provides a path to get back to reality, and allows a transition period instead of an immediate hike. He is free to leave at any time and is not being evicted. The owner would provide a $3,600 subsidy in year 1, and only a $900 subsidy in year 2, with market rate rent reached after 21 months.
|Month||Market Rate||Rental Rate||Owner Subsidy|
Option 2: Explain to the tenant that he is on a month to month lease and rather than giving him 30 days to get out as required by law he can have 60 or even 90 days. If he wants to remain after 60 or 90 days, whatever you choose, the rate goes up to market rate. This gives him extra time to find new living arrangements or arrange for getting a roommate to cover expenses with him.
It’s Unfair To The Market:
If you subsidize this man for decades and he is paying half the rent that should be paid, you are taking away the opportunity of someone else to rent this apartment and are contributing to the housing shortage. This man should be renting a place with room mates in order to cover the market rate for rent. Let’s magnify this. Say in this small town there are 4 elderly men each being subsidized $450 in rent by “helpful, caring” landlords. These landlords collectively are losing $1,800 a month, AND the properties are not being put to their highest and best use. These men should each get a roommate and be paying $900 combined. 2 units will then have 2 people staying in them paying full market rent, and the 2 vacant units will now be available for other people looking for places to rent, who are willing and able to pay full market rent.
It’s just as ethically questionable to create a situation where a single person lives in a unit that should have 2 to 4 people in it by reducing the cost only for that individual as it is to own several empty houses when there is a massive housing shortage.
This consolidation of housing will release demand on housing units. The decline in the average number of people per household is one of the driving forces behind the current housing crisis. There is nothing wrong or immoral for elderly people, or for people of any age to share housing, especially when the alternative is the rely on the charity of others to provide for their consistent economic existence.
This phenomenon only happens in housing. In no other segment of the economy do people just say, “oh well the right thing to do is give my product or service away at half the cost.” The guy at the car dealership isn’t selling a guy a new Tesla for $20,000 because the guy is elderly and can’t afford a $500 a month car payment, but can afford $250/mo. The guy at the grocery store doesn’t see $300 on the register and say, you know what, this guy is elderly, the right thing to do is for me to lose money on this transaction and give it to him for $150, and then repeat this every week forever. The utility companies sure don’t cut the price of their product. Housing is no different.
What do you think? Am I an evil landlord? Does it make sense to put $5,400 of charitable giving per year to 1 individual, presumably forever?