Philadelphia does not enforce its rental laws. This has created an ongoing cycle of illegal landlords operating unchecked while the licensed landlords are squeezed out.
Earlier this week, our company looked at purchasing a package of properties from an investor. In doing our due diligence, we noticed that he hadn’t paid property tax for several years. We asked him about this and he was surprisingly candid.
His response was that there was no reason to pay real estate taxes until he was ready to sell the properties, because Philly takes ages to seize properties and the penalties are low enough that he can do better investing the money elsewhere. He also doesn’t have rental licenses on the properties. If he needs to evict someone he just gets a rental license at that point. Furthermore, he had single family usage on one of the quadplexes. When he needs to evict someone from that property, he just gets a single family license and uses it to evict the particular unit.
This landlord, who owns over 100 properties, does not come across as a slumlord. He keeps his properties in good condition and his tenants seem generally happy. He’s absolutely behaving badly, but I bet that in his mind he’s doing what he feels is necessary to succeed as a landlord in Philly. After all, it’s what most landlords do around here.
Here’s the root of the problem: there is almost no disincentive to violating the law if you’re a Philly landlord. Our laws are not enforced. It’s why around 75% of Philadelphia rental properties are unlicensed according to the city’s own statistics.
On the other hand, there are big disincentives to obeying the law. Here’s what the 25% of law-abiding landlords pay that the rest often do not:
- Rental License – $50 per unit annually
- Business Privilege License – $300
- Trash collection fee – $300 per multiunit annually
- Business Privilege tax – 1.415 mills on gross rent
- Net Profit Tax – 6.45% on net income
- Fire alarm monitoring – around $25 per month for each multiunit
- Fire alarm inspections (annual fee)
- Fire extinguisher certifications (annual fee)
- Property tax
- Lead paint inspection fee (starting in 2013 for units with young children)
There’s a lot of cost associated with being a good landlord in Philly!
The obvious effect of all these unlicensed landlords is that the city is losing a lot of revenue through its lack of enforcement. However, there is a more subtle consequence: Landlords who make their required payments are at a significant competitive disadvantage to those who do not. Therefore, more and more properties will end up in the hands of the bad guys.
Law-abiding landlords will not be able to purchase properties that the unlicensed 75% can because the fees reduce their margins below their competitors. In the example of the illegal quadplex from the beginning of this post, it might take $15,000 to convert it to a legal property, so an unlicensed landlord could pick up the property for $15K cheaper than a licensed one. Additionally, in these tough times, landlords are regularly being forced to sell their investment properties due to negative cashflow. The fees listed above can easily be the difference between breaking even and not. I would bet that there a steady stream of licensed landlords who are forced to sell their properties in cases where an unlicensed landlord would not be. All of these scenarios will push a higher and higher percentage of properties into the hands of landlords who fail to follow the rules.
Landlords have a responsibility to follow the law. However, the city also has a responsibility to eliminate this current environment where irresponsible landlords are rewarded. I believe that there are some cost-effective ways to do this, and I discuss some of them in this post. Let’s hope that city council becomes aware of the severity of this problem and does something about it.