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Are You a ‘Slumlord’?

by Brandon Turner on October 21, 2012 · 26 comments

  

Last week on the BiggerPockets.com blog I discussed a property I was trying to decide whether to pursue or not. The property was located in a lower-income “rough” area of my town and needed significant cosmetic fixes (and perhaps more than just cosmetic.) I’ll tell you later what I did this week with the property, but first I want to explore the issue a little further.

This post became exceptionally popular and at the time of this writing has over 90 comments as people discussed the pros and cons of investing in lower-income areas. Clearly – this issue is a hot topic and something most investors will face from time to time. To summarize the comments (in case you don’t want to read all 90+):

  • Many investors would never consider buying a property in a rough area
  • Some do buy in low-income areas but chose to rehab it to high standards
  • Some suggest buying all you can in that same area and improving the entire neighborhood
  • Some suggest buying for cheap, keeping it cheap, and getting all the cash out without improving much.

That last view in the list seems to be the most controversial – purchasing a low-income property without any real desire to improve it. I’m sure you’ve seen the properties – as they stand out like a sore thumb. Deteriorating paint, junk cars littering the area, bedsheets hanging in the windows, and a variety of tenants who I would be nervous talking with, unarmed. Most of the world would look at this type of property and say it must be owned by a “slumlord.”

No one wants to claim to be a “slumlord.” So today I want to look at exactly what makes a slumlord and how to avoid being one.

What is a Slumlord?

Wikipedia defines “Slumlord” as

“a derogatory term for landlords, generally absentee landlords, who attempt to maximize profit by minimizing spending on property maintenance, often in deteriorating neighborhoods.”

Using this definition – it would seem that the majority of landlords could be defined as a slumlord. The main qualification in this definition is “maximizing profit by minimizing spending.” I would argue that if you are a landlord and not attempting to minimize your spending on property maintenance then you are spending significantly more than needed.

No landlord wants to spend a lot on maintenance. Maintenance is one of the largest expenses a landlord might face and spending money unnecessarily is like throwing money out the window. That’s why we get multiple bids, often do maintenance work ourselves, and use cheaper options when possible. Why spend twenty when ten will do perfectly fine?  Why replace when something can be repaired?

I’m not suggesting a landlord should refuse a property maintenance issue – but “minimizing” expenses is key in running any business – real estate or other.

Exploiting The Poor

I think the key concept that is missing from this definition is “exploitation.”

The truer definition of slumlord, I believe, is

“a derogatory term for landlords, generally absentee landlords, who attempt to exploit tenants and maximize profits by refusing to spend on property maintenance, often in deteriorating neighborhoods.”

To me, a slumlord is one who takes advantage of a tenant’s situation in life to maximize their profits. A tenant who cannot afford a more expensive place often has no other option but to put up refused maintenance and deteriorating property condition. Sure, they could move somewhere else. Moving, however, is not free. It takes time, money, and acceptance into a new place that might not be any better.

Sure, we could talk about why the poor are poor and who’s responsibility it is to help them. I don’t want to go there though. In fact, I want to steer clear of the politics and rhetoric and focus on something not often talked about in business: the heart.

A slumlord is a condition of the heart.

Slumlord Millionaire?

It’s not about what a property looks like – it’s about what your personality looks like. Do you exploit the poor because they have no other options (or don’t feel they have other options?) Do you refuse needed maintenance because the tenant won’t leave? Do you ignore your tenants important requests simply because you don’t want to spend money? Then you might be a slumlord.

Again, I don’t think it’s mandatory that landlords pay for high-end repairs whenever a tenant wants one. However, providing and maintaining basic services with your property – even if it costs money – is not only good for overall business but also simply the right thing to do.

As the Biblical adage states, “What good is it to gain the whole world but lose your soul?”

My Decision About the Property

As for the property under consideration – I decided to pass. For me – I decided that the great cashflow but more intensive management did not currently fit where I want my business to be. For others – it might be the perfect investment. As I’ve stated time and time again – there are many ways to make money in real estate (see my article “The Top 100 Ways to Make Money in Real Estate“) Several years ago this may have fit more closely with my business model. However, today not so much.

This one, while it does make money, didn’t fit my standards close enough. I wish whoever buys it good luck- but for me I pass.

Let me know what you think below.  Adding a comment is easy. Simply enter your name and email (and website if you have one), write your comment, and press submit. Easy as can be!

Do you agree with my definition of “slumlord?”

How would you define it?

Photo: Angela Anderson-Cobb

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{ 25 comments… read them below or add one }

Dale Osborn October 21, 2012 at 12:07 pm

The slumlords are the ones that give landlords a bad name in the industry. By never putting anything back into their properties it becomes a run down junker. Spending a little for preventative maintenance now can save you many dollars down the road in reactive maintenance. It is better to fix a problem when it is small rather than when it gets too large.

Dale

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Brandon Turner October 22, 2012 at 12:45 pm

Agreed Dale. I have friends who tease me about being a slumlord – but once I show them my properties they understand I’m trying to help – not take advantage.

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Josh Stevens October 21, 2012 at 12:15 pm

I think you hit the nail on the head with the fact a true slumlord is exploiting their tenants by the tenants lack of knowledge about available resources to help them or available resources to move.

As far as lower income neighborhood properties go, it’s been my experience that you can find good tenants anywhere, but you will have to work harder and will have more management hours involved in those neighborhoods.

Sometimes cheap is too expensive lol!

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Brandon Turner October 22, 2012 at 12:46 pm

I love that quote “sometimes cheap is too expensive”

So true!

Thanks for the comment Josh!

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Al Williamson October 21, 2012 at 4:12 pm

Congrats Brandon on a nice summary of those 90 comments. I agree with your definition of “slumlord”, although I don’t want to think hard about it.

I’ve written numerous posts on why operating like a slumlord is the least profitable way to hold inner city real estate. There are other paths besides doing nothing but co-existing with drug dealers and harboring disgust for those who pay your rent.

With that being said, I want to cheer my BP family who feel as passionate as I do about building wealth AND doing right by lower income people.

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Brandon Turner October 22, 2012 at 12:47 pm

I always have admired your thoughts Al – especially since this topic is close to you! Thanks for your input!

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Dennis October 21, 2012 at 4:35 pm

Brandon,

If I didn’t know better I would think your are bucking to top your 90 reply count, let me see if I can help you.

Now concerning what constitutes a slumlord, one can be a slumlord in a nice neighborhood also. My goal one day, is to amass such a war chest that I can buy the property next door to the personal suburban residence of the slumlord that presently reigns on my little two blocks of paradise. I would install the worst tenants I could find giving them a monthly discount for harassing him day and night. I would also allow the house to fall into such a state as to resemble his rental properties.

I would like to add, that I would not buy a property where I felt I needed to carry anymore then two automatic pistols at the same time. Presently I do not have a need to carry a gun, but in the old days I used to carry a 16 shot 9mm Smith and Wesson and a 25 caliber Beretta just in case. The old adage that folks who carry a gun sometimes end up getting shot by their own gun only holds true if they were foolishly only carrying one.

Getting back to that definition of a slumlord, taking advantage of the poor? Well sorry that doesn’t cut it. Some of the worst properties I have seen are occupied by those attending our universities, I credit this life experience along with the exposure to the fantasy world view of those in academia with cranking out young socialist communists who believe ideas like rent control and taxing anyone other then themselves to a high degree as a way of leveling the playing field.
The idea of working as hard as those nasty people seeking wealth like their landlord never comes into their minds, instead they choose to embrace policies that would drag others down to their level and they believe this is progress, and thus they call themselves progressives. These misguided folks always cook up words and phrases that reflect the opposite of what they really believe in a effort to fool the public who for the most part are easily lead astray by media pundits. One excellent example is the word liberal, to actually be a liberal one use to have mastered the 7 liberal arts, once doing so they possessed perfect discernment and clear thought on any subject. But today a person claiming to be liberal actually has no ability to think past what they have been told by their thought masters.

I will assume all those in RE investing are in business with the future hope to gush money out of their acquired assets. With this thought in mind they further the candidacies of those who will gladly rob them of as much of that money as possible to grow the pool of those slaves who will keep them in office. I always say look to the gleaming example of government greed Detroit a once shining jewel among American Cities and now for the most part a wasteland.

The idea that there are good tenants to be had in low income is not true, a good low income tenant is actually a less bad tenant. A bad tenant may be one that pays the rent on time, but is a disaster in every other way. I would say it is possible to train up a tenant to be the top of of the less bad pile, it takes a lot of work and can be thwarted by one blip in their financial life. These blips actually occur at regular intervals and if you become a truly successful low income landlord you can plan for such times as you will know exactly when they are going to occur and can profit from these occurrences.

The main occurrence is Christmas, this holiday as well as all other holidays which require the spending of money should be banned in low income neighborhoods. The temporary attempt by low income tenants to make their children think they aren’t poor by purchasing the same gifts they think rich people are buying will cause your to rent to be put on hold. I always look upon these times as a boon because I get a 10% late fee, and I know my tenants will not be able to move in the cold weather months (too cold to drag 20 trash bags through the snow).
If I didn’t know better I would think some slumlord invented Santa Claus to keep his tenants wasting money on things that will be in the trash 2 months later, and inventing a method where a 10% boon to his bottom line might come to him for the up to three months. This extra 10% can come in handy paying for the heat or for paying the air fare to Florida.

Well I am sorry for this long post, but I wanted to make sure I touched on every subject mentioned in the original post.

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Brandon Turner October 22, 2012 at 12:52 pm

Lol thanks Dennis! Yeah, I wanted to touch on this while it was still hot and include some of my own thoughts. I like your comments on Christmas – I agree, it’s like a guarantee to have late rent from multiple tenants.

I don’t mind long comments! I appreciate you taking the time to share your thoughts!

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Jordan October 30, 2012 at 5:19 pm

Great article and discussion. There is a lot of charge about this subject. I agree with most of the thoughts Dennis expressed, especially those about Christmas and how tenants handle the problems. However, I’m mildly appalled at this suggestion that there are no good low income tenants.

Full disclosure, I’m a second generation (actually third, but the 2nd didn’t care to participate) RE investor and am rather disdainful of slumming. However, my (ahem, business partner… I’m going to leave out an identifier to protect the innocent) has been in the business for some time and whether from greed or wearisome age, many of the properties were in various states of disrepair when I came onto the scene several years ago. I have moved people out days before the holidays. We have properties that attract from upper middle income to lower income homes in various areas. I have worked very hard to improve and, where appropriate, upgrade properties, to great affect.

I feel that my situation is a case in point for investing money up front and staying ahead of maintenance. As I have worked to improve the worst units, I have been able to increase rents and witnessed a rise in collections, quality of tenant and reduction in costs due to tenant caused damages. All meaning more income at the end of the day.

They are out there, and we have more than a few low income tenants who are wonderful. These are often manual laborers with very little education and typically need more than one income to make the situation work. Often they are first generation immigrants, or those looking to turn their lives around (re: hit bottom, recovering, etc). Sadly, most of those born Americans that are low income tend toward the entitlement culture and believe they ‘deserve’, regardless of merit (doesn’t sound much different from a trust fund baby… except for the trust fund). What I have seen though, is that they all have the same aspirations as those at the highest levels of society (as noted above). What sets those who are good tenants (and markedly often of income disparity) apart from those that are not, is personal responsibility. These people are no different from you or I and want a better life for their children, and work very hard to achieve that. Though, sadly, that seems sometimes lost on the children themselves. Perhaps they would be better off to invest in educating themselves.

I will admit that it often happens that a low income tenant that is good at maintaining one part of a house is often poor at maintaining another… they will have the interior immaculate, but the yard is a mess.

from here on it’s mostly a diatribe about the parallels of education, responsibility and income… you need not read on, it just feels good to get it off my chest.

There are two ideas I have found constantly repeat themselves as I deal with more people (not just tenants), across incomes. Responsibility and education/experience. First, as a graduate and having gone through the process, I can admit to Dennis hitting the nail on the head about students often being poor tenants. While not always true, most students are irresponsible about anything other than grades and the next place to score some booze. This, however, is a transitive state which typically disappears as people grow and learn. This same growth and education does not take place for many lower income people, who often never learn too much about anything, their housing and even themselves included, nor are often given the opportunity to do so. Because of this, much of my time and energy when I first started were dedicated to fighting and eventually educating, poor and young tenants alike (and truly those across the spectrum), when they first move in and throughout their tenancy. I try to provide even handed and direct information for people, to simplify absorption, and often need to repeat a message. Most people, if I am doing a good job and treating them with respect, learn (at least with respect to dealing with me) to be better tenants, or at least play the game the way I want. I hope this effort carries forward, but who can say? Regardless, if we truly want to make a difference as landlords, I would suggest not that it is ‘your’ responsibility, but all of ours as a collective to ensure that each of our efforts is not wasted. It takes a village, but what happens when the village stops caring? Like most of investing, once you have developed a system, investing in your tenants doesn’t take much effort and has monetary payoffs in the long run. I have found that the ‘better’ I get and more upfront and honest I am from the beginning, the fewer problems I have because people know what to expect from me and vice versa.

Despite this effort there are, admittedly, some people who are resistant or impossible to reach, but they aren’t around long. Often, it seems, the most problematic people act as victims, which leads into the second point, responsibility. Most people in becoming a part of society, learn responsibility somewhere along the way. This again, fails the lower incomes, as they displace blame to some other entities including me. I would like to say that I understand this, but I don’t. My only successful recourse thus far has been to be a hardass… be as mean as you’re going to be immediately for those that need it. Maybe these efforts are misguided and stem from some sic need to try and fix the world or make up for the short comings of others, or the idea that I can change someone. In fact I relish the idea of ‘beating’ someone… to get them to act in a manner I prescribe, especially if I can get them to think it’s their idea. I suppose I may be a case of someone misguidedly trying to make a difference for people that are hopeless

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michael neumann October 21, 2012 at 4:36 pm

I starting investing in the south side of Chicago two years ago purchasing 2 flats(duplexs). We renovate them to standards above all others, lease them and then sell them to investors looking for cash flow. We do the property management for the owners if they want(everyone does). Our experience has been nothing short of wonderful. These are all lower income neighborhoods. We take the approach that we are improving the neighborhood, giving the tennants a better option than what is available elsewhere and our purchasers recieve a ROI greater than achievable in most rental scenario’s (20%-30% on 75%ltv and 10-12% on cash purchases). we have purchased close to 100 units and plan on doubling our purchases in 2013. I believe the lower end of the market is the best as there are always people looking for housing and if you treat them correctly, you will mostl likely get the same in return.

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Brandon Turner October 22, 2012 at 12:52 pm

That’s a nice business model Michael! I wish you a lot of luck on this!

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Mike October 21, 2012 at 6:56 pm

Another great post Brandon. I really love your writing and the conversation that you stir up!

For me, the definition of a slumlord is an irresponsible landlord who takes advantage of the poor, shirks his or her landlord obligations and does not keep up maintenance and safe living conditions for tenants.

The issue is that with the way the rental laws are now and with the proliferation of Section 8 housing, it’s pretty tough to actually be a slumlord when you have Section 8 inspections regularly. Either you fix up what’s needed or you forego your check and may lose the ability to rent to those kinds of tenants. So based on that definition, the slumlord tagline is hard to affix now.

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Brandon Turner October 22, 2012 at 12:54 pm

Thanks Mike! That last one sure stirred up some debate, eh! And that’s a great point about Section 8 inspections. In fact – I just had one in one of my Section 8 units and sure enough, there were a few issues I need to get taken care of. Apparently the heat isn’t working right, and for some strange reason the tenant never bothered to call and let us know!

Thanks for the comment Mike and keep up the good work!

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Shaun October 23, 2012 at 10:30 pm

In my experience the people that opperate like true slumlords are renting to immigrants.
They take advantage of the fact they may not know their rights or where to go if they actually wanted to complain, and that is for the legal ones!
Make it like 10x worse if the people are not hear legally. In this case even if they know they are being screwed and would love to complain they won’t since they don’t want to have any agency to know the exit!

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Brandon Turner October 23, 2012 at 11:07 pm

I see that a lot in my town, and I’m sure this property has been part of that same problem. It’s not good. Thanks for joining in Shaun!

Laurice McCoy October 21, 2012 at 8:36 pm

Good post. I respect your perspective on what is a slumlord. Especially since I was once on of those “low-income” tenants. I believe just because you’re low income doesn’t mean you should have decent housing. I’ll leave it at that.

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Brandon Turner October 22, 2012 at 12:57 pm

Thanks Laurice! I agree. Low income doesn’t mean low quality. I try to treat everyone with dignity, even if it doesn’t seem they deserve it. I’d rather be guilty of helping than hurting.

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Philip Wade October 22, 2012 at 1:03 am

The post really does not provide any information regarding the poor people. I thought that it would be related to that. However, the information in this post is good and seems to be not complete.

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Brandon Turner October 22, 2012 at 12:58 pm

Hey Philip – Yeah, that would be an interesting side on this topic – how the tenant feels. Perhaps another week! Thanks for the comment!

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Jason October 22, 2012 at 7:32 am

I have a few properties in rougher areas of Denver. Mind you our rough areas pale in comparison to other big cities. Well kept properties attract better tenants. You have lower turnover, and shorter turnover time. There is a difference between a well kept property in the rough areas and a well kept property in a nice area. Its a matter of perspective. I find those that follow the golden rule, do well as landlords in rough areas.

Jason

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Brandon Turner October 22, 2012 at 12:59 pm

I think there definitely is something to the Golden Rule – but as with every rule there are exceptions! Thanks for the comment Jason!

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Deb Smith October 22, 2012 at 12:39 pm

Agree with Jason’s post. I have a rental house in a pretty rough neighborhood and when preparing it after purchase I tried to look at it with a “would I live here?” perspective (neighborhood aside). When that “for rent” sign went up I had a hard time keeping up with the volume of phone calls. I also learned that most of the people that REALLY wanted to rent the house currently lived in the neighborhood and really wanted to stay in it. To an outsider it looks like a rough place, to them it was home. Perspective, indeed.

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Brandon Turner October 22, 2012 at 1:01 pm

Deb- I think you said something really key here. People want to live in the same neighborhood they already live in. Often times there are really good tenants in bad neighborhoods simply because they always have lived there. It’s those people we want to attract with higher quality buildings. Thank you for your input!

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Dennis October 24, 2012 at 6:46 am

Let me just add one of the biggest pitfalls in low income investing, and probably the reason you are being warned off.

These properties are occupied mostly by those who have decided that life is good where they are. In my opinion that is their God given right. Personally I would not want to expend the energy to become Donald Trump, or have his life. My tenant have told me many times I am the hardest working white man they have ever known. Probably right but I don’t consider what I am doing hard work.

That said the largest pit fall of low income is the actions of other landlords within these areas. This factor never comes into play in nicer areas because people will use the law to end the siege.

In my little end of paradise my rentals are the nicest some you would live in, and the area is not unsafe. What has happened of late is an effort by the City to push drug dealers out of the projects a mile away. Their efforts are working the hoods are moving into nicer areas, chasing less bad low income tenants away.

So what does the above cause? I have 3 vacancies for 2 months out of 9 on one block.
So what am I to do now that we are coming into the cold weather? What I am going to do is give up and put my buildings in the control of a program, that program is going to fill these buildings with early release prisoners. The properties will gross twice the month rental income but the expenses will remain the same or go down (things don’t need to be so nice).
So a properties that gross $5000 a month with $900 month expenses will gross $10k.

But what will happen to the area and to other landlords who have nice tenants? They will probably join the program and destroy the area as i am going to be forced to do.
The difference is I am going to sell all of these buildings on my way out of the City who does not seem to care about those trying to fight blight in the low income areas. I and all of the other long term neighbors get no where with the City or the Courts.

The really big picture in our Cities is the war against the police by the courts and the media.
Police have the worse job in the world from a politically correct position. There plan is like everyone else, they felt called to do a job, work very hard to be the best, and one human mistake taken mostly with criminals who the media paints as victims and the officers carrier is at an end. This just happened to a 20 year veteran officer in the Philadelphia police force.
What is going to come out of this is the police second guessing every move they make because of You Tube. This is why my area is on a fast road to blight and abandonment.

I am sure in 20 years there will be great fanfare while some pundit politician does the ribbon cutting on the new neighborhood that millions of tax payer dollars created after the smoke cleared. Just a little leadership and governance would have preserved the area.

So keep this is mind you can do as you like to make things nice for your low income tenants, go pat yourself on the back telling yourself you are a great humanitarian. One or two shooting or maybe a few break-ins to cars and some general vandalism, a strong arm robbery. Your less bad tenants will vanish leaving all of your efforts to weeds.

If I had it over to do I would not have bought into these areas, don’t get me wrong, the cash is nice who couldn’t use a few thousand extra a month for no money down and $10k at closing? But the next morning after the honeymoon is over can be disappointing.

One of my good friends transitioned into the suburbs and rode the bubble getting off just before the crash. He invested is loot into a shopping center and now is sitting on the beach. So am I but I have an anchor tied to my leg while he can move about easily.

Let me give all of you new or rising landlords some advice I did not take. The next time folks are insanely throwing money around in REI sell everything you have. REI should not be looked at as long term buy and hold. We like to say those who believe this about the stock market are old fashioned, but somehow it is good to do in REI. I would agree only in terms of buying truly cash gushing stocks like Microsoft or Apple or any that pay dividends and that is the kind of REI that you should hold long term. Everything else buy low and sell high. At one point during the run up I sold two of my then six 3 unit properties to a newbie investor for $165k he intern borrowed $250k on both and highly renovated the buildings, later he lost both to foreclosure I bought one back for $49k another investor paid $75k for the other.

I should have sold him all of my properties because he had formed a investing syndicate and could have bought them all. This mistake will not happen again Mr. Obama is opening up the credit markets again printing money, interest rates are low, we all know very shortly the media is going to have mom and pop selling their stocks and bonds to go into REI and I will be waiting for them.

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tracy July 6, 2014 at 10:15 am

My Uncle is the owner of a three family I rent an apartment in. When I moved in, over 8 years ago, there were minor things he swore he’d get to, (i.e. a connector pipe under my kitchen sink that I have to keep propped up so drained water doesn’t get all over the floor, a broken window in one room, missing tiles in the shower). None of these issues have been fixed and newer ones are appearing , (i.e. floor in bathroom, which by the way has no heat source, is collapsing from moisture, each time it rains the outer facing walls collect more moisture these walls are ALL the outer facing walls. I’m guessing it is due to poor or no more insulation in the walls). The water damage to the horse hair fiber boards he used over 30 years ago can be seen through the wall paper which also hasn’t been repaired or replaced in over 30 years, as well as on my ceilings between the 2nd and 3rd floors. when I bring these things to his attention he says something like, ” oh yeah. I’ll have to fix that “. but nothing ever gets fixed. He is charging me a minimal rent but not because he is my Uncle, more likely because he couldn’t get a rent that this size apartment should be able to bring in. I love my uncle but it’s getting ridiculous. does this make him a slum lord/ if so who should I contact?

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