Second Landlords in Shanghai – Avoid at All Cost?

Should You Avoid Second Landlords when Renting Your Shanghai Apartment?

You might have heard about them or not: Second Landlords. They are similar to house flippers, but operate in the context of renting real estate. They find properties that are relatively low priced, renovate or furnish and decorate them, and – yes – put them back on the rental market with a higher price tag.

The real estate professionals over at SmartShanghai recently dropped the following advice for their readers:

Avoid Second Landlords - Second landlords are people, and often entire companies, who rent an apartment (and often dozens or hundreds of them) from the original landlord (the “first landlord”) and then turn around and re-rent them to tenants at an inflated price. Sometimes — sometimes — they justify the price increase by adding some design flourishes or even doing a big renovation. But still. They are inflating the market — we’ve most recently heard of a 15,000rmb place on Yongjia Lu being renovated and put on the market for 35,000rmb. There are even third landlords. They are rarely as responsive or responsible as first landlords, and you’ll always pay more for the pleasure of a second landlord. It’s just asking for trouble. Avoid.

Well, thanks for acknowledging that at least some of them are people – humans one might say. As somebody who has worked with real estate agents, expats, landlords and second landlords in Shanghai for the last seven years – I however disagree with the rest. Now, I am not saying that this cannot be a very lucrative business in Shanghai. There are more than 60 companies in Shanghai engaging in this, and countless individuals. Pretty much every superhost on AirBnB Shanghai is doing it as well. But to claim that only “sometimes – sometimes – they justify the price increase” by actually adding value to the property is far from the truth. Closely following the market allows me to see my fair share of second landlord rentals, from the the time when they were put on the market by the original owner, until they are offered again by the second landlord.

These properties are originally rarely able to attract the interest of actual, legit tenants who are looking for a place to live in. Instead, they usually come with old, shabby furniture, outworn wood floor, a 15-year old top-loader washing machine, TVs from the last century and without any heating. Prospective tenants on a low salary find larger and newer options in the suburbs, and those who earn more can find better in downtown. Landlords who do not want to or cannot make the investment are very happy with second landlords showing interest in signing a long-term lease contract, for typically 5 to 7 years.

And that’s when a second landlord starts to insert his money and work into the property. Rent will of course be charged from day one, property improvements begin. Depending on the condition, that might mean completely gutting out the property and installing heating, new A/C, proper flooring, rearranging walls to make space for a bigger kitchen with all the equipment that tenants expect today. Sometimes it might indeed be not much more than painting the walls and replacing outdated furniture. However, with the massive competition in this industry, the rent paid to the owner will not be much lower than what the second landlord can charge. In fact, second landlords nurture their agency contact with a lot of dedication in order to be informed immediately about any potentially suitable property. That means once an under-priced rental becomes available, and requests and offers will reach the owner instantly. Shanghai property owners are not idiots – for the most part – and will quickly correct pricing or just let second landlords bid for the contract.

That being said, without having seen the property on Yongjia Road, that the SmartShanghai staff  “most recently heard of” that had supposedly a 133% profit margin, I am fairly sure a lot more work went into it than just turning around and replacing a 1 with a 3.

I have actually two friends who are actually second landlords. They focus on smaller 1  and 2 bedroom apartments, sized between 50 and 70 sq.m.  in downtown Shanghai. They typically pay 5,000 to 7,000 RMB per month to the owner, and put it onto the market for double that. Here is what they do to justify that increase:

  • Gut out
    Remove everything that cannot be reused, from flooring over household appliances and and furniture
  • Install heating
    Wall-mounted radiators or under-floor heating
  • Often: change layout
    Bedrooms and kitchen are often under-sized in older apartments and a deal breaker for many house searchers from today.
  • Buy household appliances
    Ovens, dishwashers, washing machines, dryers, gas stove with spider burners, flatscreen TVs, new high quality A/C units are all frequently requested, even more so by expats who will not stay long enough to justify buying these devices themselves. They will also often add modern gimmicks like smart locks.
  • Bathroom finish
    Bathrooms are often suffering the most from renovation backlog. Tiling, shower cabins, sometimes bathtubs all need to be bought.
  • New furniture
    Heavy Mahogany furniture is replaced with contemporary pieces. These can't be too low quality, because they ideally last at least until the 5 or 7 year lease is up.
  • Decoration
    Decoration items like paintings, vases, lamps might be added sparingly, and constitute only a fraction of the overall cost.

Total investment before it can be rented out? If everything moves fast, 1 month “1st landlord rent” (renovation period), commission for real estate agent equal to 1 month “2nd landlord rent” and at least 100,000 RMB – that’s for a small apartment. Bigger once will exceed that easily.

So, if nothing breaks, and if they don’t need to find a new tenant after the first year, at best they start earning money after 2 years. Meanwhile they are bound to long-term contracts even during times like the current global pandemic.

Are second landlord apartments worth the higher price?

At this point you might say: fine, second landlords are not necessarily the evil money grabber that they are sometimes portrayed as. But: Is it worth it for a tenant,  i.e. Me? That very much depends on your personal requirements. If you value new appliances and furniture, that have not been used by  previous tenants, it might very well be worth it. If you find a property that is in its late days of renovation, you often can also influence the furnishing. Need the second bedroom furnished as a study room? Usually not a problem with second landlords. Often you can even let them replace at least part of already bought furniture, because they can use it for another property.

With regard to the price they are obviously a tad more expensive than the average apartment. While 150 RMB/sq.m./mo. is what you can expect for a good, furnished, “normal” apartment in downtown, those from second landlords tend to be closer to 200 RMB/sq.m./month. Whether the difference in equipment, design, and condition  is worth a around 25% more, mostly depends on your personal preference.

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