Love that dirty water?

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If you spend a lot of time in crappy parts of LA (like I do), you have probably noticed an odd kind of retail establishment popping up in low-end strip malls: Water stores.

Here’s how these businesses work:

  • They have a normal connection to the city water system
  • They install a fairly expensive charcoal filtering system to filter the city water
  • The sell the water, sometimes via vending machine, to customers who bring in containers of the type you see on top of office water bubblers

But wait, you ask, why do people need to pay for filtered water when city water is supposed to be potable right out of the tap?

The answer, like many things on this blog, comes down to rent control. Why?

Imagine you are the owner of a 1920s apartment building with, say 30 units. Your building is rent controlled and many of your tenants have lived there for years. Your plumbing system probably dates to the time the building was built, with patching done over the decades as the pipes started to leak.

Now the water in your building is brown coming out of the tap due to corrosion in the pipes and your tenants want you to fix it.

Re-piping your building is going to cost you around $100k, give or take. The city will only let you recover 50% of the cost from your tenants in the form of a maximum rent increase of $50 per unit spread out over 33 months (almost three years).

So, here’s the investment decision:

  • Invest $100k
  • Get back $50k, in the form of additional monthly payments of $1,500 for nearly 3 years

Do you make that investment? Not if you’re sane.

So, your tenants spend time and money each week driving to the water store to fill up bottles like they live in a village in the developing world, instead of in the center of the second largest city in America.

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