Can your real estate investment compete with government or non-profit projects?
The short answer is no. This is what you are up against:
1) Properties for low-end homes that cost as much per square foot to build as high-end homes.
2) New vs. renovated.
3) Low rents
4) More services.
I walked out of a meeting last week in which a nonprofit group extolled the virtues of its new quasi-high-income mixed community. They discussed the benefits to the community, such as reduced crime, lower density, more amenities, rents that low-income tenants can afford, and direct rental subsidies.
The whole concept works assuming you can get in to all three types of residents, those who are willing to pay market rents, those who are provided with a rent subsidy, and those who are paid rent directly by the state.
I can understand why it would be attractive at least for rent subsidy and direct pay residents. For the first time in their lives, they are being given the opportunity to live in a brand new community, complete with granite countertops, dishwashers, washer and dryer, community parks, and other amenities.
For me personally, this was not available to me until I finished college, a master’s program, and got a decent job to work at a decent company. Not to mention paying all my bills on time for the past seven years to make sure my credit was good enough to qualify.
So if I was offered this opportunity with just fair credit, no reliable employment history, and a handful of other personal issues, I’m sure I’d move out of my $500 a month unit and into this type of community. .
The question is where does that leave you, the professional real estate investor who has provided low-income housing for your investment career? In a bind!! He’s spent years building his portfolio of properties, which he paid for with hard-earned dollars and decent credit. Based on market economics, he has invested the correct amount of money in the property based on what he is receiving in rents, which is probably pretty minimal. That’s okay though because that’s how the economy works. You have a justified ROI that each of your investments should produce and it is market driven.
Well, the government has decided to partner with non-profit groups to revamp the housing situation by providing housing units that cost 3 times as much as their unit to build and maintain because they don’t have to worry about whether the property is profitable or not. In fact, they are built on the assumption that the properties will be losers, but that’s okay.
To improve the situation, the new units show how they have reduced crime by weeding out those with criminal records. So they have a backlog, because they’re providing middle-class living arrangements for little to no cost. They accept the cream of the crop and shun the troublemakers. So clearly the crime rates will be better.
Now you, the landlord, are left with reduced rents and a higher than normal population of real troublemakers to rent to. So, in effect, you will be left with more property abuse, reduced rents, and lower property values.
Suddenly, it’s not the big win-win for the community that they anticipated. Owners will reduce capital expenditures to bring these properties down to a level consistent with the economy, putting further downward pressure on their investment. Eventually, the smart money moves out of these areas entirely, so the end result is that you have displaced one low-income, crime-ridden area with another. So, now back to square one, but wait, as an income tax payer, you now have to support this amenity-rich community because, remember, it was built with anticipation that it would be a financial loser.
Moral of the story, we as a community of real estate investors do not need to support these types of projects. They do not create jobs, and they are not an attraction for companies to move. These are primarily the ways to move a community forward, and these types of projects do not accomplish any of that. The concept may make sense on paper, but all they are is a short-term Band-Aid for a problem that can only realistically be fixed by a good city plan and capitalism.
Taking money out of your pocket to know how to finance a losing proposal should make you as angry as me. Taking money out of your pocket now to lower the value of your portfolio in the long run should make your blood boil.
Can you make money in the real estate market right now? Absolutely!!! Can you do a lot? Yes. Is your government making decisions, making you pay for these decisions, and reducing your profit potential? You better believe it.
Stay away from what’s going on in your community. Find out who is driving these types of projects. I bet you’re looking at a very one-sided push. Banks, contractors, etc. they are making a lot of money from these projects, because the government is anything but efficient. We need to stand up and point out what these projects are really doing in our communities.
If only we had a free-market lobby group that was as loud as those groups that spend all their time moving these types of projects forward. Unfortunately, we tend to be busy trying to make some money and grow our businesses!
Keep your eyes open, invest wisely, and it will eventually become clear that the free ride solution simply doesn’t work. Don’t be afraid to raise your voice to oppose these types of projects.
jacob
