Be afraid, be very afraid. The latest mantra of those who would abrogate our property rights and interfere with our rental property businesses is “affordable housing.” It always sounds so appropriate and worthwhile, no matter what the latest mantra. They plan it that way. Who can be against “affordable housing”? Well, nobody, and that’s the problem.
Affordable housing means “decent, safe and sanitary” housing that is purchasable or rentable by people whose incomes are no more than 80 percent of the area’s median. It includes Section 8 housing, which is available to those whose incomes are no more than 50 percent of the area’s median.
The problem is that when drives for affordable housing hit roadblocks, those who are in the business of protecting the welfare of people who would rent or buy below-market housing take further action to make sure their goals are accomplished. People in communities with little or no “affordable housing” live there because they expect a lifestyle that reflects their capability of living in upscale communities. “Affordable housing” advocates say, “No fair. What gives you the right to live in upscale neighborhoods when all those other people can’t afford to live there?” So they conjure up reasons why more successful people should have to share their enclaves of prosperity with those who can’t afford to.
The State of New Jersey is a vanguard example. Encouraging building affordable housing didn’t work; those pesky wealthy people just didn’t want slums imported into their cities and towns, so the legislature established “affordable housing” quotas that cities and towns had to meet. For a while local governments got to barter off their quotas to other cities and towns; but once again those pesky wealthy people still got to live in communities without having to live near people they didn’t want to tolerate. Last summer all that went away and now every city and town (at least those with too many wealthy people in it) has to have an affordable housing plan that fulfills the quota.
Why we should be afraid, very afraid, is that ideas such as New Jersey’s are tested in one place to work the kinks out (or not), then foisted off on the rest of the country, often by our elected representatives in Congress. The result of this particular event is lower property values. Here’s why.
Investment property is usually valued using cap rates. Cap rates are a function of Net Operating Income, which is rental and other income, less a vacancy rate and operating expenses. The lower the Net Operating Income, the lower the value of property. That means if your Net Operating Income drops because you had to provide housing for people whose incomes are no more than 80 percent of median, or a low-rent complex gets built next door lowering rents in the area, you have lost some of the value of your investment.
For example, if your rents had averaged $1500 a unit and the cap rate was 6 percent, the value of each unit would be $300,000 ($1500 x 12 divided by 6 percent). Suppose then, that you had make one quarter of your units “affordable” and that lowered your average rent per unit to $1400? That would lower your value by $20,000 a unit. Even worse, suppose the average went down to $1250 a unit? You just lost $50,000 a unit.
That doesn’t even include the increased wear and tear you can count on with lower-income tenants.
Be afraid, be very afraid. Our property rights and our profits are an inconvenience that can be taken away by those with people with agendas. Join and/or participate in your local apartment, landlord or rental owners associations’ political committees to protect your profits and property rights.
