Ethics of Real Estate Investment, NIMYism and the Housing Crisis

And I hesitate to bring this up... But at what point does this become Stalin seizing the Dachas, and everyone moving into an identical apartment building? 

I don't want no regulation - I don't want antifreeze in my gatorade. But if it is an investment property, if you're not living there, it is taxed at a higher rate, if you own it for less than two years (???), you pay higher capital gains tax on it. And they're taking on a lot of risk, too. 

I'm just struggling here to really commiserate with your plight - and I struggled to find a home I could afford in the neighborhood that I wanted. I bought probably the worst house because of it. But I bought the location, location, location. Want something cheaper? Find a worse location. That could involve a long commute.  

Robbie (Forum Supporter) said:

pinchvalve (Forum Supporter) said:

It has become almost impossible to buy modest houses and rent them out for acceptable rates around here. Flippers and other investors snag them up for cash and resell them. They have teams of contractors who can gut a place and have it builder-grade ready in 1-2 weeks. It has pushed out the small investor and increased rental rates to the sky.

um, did the flippers do that?

or was it the consumers renting and buying the flipped properties?

Its the seller.

They always take a cash offer over a possible failure in the loan process. As a cash buyer I can come in 4-5% under almost any standard buyer especially if I don't have a buying agent.  I always sell to families because I want the extra 5% and can handle the risk. This means the flippers get first pick and better picks. 

In reply to pheller :

This is sounding more and more like you really want a centrally planned economy with centrally planned development, centrally regulated cost controls, etc etc etc.  In other words the whole authoritarian / socialist / fascisti ball of wax.

It's been tried.  It doesn't work.  Real life is a chaotic system and there is just no way you can centrally plan every part of it any more than you can hyperaccurately predict (let alone control) the weather.

And, frankly, that's a good thing for anyone who isn't a fan of sterile, dystopian futures.

In reply to pheller :

Don't worry your concerns are going to be dealt with soon.  Here's how 

Imagine you could fly around every downtown office building. Fly through walls, and check out everything nearly instantly.  
  What did you see?  
A lot of empty or nearly empty offices didn't you? It's not going to be different next week or even when the vaccines become widely used.  
Why? Working from home is working out.  People are more productive and it costs a whole lot less not to have to store them while they work.  While some of that savings will be passed on to workers in the form of pay raises most will go into the pockets of the owners.  
 

So what will businesses do with all those offices?  Turn them into apartments. Yep that will flood the markets with conversions so initial price will be cheap. 
Turning an expense into an asset is the dreams of capitalists everywhere. Cashing that asset will make millionaires into Billionaires. And Billionaires into Trillionaires.   Nothing the rich love more than getting richer. 

No, I've just come around to a lot of Georgist ideas. Henry George, that is. LVT. Single tax. He was not a socialist or communist or even in favor of much regulation, but he believed that if were going to tax anything, we should tax land the most. Especially valuable, economically efficient land. 

For the simple, age old reason: they aren't making more of it. 

I remember being young in southern CA in the 90s and gas was verging on $1. Somehow it was decided that nobody would buy gas on X day. I was old enough to be aware but not old enough to have any skin in the game. I do remember it had a pretty obvious effect on gas prices. 
I think a market driven correction like that would be healthy, but it wouldn't just be X day, it would need to be enough to put the hurt on banks, developers, flippers, and anyone else involved. 6 months? I'm not sure it's even possible to organize something like that. Probably not possible. 
Just throwing things out there. I do worry about some friends that just bought in this inflated market, especially where both of them have jobs that will suffer big time in the event of another recession. Too many folks I know lots in a big way by buying at the height of the last bubble in 08. 

This is going to sound callous, but people aren't guaranteed home ownership.  If you're priced out of owning a home in a certain area, you have a choice to continue to live in that area in a rental, or move to an area you can afford to purchase a house. 

Those that can afford a home in a certain area shouldn't be penalized for their ability to do so, whether they plan on living in it as their primary residence or using is as a rental.

Things like Air BnB/short term rentals should be dealt with in another fashion, as they're not a typical rental, they're operating more as a hotel/business, as someone has pointed out earlier.

pheller said:

No, I've just come around to a lot of Georgist ideas. Henry George, that is. LVT. Single tax. He was not a socialist or communist or even in favor of much regulation, but he believed that if were going to tax anything, we should tax land the most. Especially valuable, economically efficient land. 

 

For the simple, age old reason: they aren't making more of it. 

We already have that. Property taxes are ALWAYS based on the assessed value of the land. And the assessments and tax rates are COMPLETELY in local control.  The only thing tax assessors have to do to change the dynamic is change the millage rate. 
 

The system is already in place.  Perhaps this theory is flawed?

barefootskater (Shaun) said:

I remember being young in southern CA in the 90s and gas was verging on $1. Somehow it was decided that nobody would buy gas on X day. I was old enough to be aware but not old enough to have any skin in the game. I do remember it had a pretty obvious effect on gas prices. 
 

Are you talking about the deal where nobody buys gas on Tuesday, and that'll show those rich bastards?  The deal where you bought the gas you needed on Monday or Wednesday, and the week sold exactly the same amount of gasoline anyway?

Yeah, that doesn't work.

I was raised in Central NJ, in one of the wealthiest counties in the country in the 1960's and 1970's. My father could remember when land in that area was $50 per acre. Today, an acre of land in the same area could easily exceed $10 million.

As a young married couple, my wife and I made the decision to relocate to an area that was significantly less expensive. 
 

That was 35 years ago. It's been wonderful raising our family in an area that was less costly, and less stressful. We were able to be a single income family, and my family has benefited  greatly from it. 
 

It was easy, and we didn't need any government official or law to make it happen for us. 
 

No regrets. 

pheller said:

2) so they can start accruing wealth. 

 

Having a house != accruing wealth.  Encouraging people to own houses they dont have the time/energy to maintain, or $ to afford doesn't help anyone unfortunately.  Home ownership = wealth is a myth that is repeated over and over but it isn't true in many situations so we shouldn't view it like this.

That said, multi-bedroom rentals at the lower end of the market are insane money makers.  Its something that gives me pause with respect to investing.  You get the best return on the lowest value property and that is at the expense of the person least likely to be able to afford it.

To contine my rambling, the mortgage interest tax deduction should absolutely not be a thing.

In reply to pheller :

You seem to be discontent with AirBnB ownership and the contribution it may have to this. 
 

Please explain. Help me understand. 

You are viewing investor owners as the problem that is causing housing to be financially unattainable for some people. 
 

I don't think they cause the high prices. That's a disconnect. 
 

The high prices are caused by supply and demand. Desirable areas are expensive. Owner investors are simply opportunists. They see a perceived value, spend their own money to invest in it, and offer a service to the community by offering their properties at market rental rates. 
 

If owner investors are penalized or deincentivized for owning property (through taxation or otherwise), then government will have to deal with the problem of residents who are unable to purchase their own property. This leads to drastic drops in property values, massive expansion of government owned real estate ("Projects"), or mass migrations of population out of areas that become unaffordable (which cuts tax base, and reduces workforce productivity potential). 
 

My view is that owner investors are providing a service which HELPS local governments and economies. 

I'd like to see lending standards improved, but I also agree with wearymicrobe that alot of "cash" investors are making aggressive offers currently.  Cash in quotes only because often those offers are coming from refinances of existing properties, business loans already in place, or other paper. 

I don't really have a problem with that, other than we seem to be socializing the risk, but not the reward.  IE, you (you here being an individual investor, business, REIT, anything) founded an LLC for your rental company, bought a bunch of leveraged houses, and if they appreciate or rent at favorable rates, you're rolling in dough.  If things go under, you declare bankruptcy (at no personal cost, it's all the "business") and walk away, offloading your debt to the bank, who gets bailed out by the government.  Or your business just gets bailed out directly. 

If I was pointing fingers at anyone, it would be the Fed and large banks enabling wanton borrowing without commensurate risk. 

SVreX (Forum Supporter) said:

I was raised in Central NJ, in one of the wealthiest counties in the country in the 1960's and 1970's. My father could remember when land in that area was $50 per acre. Today, an acre of land in the same area could easily exceed $10 million.

As a young married couple, my wife and I made the decision to relocate to an area that was significantly less expensive. 
 

That was 35 years ago. It's been wonderful raising our family in an area that was less costly, and less stressful. We were able to be a single income family, and my family has benefited  greatly from it. 
 

It was easy, and we didn't need any government official or law to make it happen for us. 
 

No regrets. 

You are about to see a massive change equal to America moving from a primarily agrarian economy to the industrial complex we became.  
  Urban areas are filled with giant sized buildings that are currently and likely in the future underutilized. Between retail  markets replaced with Amazon and office workers being more productive working from home and less expensive means this is not something that will change when we all get the vaccine. 
Those building will be converted to residences.  

pheller said:

Henry George, that is.  He was not a socialist or communist or even in favor of much regulation...

Be careful trying to disconnect Henry George from socialism. He most definitely called for the socialism of land (though he did not agree with government ownership of the land). 

Note his Wiki page uses the word "socialism":

He recognized the State would benefit more from charging rent for the land to owners for eternity than they would from owning the land. 
 

This quote is not comforting:

"It is not necessary to confiscate land, it is only necessary to confiscate rent".   Hmmm...

In reply to Streetwiseguy :

Except it did work. At least in the short term. Gas dropped nearly 10% in our area in less than a week. 
It's not a great example since more folks buy gas (and more often) than buy homes, but it is supply and demand. If something isn't selling, the price will go down. In the case of gasoline, sure, the oil companies probably didn't lose any overall sales volume, but my money says that one day disruption in their supply/sales chain made a pretty big impact. 

SVreX (Forum Supporter) said:

"It is not necessary to confiscate land, it is only necessary to confiscate rent".   Hmmm...

This is property tax, no?

I am all for an across the board "upzoning" as it seems completely un-necessary to designate any property only "single family." Not require, but allow easily, which could add some additional density and rental units in some more areas without too much nimbyism. 

I don't really take issue with AirBNB. Or even rentals for that matters. If there is demand, then the housing is being used efficiently. I wish that locals, especially those searching for a primary residence that they were qualified and well able to afford should had first dibs, but how do regulate or tax for that outcome? No idea.

Where I take issue is with vacant land and vacant homes. Those two areas bugs me, especially in areas of high demand. 

In many dense European cities, vacant land is a rare thing, it's either far too expensive (high taxes) to sit and do nothing, or its public land. Is our tax structure in some cities aggressive enough by comparison?

Paris has been taxing vacant 2nd homes with some success, and Vancouver is doing the same. It's not about penalizing people for buying property in a given city, it's more about making sure that every unit in a high demand city is efficiently used. Have such land or housing sit empty is a true luxury. 

Land Value Tax is one in which the structure is untaxed, but the land itself is taxed heavily. 

Therefore, the motive is to maximize the land for it's utility. In an urban center, where lots of people work, you'd want big tall skyscrapers full of high paying tenants. In the rural areas, you could farm, or, if taxes are low enough due the lands harsh or arid environment, merely enjoy the open space. 

In high demand cities, the idea would be to match the land tax to the current property/structure tax. Then as time goes by, as prices go up in the high demand areas, so would the "value" of the land those proprieties sit on. If you bought your property long ago and were riding it out with a blighted old home that you no longer maintain, but the area around that house was high value, you'd pay higher property taxes (so long as it wasn't your primary residence).

I think part of the problems is that in most places, property assessment weights the structure too high, and the land too low.

I think some are giving "flippers" a bad rap.

Let me go through a typical senario.

Lots of hours researching properties, driving through neighborhoods, talking to banks, and realtors.  Searching through public records.  When you find a property you need to pop with cash.  Banks won't lend money against the value of the POS you are trying to buy.  Then you roll up with your trailer full of $20K of tools... Congrats.  You now own a house that no one in their right mind would live in.

Dumping fees for all the 50 year old carpet, and meth residue.  Lead paint abatement.  Asbestos abatement.  Black mold abatement. Builder's insurance.  Surveys.  Structure repairs.  Inspection fees.  Utility hook up fees.  Termites. Roofing.  Insulation upgrades.  Window upgrades.  A/C and heat upgrades.  Plumbing upgrades.  Bathroom upgrades. Electric brought up to current codes.  Paint.  Walls.  Flooring. Trim. Lighting.  Cabinets.  Appliances.  Decks.  Porches. Driveways.  Landscaping...    Try to do it in 3 months because of the cost of money. You'll be in at least $100K not counting your labor.   No sweat.  

When you are done you have a home you would be willing to move into.  So...get it on the market.

All the while hoping it doesn't get so expensive that it exceeds the "comps" for the neighborhood so a buyer can qualify.

When you get a sale... start paying:  the realtor, closing costs, doc stamps, the accountant that does your now complicated taxes, and oh yeah... pay the IRS taxes on the short term capital gains   $$$.

Then... wonder if you shouldn't just get a job at Home Depot...

Rinse and repeat.

there are a lot of homes here that have been empty since the great recession 12+ years ago.  The Banks took them back in foreclosure and then did nothing more with them but cut the grass and make sure they look kept up enough not to anger the city council.  No for sale signs, no leasing, no rentals, and no bulldozing, they just sit, bringing everyone's home values down while the houses that are for sale do not stay on the market long.  I do not get it.

Purple Frog (Forum Supporter) said:

I think some are giving "flippers" a bad rap.

I don't have a problem with flippers.

I do have a problem with poorly done flips.  I'm not a fan of low quality materials, design, or craftsmanship, and those 3 often go hand in hand with flipped homes.  I mean I get it, they don't have to live in the house and its an easier way to turn a profit.  The same could be said for lower end homes (siding, carpet, E36 M3ty counters/cabinets, poor deck design, etc.).  The type of stuff where an extra 25% in materials and 5% in labor would get you a product that will look twice as good and last 6 times as long.

In reply to mad_machine (Forum Supporter) :

Its that kind of thing that kills me. How do homes in high demand areas just go empty? Why? Sometimes you wonder if its the banks not doing something, or maybe they were sold in big blocks to investors who just sit on them? I dunno, but it concerns me.

I guess because this isn't a problem we're I live I had to read and see what was going on. Sounds like it's expensive to live in a highly desirable area. Hasn't it always been that way? I mean E36 M3ty apartments in Hagerstown and Baltimore rent at 2x + what my house payment is to live in small town Ohio. On the other hand the average income here isn't near what it is in the desirable city's. 
 

they are building all kinds of new houses here since the covid shutdowns started, seems to attract mostly people who would rather travel too work now then keep living in cramped apartments.