Ethics of Real Estate Investment, NIMYism and the Housing Crisis

We've got a wide variety of opinions in here so I thought this would be a fun place to pose this question:

Is our fascination with real estate investment doing us a disservice? Or does the system need to be overhauled to just simply make it less of an investment?

I've had some debates with folks close to me about this topic, and its created some heated discussions. I have friends and family who own multiple rentals. In some cases, they make a good income just from their rental income. 

At some point however, there is a crossover between merely providing rental housing to people who don't have enough money or stability to buy a house, and so much property or vacant land being owned for speculative or investment purposes that the individuals you once rented to, can no longer afford to buy any land or property...for the rest of their lives. 

Alternatively, I heard an interesting argument about removing zoning from a city with high prices as a means to create infill development. The idea being that without zoning restrictions (NIMBYism) people could redevelop their homes into apartments or whatever. The objector however brought up this fact: if you bought your house for $100k 30 years ago, and your neighbor bought his house for $500k last year, one of you is better suited to redevelop your home, and one of you might see a decrease in value because that property hasn't been turned into a multi-unit rental. The author advocated for more of a slower, 10-20 year "zoning fade" where incremental changes radiated out from the high density core once a decade, allowing for once single family neighborhoods to slowly evolve into higher density housing areas. Of course, the downside to this is speculators will hold property until it becomes high value, high density zoning - and might not upgrade their homes at all in the meantime - creating blight. 

Sometimes I wonder if some of this might not be remedied by making non-primary residences and ownership a losing venture? I've proposed a "resident worker tax credit" where if you live in your primary residence and you work in the city, you pay no taxes, or very little taxes. If you don't live in the city where you own property, than that property is taxed higher. Of course, not every city would need such incentives.

Furthermore, with the rise of AirBNB and other short term rentals, some town might have over 50% of the properties within city limits owned by people who don't claim residency within that city. A town owned by outsiders. Meaning, they don't vote. Is this is a good thing? Lots of tax revenue for sure, but at what price? 

Your thoughts?

Vancouver is increasingly owned by Asian non residents. They have pushed the price of housing far beyond the reach of most working folk so we have already lost the battle you are referring to. Now the city is trying to walk back the damage by limiting short term rentals, taxing empty homes to encourage long term rentals and allowing much more density in previously detached home neighborhoods. But the damage is done and anyone who can spend three million on a condo or eight million on a house while living and working in Beijing or Hong Kong is not bothered to build a laneway house or suite for extra income or stick a renter in their highrise.

At some point however, there is a crossover between merely providing rental housing to people who don't have enough money or stability to buy a house, and so much property or vacant land being owned for speculative or investment purposes that the individuals you once rented to, can no longer afford to buy any land or property...for the rest of their lives. 

But is that how it works?  If the rental market is overpriced, doesn't that mean that there is a shortage of rental properties?  If I buy a house with the intention to rent it out, and I need to get $2k a month, but the local rent rates are $1k a month, I'm not going to increase the local rate, I'm going to have an empty house.  

In reply to Streetwiseguy :

A lot of small landlords these days seem to be happy to feed a rental and bank on capital appreciation. And no, I'm not saying this is a good plan.

The issue with many urban areas and development and housing and zoning isn't based upon single versus multi-unit, it's commercial types of commercial mixed use versus current zoning. There are very few areas in the country where what is known as a 15-minute city exist, and that's what needs to be corrected. Quality of life is much higher when all of your needs can be met where you live and you're not spending an hour and a half to two hours in a vehicle every day. That means more time for sleep, self care, relaxation or time with loved ones. 

I thought airbnb was getting shutdown? We have fights about it in Maine.

A few issues here. 

The first thing, the most important thing, I think AirBnB needs to get taxed as a hotel. It is a market disrupter. Using it for your extra bedroom is fine. But an LLC owning 10 buildings with 40 units? That is a hotel. It should be treated that way. Outside of that, I just don't see the real estate as a huge problem. You get what you pay for, and the returns really just aren't good enough compared to other methods of capital expenditure that I think it is a big issue. 

I generally want to let the market handle it - with some regulation, to prevent unscrupulous landlords from becoming defacto monopolies. Yes, it is a problem that people are buying properties and not doing anything with them. But outside of foreigners doing so, I don't think it is that big of a problem in the US. And I don't think that there is a worrying amount of it going on. Des Moines, IA is still affordable, and I don't see folks from Hong Kong ever swarming there. 

There are bigger systemic problems, to me, that are feeding into it, and this is the manifestation of it - specifically [take home] wage stagnation, student loan debt, and insurance costs. And there are bigger problems with people - taking on these student loans (that was a choice), buying a new iPhone every year, impossible dreams of high standards of living... Many people, a problematic amount, are not capable of living within their means due to various issues. That defintiely needs to be addressed. But there are also a ton of people who are capable but unwilling to live within their means, because they need that coffee every day. 

I dunno. Owning property has always given you power, and should it not? Because of property taxes, you are really just renting land from the govt. If the rental rates are attractive, it will incentivize investors. If the rental rates are unattractive, it will "decentivize" investors. 

If you own property in an area and you don't live there, you don't vote there. Which means the relative power of the votes of the people who do live there goes up (in that area). 

Zoning laws have good sides and bad sides, and like most things could probably be improved. I'm sure there is a process for that. 

In my experience though, if you are renting and not buying, the main reason is NOT that you are stuck renting because of high rental rates. That is an excuse, not a reason. And just because it is a common excuse, doesn't change that it is an excuse. 

Here's are some ideas. 

How about issuing work permits for people who want to come up from South of the Border to build houses. 

Free construction classes for those who want to be builders, plumbers and electricians at the local community colleges and free degrees in Construction Management at the University until we have enough workers to fill the need. Cut taxes for companies that build single family homes. 

Subsidize building supply manufacturers. Here in DFW everybody keeps driving the concrete companies out of town. (Environmentalists won't like this.)

Cut property taxes to zero for people who live in their own homes and work in the community. Tax landlords, absentee owners and Air B&B spaces. Tax the hell out of Absentee owners from foreign countries. (Landlords won't like this. It may also start WWIII with China.)

They just opened up a lot of the single family housing lots in Portland to multi unit development (up to four units IIRC), but a realtor/developer I know didn't think it would do much because the economics of tearing down a 600k house to build four lower value units just didn't work out.  For most developers the cost of the lot would have to closer to 300k to make things work.   So there may be a few really run down homes that get torn down and replaced with multi unit buildings, but not enough to shift the overall market ... which is a long way of saying that changing zoning laws isn't a magic bullet in most of the already high priced markets.

I do expect some changes in the coming years.  A lot of businesses and people are finding that Work From Home is viable for a lot of people, so there's less incentive to live close to metro areas (especially tech hubs).   Starlink is also coming on line, so internet service to rural and even remote areas is about to take a huge leap.   In our recent home search we had to pass on a lot of great homes because internet service outside of suburban centers is so limited.

Metro hubs will still have a lot of draw, but a small decrease in competition for limited homes could see prices ease.

Robbie (Forum Supporter) said:

I dunno. Owning property has always given you power, and should it not? Because of property taxes, you are really just renting land from the govt. If the rental rates are attractive, it will incentivize investors. If the rental rates are unattractive, it will "decentivize" investors. 

If you own property in an area and you don't live there, you don't vote there. Which means the relative power of the votes of the people who do live there goes up (in that area). 

Zoning laws have good sides and bad sides, and like most things could probably be improved. I'm sure there is a process for that. 

In my experience though, if you are renting and not buying, the main reason is NOT that you are stuck renting because of high rental rates. That is an excuse, not a reason. And just because it is a common excuse, doesn't change that it is an excuse. 

I agree with this, 100%. Excellent post. 

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.

I think we're all agreeing on the same stuff. 

Lets go back to the "voting where you live" point: 

I think the voters have every right to raise taxes on outsiders, raise taxes on outside investors and vacant property owners. I think they have the right to specifically target those whom compete with them for housing. 

Why do you think we're often so afraid to vote in our own best interest? I think that was the case with zoning, it meant "yea my neighborhood is going to look this way for the next 30 years while I live here" - that makes sense. You want to protect the neighborhood where you intend to make a life. But are folks that unimaginative that can't figure out ways of strategically targeting AirBNB owners who don't live in the same town? Or vacant property owners from the next state over? Or another country? 

Someone asked why do the Fly-Over States not suffer from the same issues with housing affordablity as the western states? Well, largely because of national parks and public land creating little islands of private land, and that private land is owned by generations old ranchers, and because there is limited land, there is high demand, which means high appreciation, which means big ROI for investors. 

Cheap land surrounded by hundreds of thousands of miles of cheap land doesn't appreciate like island property. 

Some countries are actually experimenting with building whole new cities in areas that were once nearly uninhabited. They believe they can create all the best things about the most popular cities in an area that is far cheaper to live. I'm surprised we don't do that in middle America. 

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?

The idea that real estate ownership is some divine right, or that real estate is always a good investment just doesn't seem to have any historical precedent. Land owners have always been the wealthiest part of society, and the lowest earners have always been unable to own land.

If real estate is too expensive, then put the money into better performing assets. As more and more people do this, you get downward pressure on RE prices. In areas with a high cost of living, where RE purchase prices are out of reach for more and more people, renting can make far more financial sense for those across the income spectrum.

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?

And to take this a step further, who's lending to the final customer that agrees to buy the flipped property? Cheap money means prices go up.

pheller said:

Why do you think we're often so afraid to vote in our own best interest?

Someone asked why do the Fly-Over States not suffer from the same issues with housing affordablity as the western states? 

Who's afraid to vote in their own best interest? Also, limiting supply does have an effect on prices - as long as there IS demand. I can make an island of property in my own backyard but that won't make it attractive to investors. 

To put shortly, you said it best. Land in fly over states doesn't appreciate as much as more desirable places, because, well, most people just want to fly over.  

Why don't employers in the fly over states suffer from labor affordability?

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.

So what do we do about that? What should we do about that? 

Someone out there has figured out a cost effective and profitable way of updating housing. Should that be a bad thing just because local folks don't have access to the same capital? 

Don't blame the flippers. They're only servicing a need.

It's the people overpaying that's causing the problem. I have my theories on that and they would be wildly unpopular

In my province renting is tightly regulated by the government and the rules are very much in favour of the tenant, with the intention of protecting the them. What it actually accomplishes is to reduce the number of rentals, increasing prices making it more difficult for prospective tenants.

pheller 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.

So what do we do about that? What should we do about that? 

Move. 

It's why I don't live in California anymore. 

If you want to know more about macro-economic inputs and the residential real estate market in the US, I can suggest a book called "reckless endangerment". It's focused on the people and policies who created and profited from the 2008 housing event. 

So, lets say the lending standards are going to be a tough road.

Is there some way that local governments could implement tighter lending standards than the state?

For instance, imagine a city with a regulation that said "in order to buy any non-primary residence within the city, you must pay cash." 

Now, that wouldn't work for investors, because they've got capital that isn't always mortgage debt. It might work for smaller residential and AirBNB hopefuls, but it wouldn't work for the big companies. Eventually too, I think people would find ways of getting money into their accounts outside of the normal mortgage process. 

How do you target just those businesses who are leveraging massive capital and can buy "all cash" outside the mortgage process?

In my mind, the only way of doing that is to tax them based on the style of their business. Which again, I have some concerns with because there shouldn't be anything wrong with updating housing efficiently. If the problem is in the quality of the build, you can regulate that better with building inspections, but unless you have a local tax that wipes out the profit motive for "all cash quick flip" I'm not sure how you target that style of business. 

As a homeowner, a land owner (well, I pay a mortgage anyways), I would never buy somewhere that limited who I could sell it to. That is asinine. If someone wants to pay me cash, or pay me with cash they got from a mortgage, I want as many people coming with offers as I can get. I would vote against that kind of proposal 100% of the time. 

Your problem is ultimately that you want to live in a popular area where a lot of other people want to live. You just don't like the laws of supply and demand. It isn't the flippers, the investors, the landlords that are the problem. It is the people buying and renting from them. 

In reply to mtn (Forum Supporter) :

WHAT HE SAID.

On the topic of lending, it's a chicken and egg situation as well. 

Yes, we have a habit of lending large sums to people who really shouldn't be spending $800k on a house in California. 

We also have a habit of lending large sums to people who leverage multiple houses as rentals to acquire more property, ramping up home prices, and being on equally shakey ground in terms of financial stability. 

In my mind, both are a problem, but the folks spending $800k on the primary residence are only doing so because thats the only or best option they have. Should they not be driving new cars? Nope. Should they forgo the new iPhone every year? Yep. 

I look at my own situation. Our mortgage is our only debt, but it's a big one. If I lost my job, my wife could ramp up to full time work and pay our bills. If she lost her job I could cover us. However, we're stuck in this position of both of us needing to work in order to save effectively, and that limits some of our lifestyle options. If our housing was cheaper, say, $270k instead of $370k. That might allow us greater flexibility. Thing is, $270k will get you a run down, tear down, small, house in my town, and that's going out about 30 minutes in each direction. Any money saved on housing will be paid on other expenses. 

Sometimes we do need to spend more than what we'd like on housing because that's the only option available, and because we're being outcompeted by people with more capital. 

I'm a big advocate for "local labor first" when it comes to housing. I feel that if you live and work in a city, you should get priority for housing, whether that's cheaper or better closer to your work or whatever, from an economic efficiency standpoint, we want the folks at the bottom of the payscale to have first dibs, lower taxes, or lower costs on housing so they can 1) offer use their labor for cheap and 2) so they can start accruing wealth.