Latest / The Academy Presents podcast / Rent Control, Affordable Housing & Real Estate Investment Strategies with Andrew Cramer

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Rent Control, Affordable Housing & Real Estate Investment Strategies with Andrew Cramer · The Academy Presents podcast

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  You're already taking the first step. just by
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  joining us here today. No rent control is, as
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  an economist, rent control is not a good move.
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  Because I think, as you said, it's reactionary.
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  And I believe there's some underlying belief
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  that it's going to increase efficiency. But it
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  doesn't. It just makes people angry. Well, it
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  creates the challenges in general. if you're
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  an elected official you're working on a two or
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  four year cycle and you need to generate results
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  for your constituents really in the same year
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  that you pass a law and the truth is rent control
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  prevents rent from going up in that year the
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  reality what you see over time is rents actually
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  go up more in a rent controlled environment because
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  if you're now a landlord you know like you own
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  properties and I'm sure like in Texas you say
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  like every year that goes by you kind of look
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  at your rents you say okay are we market or are
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  we over market are we under market because you
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  you can't every decision can be can kind of take
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  place in real time you say hey you know what
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  this property in great condition these tenants
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  are great they've been here for a long time we
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  love them the rents are fine we don't need we
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  don't need to do anything about it because you
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  know In an uncontrolled environment, or sorry,
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  in a non -recontrolled environment, you can say,
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  oh, oh, a sewer line broken. We have to replace
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  a well. There's a big, giant capital expense.
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  And you can communicate with your tenants and
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  say, hey, guys, we had to replace the sewer system.
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  We had to replace all our sewer lines. And that
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  cost $100 ,000. And so we're going to have to
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  increase rents as a result of that. But it's
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  a very correlative increase environment. You're
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  very conscious about it. And we know this because
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  we used to do this before we had rent control.
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  It was always a discussion between our property
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  managers of what is market rent? And how do we
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  sort of make those adjustments? Now, in a rent
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  control environment, you just raise rents because
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  you don't know. Right now, we say, OK, in Oregon,
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  it's 6%. In Washington, it's 5%. You have to
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  do it every year because guess what? You don't
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  know when those big capital events are going
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  to happen. You don't know when the well is going
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  to be about. You don't know when the sewer lines
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  are going to break. So you have to prepare. And
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  you also, it's a scary thing because you don't
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  know if rents, maybe this rent control is going
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  to go down next year. So every rent in every
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  multifamily property in a rent controlled environment
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  goes up. Whereas in an uncontrolled environment,
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  that doesn't necessarily happen. So by consequence,
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  your average rent is going to go up more. And
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  you see that. You see the cost of housing actually
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  increase after a rent control is implemented.
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  And there's a lot of other circumstances. There's
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  a lot of other things that happen as a result
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  of that, too. Things like construction. No, it's
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  a very, you know, investment just plummets after
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  rent control has passed. Because, you know, no
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  one wants to build a new environment where they
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  can't necessarily get a return on that investment
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  that they want. So it creates a lot of economic
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  uncertainty, which obviously reduces investment.
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  So it is, it's a, I try to... it's counterintuitive.
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  And I try to, as a guy who's, you know, trying
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  to work with as many people as I can, I do try
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  and sort of sit on the side of rent control advocates.
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  And the tricky thing is, if you are an elected
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  official, just like any of us, you kind of are,
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  you know, how do you keep your jobs an elected
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  official? Well, you please your constituents.
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  And how do you please your constituents? You
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  have to generate a result that happens in the
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  short term. And I think rent control the reason
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  why rental shows up again and again as an affordable
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  housing solution even though like all of the
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  evidence really points to it not and all these
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  things I mentioned right like overall rents going
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  up construction going down supply going down
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  even though all of those things are very true
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  and everyone kind of signs off on them the reality
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  is in that short term you know like six to twelve
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  months after its passage it does sort of prevent
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  rents from going up and that's sort of where
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  you know it's one of those things right it's
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  like you're creating like a temporary short -term
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  solution that has tremendous long -term effects
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  and that's just you know I mean that's you're
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  getting into like how our political system is
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  built in a way but I think it's really and it's
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  sort of ironic because you know we a great example
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  is like Washington Oregon Idaho Montana right
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  that's kind of the greater Pacific Northwest
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  and if you think about Washington and Oregon
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  both are in control and then Idaho, Montana,
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  both of which do not have rent control. It's
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  funny because the risks you take, our underwriting
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  is totally different in those places because
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  in Oregon and Washington, we don't even think
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  about it. Like if you're doing a projection over
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  your next five years, there we know the rents
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  are going up because those are rent controlled
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  environments. And that's just the revenue is
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  sort of a foregone conclusion. There's not going
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  to be any new supply at it. there's always there's
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  such a demand that you know the rents are going
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  to go up whereas like in Idaho and Montana you
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  have to be very thoughtful and say okay let's
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  look at the permits let's look at new supply
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  coming online what are market rents and I think
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  if you're a so from an investor standpoint these
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  regulated markets can actually be pretty great
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  as much as I hate to admit that because you've
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  got such stability in revenue right so if I if
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  we know like an accurate nice smooth five six
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  percent per year of revenue increases That's
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  pretty nice from a real estate investment standpoint,
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  versus you go to like, you know, well, hey, Texas,
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  right? Travis County, you know, Travis County,
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  I think there was a 20 % reduction in rents between
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  2023 and 2024. And now it's caught back up again.
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  It's because you're bringing on new supply. And
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  if there's a bunch of new supply, obviously,
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  the demand is going to go down a little bit and
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  the rents are going to have to adjust. just like
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  any other market and so that when you when you
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  sort of take that away when you take that market
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  dynamic away it really smooths out that growth
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  curve but it certainly prevents a lot of new
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  supply from coming online so i think that's kind
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  of what we look at as well we want to be investment
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  managers we want to promote affordable housing
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  for all the reasons i've said but from an investment
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  management standpoint it creates some neat opportunities
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  because if we're kind of buying properties right
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  on those state lines we can deliver kind of a
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  cool portfolio to our investors who say, hey,
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  over here in Oregon, Washington, we've got this
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  guaranteed smooth and revenue increase that we
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  do cost control and add units. And then in Idaho,
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  Montana, we participate in more market growth.
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  So it's kind of from like an investment standpoint,
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  it's sort of interesting in the Pacific Northwest
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  because it's a unique place. I think kind of
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  like one of the only places in the country really
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  where you've got like four states that are very
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  kind of politically different that are like in
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  store to one another. So normally like this little
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  more of a gradient getting from sort of progressive
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  to conservative. So we kind of, we, we found
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  that there's some pretty cool investment advantages
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  to kind of operating where we do. Yeah. Well,
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  I've never heard anybody present it like that.
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  I've only ever heard negative. It's really neat
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  hearing your perspective on it. It's not, and
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  I would reiterate, like, I don't believe in it
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  as a solution for like delivering affordable
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  housing and like the Northwest desperately needs
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  affordable housing. And, you know, having rent
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  control measures implemented, like I said, it's
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  sort of reactionary. It's like an attempt to
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  create a short -term solution. But, you know,
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  like having operated in this area for a while
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  now and Oregon passed statewide rent control
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  in 2019. What we've seen is, I'm just kind of
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  giving you like what we've seen, which is you've
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  got this smooth revenue increase. And, you know,
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  as you know, kind of like the private equity
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  community can be a little bit reactionary. So
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  when they see like rents going down, they're
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  going to kind of get spooked and they're going
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  to want to go to somewhere more stable. And if
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  you're looking, you know, if you're one of these
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  big, giant asset managers, you're going to want
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  to have a little bit of that stability in your
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  real estate allocation. You say like, all right,
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  I want to participate in, you know, I want to
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  go to Waco Texas and have, be a part of Angel's
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  new development. But I also like buying something
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  that's there. That's always going to have demand.
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  That's always going to have that nice, steady
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  revenue increase that has appeal too. So, you
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  know, I think it's just like, like I said, it's
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  an interesting I've had to accept it. And I've
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  also said, well, there's actually some advantages
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  from an investment standpoint. And I, I didn't
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  even think about the fact that you actually have
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  push on rent. So you're always going to have
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  upward strengths. So we're, we're in North Texas
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  and our rents have, it's not so much that they've
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  gone down. It's that we've had to increase everything
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  else. Sure. So we've had to offer a half month
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  free or a month free or come on in, you get free
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  rent. Like that's the biggest one is free rent,
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  free rent because it burns off. But that's the
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  equivalent of decreasing rent for a year, a month
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  free. Go ahead and put that out for the other
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  11 months because that's going to amortize it
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  into the year. And I mean, that's very common,
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  right? You're going to have to as new supply
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  comes online, if where there is there was one
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  apartment, now there's two. there's competition
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  for that one person and I think the and you know
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  don't get me wrong here that's a good thing like
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  it creates a better environment you just said
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  it perfectly like you're offering incentives
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  for your tenants you're making improvements to
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  your property and make it more appealing for
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  tenants all of those are good things those are
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  good things to happen in a market and when you
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  take away that incentive and you just have sort
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  of a blanket we can increase rents because there's
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  no, because there's no new supply coming online
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  and tenants don't have a choice. Well, that kind
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  of does the opposite, right? Because if you're
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  now looking at this same, take that same apartment
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  community or mobile home park where, you know,
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  you're out there in Texas saying, Hey guys, we
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  got to make this better. Like, let's clean up
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  this landscape. Let's make this, let's make this
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  more appealing for people on the other side of
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  it. If you have someone who's owned a property
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  and rent controlled market for a long time, like,
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  where's the motivation to do anything. So like,
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  in addition to sort of what, what I mentioned
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  about that lack of new supply, The overall quality
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  of the rental stock tends to go down because
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  if you can raise your rent six percent, whether
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  or not you're doing great landscaping and repaint
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  the exterior apartment building, why would you?
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  And when you know that that demand is there,
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  it just it creates this like long term disincentive
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  for investment in these properties for the exact
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  same reason. You just said that there are incentive
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  when there's competition. So, yeah, you know,
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  it's like I said, it's a very weird. It's hard
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  for me to talk about it in a way, because there
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  are tremendous investment advantages to operating
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  in one of these rent control markets. It's just
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  not a good solution. Well, and I think you've
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  alluded to something, too. What's the character
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  of the person in the ownership position? Because
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  if that person knows they don't have to do anything
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  and they're just going to get rental increases.
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  and they don't have a heart for wanting to make
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  it a better place, then they're just, they're
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  not going to worry about anything. They're not
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  going to push residents on resident owned homes
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  to take care of the deferred maintenance. There's
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  going to be like, Hey, a lot rents going up.
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  You really do have to have somebody with a heart
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  come in. And the last thing you want to do is
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  sort of rely on someone. behaving ethically for
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  no other reason than they should. I hate to say
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  that, but it's true. And, you know, I'm not even,
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  you look at like big giant investment managers.
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  I won't mention them by name, but we all know
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  who they are. You know, that's not going to be
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  you sitting in Texas next to your properties
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  or me sitting in the Northwest and I'm driving
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  distance all of our properties. It's going to
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  be someone, you know, sitting in an office and
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  they're going to be sort of making financial
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  decisions based on a series of financial inputs.
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  And they're like, it's not even, and I don't,
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  I don't think those guys are bad people necessarily.
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  I just think they're not looking at the same
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  way you and I do. And so when the highest level
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  institutional investor really doesn't have to
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  make a decision to alter the financial performance
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  of an asset, and that's what these things are,
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  when you get right down to it, they're not places
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  like for the investment community, these are
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  assets. They're just like a stock or a bond.
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  So when they look at the performance, they say,
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  well, I can increase revenue by 5 % and not increase
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  my expenses and not make any capital investments.
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  I'm going to do that. They don't even take a
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  step beyond that. They don't say like, what about
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  this? What about this? It's just not part of
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  their analysis. And that's kind of one of the
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  challenges too, when you're looking at this rent
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  controlled environment, you just don't have,
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  there's no incentive. And immediately after there
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  being no incentive, there's just no thought about
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  it. And that's where, it's the purpose of rent
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  control. the long -term beneficiary of rent control
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  is really the investor when you get right down
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  to it. And that is not what state legislature
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  should be worried about. No, I just, it's not
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  that I'm in awe of it. I'm just kind of like,
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  well, because I think that we kind of represent
• 13:55
  this middle ground where we're not necessarily
• 13:58
  mom and pop. We kind of are, but we're not necessarily
• 14:01
  mom and pop. We're definitely not institutional.
• 14:03
  And so we actually have the bandwidth and can
• 14:08
  set up our parameters to where we can have a
• 14:12
  heart and we can look beyond just the numbers.
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  And even though when you get into real estate
• 14:17
  investing, they tell you all the time, don't
• 14:19
  fall in love with the property. Just look at
• 14:20
  the numbers, look at the numbers, look at the
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  numbers. Well, I'm not a big numbers person.
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  And what I see and what I envision is my students
• 14:29
  now have a safe place to live. Yeah, of course.
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  and my students have a safe place to raise their
• 14:35
  families in the future. I always envision my
• 14:37
  students and them being in my units or being
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  in my home. I want them to feel safe and secure
• 14:43
  and be in the best place they can live at their
• 14:46
  price point. That's what I always try and emphasize.
• 14:49
  Those don't need to operate separately. Affordable
• 14:52
  housing, long -term housing can generate tremendous
• 14:55
  benefit for investors. you know it's like I said
• 14:58
  about like metering utilities right like that's
• 15:01
  a great example of the resident benefiting having
• 15:03
  control of their housing expense and the investor
• 15:06
  benefiting from like getting that operating cost
• 15:09
  off of the property level expenses like that's
• 15:12
  a another great one is you know every home you
• 15:15
  sell to a resident we're talking about homeownership
• 15:16
  and all the tremendous benefits to the tenant
• 15:18
  there's great benefits to the landowner as well.
• 15:22
  And if you were, you know, now, if I sell a home
• 15:24
  to you and you're living in this home, you're
• 15:26
  going to take care of it. You own it. You're
• 15:29
  right next to me as an investor in the property.
• 15:32
  You're going to take better care of it. Universally,
• 15:34
  that's the case. And that's where, if you do
• 15:36
  it now, obviously, all of these things are very
• 15:40
  sensitive. If you have an unscrupulous landlord
• 15:41
  who's going to crank up rents and not take care
• 15:43
  of the property, well, that home value for that
• 15:45
  tenant is going to decrease just as easily as
• 15:47
  it can increase. if you are investing in the
• 15:49
  property and you are taking care of them. So
• 15:51
  it's not having a productive, successful real
• 15:57
  estate investment in multifamily and affordable
• 15:59
  multifamily housing can absolutely exist with
• 16:03
  increasing the quality of life. And it should.
• 16:05
  And that's one of the many things we always try
• 16:09
  and promote as well. Or if you're going to invest
• 16:10
  with Bridgeview, you can participate if you want
• 16:14
  to add affordable housing to your community.
• 16:16
  most of our investors are sort of local to the
• 16:19
  region. So we absolutely promote that and say,
• 16:22
  hey, this is a great problem in the region. And
• 16:25
  if you want to participate in the solution, here's
• 16:27
  how. And you can get tremendous, you know, all
• 16:30
  the great tax benefits, but also really great
• 16:32
  financial returns. All of that can exist at once.
• 16:34
  It does not have to be an exclusion. I think
• 16:36
  that's one of the frustrating things I hear a
• 16:38
  lot when you kind of attend these, a lot of the
• 16:40
  sort of policy level political meetings. It's
• 16:43
  always, they're creating such adversity. between
• 16:46
  landlords and investors and tenants. That doesn't
• 16:49
  have to be the case. And that's really, we see
• 16:52
  that a lot here, but it doesn't have to be the
• 16:56
  case. And I think there's, in all honesty, I
• 16:59
  think there's gotta be a little bit better self
• 17:01
  -policing among the sort of real estate investment
• 17:04
  community. I think that's something that we can
• 17:05
  all do a better job of, but it's hard when you're
• 17:08
  always kind of... when the legislative political
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  environment is always sort of vilifying you,
• 17:14
  you kind of instinctively are going to try and
• 17:16
  group together with the other people who are
• 17:18
  being built with you as opposed to kind of trying
• 17:20
  to say, hey, maybe we need to come after you
• 17:22
  a little bit more. So it's one of those things
• 17:24
  where in general, legislation, high level oversight
• 17:30
  tends to be a very, very broad brush. And everybody
• 17:33
  kind of gets swept up in legislation, even those
• 17:35
  that don't deserve it. Yeah, so I wanted to I
• 17:39
  wanted to address two things I have questions
• 17:40
  so for us Mobile home keys are still very much
• 17:45
  NIMBY You know not in my backyard. Are you seeing
• 17:49
  that the same in the Pacific Northwest? Absolutely.
• 17:52
  Oh, yeah, that's very We see that at not only
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  like in the tradition in the conventional like
• 17:59
  homeowner NIMBY sense, but also at the county
• 18:02
  and city level where we oftentimes will buy properties
• 18:05
  that are in a city that very clearly doesn't
• 18:08
  want that park in their city. They want that
• 18:10
  thing to be knocked down and they want nice subdivided
• 18:14
  homes sitting there and there's you know unfortunately
• 18:17
  there's an incentive for that because like let's
• 18:20
  take an example of a 100 unit mobile right and
• 18:23
  so that if you're a city that is assessed as
• 18:26
  a single tax parcel right so you're going to
• 18:29
  collect your tax revenue based on a single tax
• 18:31
  parcel Contrast that now with, say, D .R. Horton
• 18:35
  or somebody shows up and builds a 100 -lot subdivision
• 18:38
  and sells 100 single -family homes that are attached
• 18:41
  to the land. Now you have 100 different tax parcels
• 18:44
  that are going to be taxed as not only raw land,
• 18:47
  but with improved land with the house on it.
• 18:50
  So the taxable basis, if you compare 100 unit
• 18:52
  mobile home park, which from a tax standpoint
• 18:54
  is land, right? Because none of those homes,
• 18:57
  from the assessor's perspective, are improvements
• 18:59
  of that land. versus 100 homes that aren't, you
• 19:03
  know, you're talking more than an order of magnitude
• 19:05
  of value difference, and that's the tax basis
• 19:08
  for that city. So ethics aside, there's a massive
• 19:12
  economic incentive for a city to get rid of min
• 19:15
  -effective home parts because their revenue is
• 19:18
  going to be cut. So that's, so the NIMBY side
• 19:21
  of it is not like, you know, I mean, look, the
• 19:23
  like neighborhood stuff, that's like, I, we've
• 19:27
  dealt with that a ton. There's a lot of education
• 19:29
  that happens, and ultimately, you know, if you're
• 19:32
  providing affordable housing and you're doing
• 19:33
  it in a sort of ethical conscious manner, that
• 19:37
  whole NIMBY thing is, it's something that's always
• 19:40
  going to be there. Excuse me. I don't really
• 19:42
  view it as like a, it's not a massive impediment
• 19:47
  if you kind of are able to kind of be focused
• 19:49
  in what you're doing. The city and county stuff
• 19:51
  is really difficult because they will oftentimes
• 19:54
  write their code such that I just dealt with
• 19:57
  this literally yesterday. I was in a county meeting
• 19:59
  and the county was saying, hey, this is non -conforming
• 20:02
  in the county. And if you have a vacant lot in
• 20:06
  this park for more than 12 months, you lose that
• 20:08
  lot entirely. And that's a pretty clear example
• 20:13
  of them not wanting that park to exist, right?
• 20:15
  So like talk about a disincentive, right? Where
• 20:18
  now suddenly that 100 unit park, every time you,
• 20:21
  if there's a, you know, we're looking at, there's
• 20:23
  a lot of vacancy there right now. And that, so
• 20:25
  those vacant lots, We thought they existed and
• 20:27
  we thought we could add new homes, but now we
• 20:29
  can't because, you know, that's the scary thing
• 20:33
  to me. The NIMBY attitude, when it permeates
• 20:36
  into the county and the city level, they can
• 20:39
  enact legislation that can be very destructive
• 20:41
  to damaging communities.