Who can afford to invest in a poor neighborhood? (Part 3)
For the past two days, I've been talking about my journey toward buying a small apartment building which I hoped to develop and rent out — and the trials along the way. In Part 1, I started by talking about the process of finding a neighborhood that my partner and I loved, then locating a property there with great potential. In Part 2, I talked about the convoluted route we took toward securing financing, with many a road block along the way. Today, I'm sharing the conclusion to this winding journey, and how we decided to change course when our options ran out.
What's Left After you've Exhausted all Your Options
So, I didn't invest on B Street. But who could? And more to the point, who can afford to invest in all our declining neighborhoods?
One answer, of course, is: sheer, impossible altruists. If my partner and I had been willing to make an all-cash or almost-all-cash offer on the building, self-finance the needed renovations, and, out of the goodness of our hearts, keep the rents affordable on top of all of that, we theoretically could have done it. I mean, sure, granted, we wouldn’t have been able to provide even the flimsiest safety net if the building needed more work than we’d expected (which, trust me, in my experience so far, buildings built in the 1800s and neglected for decades tend to do). If the roof had caved in, it would have been game over. If the sewer collapsed, oh well, you’re out of a home. But at least our fate would have been entwined with the fate of the building and its tenants. We would have felt absolutely awful about the people we’d harmed, in addition to being ruined ourselves.
Another answer: a non-profit could take it on. For the B Street building, that's what happened. The CDC has held onto the building since we passed, and they’re going to rent it out through their property management arm. B Street is astonishingly lucky to have an amazing, well-funded community development partner, and their tenants will be better off for it.
But of course, the CDC can’t buy everything. And they don't really want to. Though they own about a dozen of the buildings on B Street, no non-profit in the world could—or, arguably, should—shoulder the responsibility of housing an entire region, especially when residents could be building much-needed wealth by owning this same real estate themselves.
No matter how you slice it, buying and rehabbing a home in a low-income neighborhood is a financially tenuous investment that even the most committed people will find hard to make work.
The CDC really did want to sell to us, and they did everything they could to connect us with financing that made sense. And they still want to get good, ethical, carefully vetted private landlords into these buildings. They recognize that one major developer on a block, however benevolent that developer might be, is a fragile arrangement; this multifamily block would be better served by a network of small-scale developers in addition to the CDC, and particular, by private individuals who have skin in the game, who care about their tenants, and who can give these buildings the dedicated attention they deserve.
But more likely, the people who can afford to invest on the B Streets of the world are the same people who have always invested on them: bad landlords. They’re going to be people who buy buildings for those rock-bottom appraisal values, or buy them out of foreclosure, or wait for the land tax sales. They're going to do next no repairs—hey, it's not their fault that they couldn’t get the money to pay to fix the big stuff, anyway — and then rent their units to vulnerable tenants who are afraid to report abuses, and find shallow but absolutely legally workable pretenses to evict them if they do make a fuss (usually by charging just a tiny bit more than than their tenants can really afford from the start, in order to ensure they’ll fall behind on rent at least once and give the landlord an easy eviction trump card.)
If slumlords don’t play their cards right and can't manage to do the bare minimum in time, the building will decline even further, and eventually, it will probably be condemned. Oh well; at least the landlord got a nice tax haven out of it for a few years, and, in the meantime, milked the rents for the meager amount they were worth. When buildings become pure, abstract real estate investments, there’s simply not enough incentive to maintain, much less improve, a structure that you’ll virtually never be able to sell for more than you paid for it— not because no one would ever live there, of course, but because no bank would ever finance the purchase for any amount that would generate a profit to the landlord. And anyway, these buildings are so cheap, these slumlords will make it up on volume; the landlord who owned the house on B Street before we explored buying it owned over 200 apartments in the surrounding region. There is no doubt this was his whole business model — and cynical as it is, that’s probably the single most profitable way to conduct business as a landlord in a declining neighborhood.
The only other option? Blight it. Bulldoze it all. Put up a parking lot, or a stadium, or a corporate campus, or whatever other ultra-fragile silver-bullet solution is en vogue. The city will probably even pay you to do it, even if you have to fudge the numbers a little bit. Give up on any appearance of caring about the community in these hundred plus year old neighborhoods, put up something shiny that you know is doomed to fail, and call it growth.
Here’s the sad truth about places like B Street: unless these buildings find buyers who will view them almost purely as homes and volunteer to virtually forgo the investment potential of real estate that their neighbors on wealthier blocks are likely to enjoy, these areas will continue to decline. Unless these properties find banks or nonprofits who are willing to take huge, financially irresponsible risks in the name of community building and/or find creative ways around the appraisal gap, they will continue to decline.
Unless we somehow do both these things at a vast, frankly unimaginable scale, right now, whole regions will continue to decline. And the buildings in them will be bought by slumlords who recognize that there is no incentive for them to reverse that decline. They will be funded by banks who recognize the risks inherent in these areas and, rightly, decide not to gamble with their institution’s financial health. Things will keep going south, and the people who will pay for it are the ones who can’t afford to live anywhere else.
You may be a professional developer who’s reading this right now and shouting the name of a grant or a tax credit or a lenient bank or some other creative funding solution we missed at the screen. A few of you have already left these ideas in the comments, and while I appreciate your insight, I want you to take a step back, and recognize that your impulse to do this proves a point I believe is essential.
Our cities need non-professional, small-scale, skin-in-the-game developers in order to thrive—as many of them as possible, at a far greater scale than we have now. And if non-professional, small-scale developers can’t easily navigate how to finance a declining building without professional knowledge, we have a huge problem in this country.
If my partner and I—who had the expert advice of a CDC and a network of friends who are landlords and many, many advantages that the residents of B Street simply don’t have—couldn't figure out a way to buy this building in a reasonable amount of time. And if we couldn’t do it, you can bet that no renter on that block is going to be able to do it and make the leap to being homeowners themselves.
And honestly? They’d likely be the best owners of all, because this is already their home.
Pulling the Trigger
My partner and I did end up buying another four family. I had to take a break from writing this article to attend our closing; there’s a packet of mortgage papers and a giant bank logo chocolate bar that my lender gave me as a congratulatory gift sitting on my desk as I type. We spent almost exactly the same amount of money we’d planned to spend on B-Street, but we bought about half a mile north, in a slightly more established neighborhood that has a few solid, comparable properties nearby. We did have to navigate an appraisal gap, but it was small enough that the seller, grumblingly, lowered his price to meet it. It’s going to need some work, but not $25,000 worth of it up front just to get a tenant safely in the door.
“We’re not putting our money into the neighborhood that truly needs us the most. But ultimately, we’re doing what we set out to do on a scale that we’re able to sustain.”
We’re going to be able to provide affordable housing in our new building, and we’re going to have enough left over every month to ensure that the property and the people who live in it will have a true safety net if something goes wrong. If all goes well, we’re going to be taking an old, struggling fourplex and gradually fixing the things we need to fix and bringing it out of decline.
It’s not as much of a leap as the transformation on B Street would have been. We’re not putting our money into the neighborhood that truly needs us the most. But ultimately, we’re doing what we set out to do on a scale that we’re able to sustain.
And here’s where I have to admit something: for me, the kind of logic that led me to buying this building rather than investing on B Street is the single hardest thing about the Strong Towns message. Because recognizing that a neighborhood has declined so far it can’t get back up — at least not today, and probably not tomorrow — is really painful. The fact that I’ll be helping to shore up a neighborhood adjacent to B Street, the good effects of which very well may spread the blocks south to the neighborhood I originally set my sights on? Well, that makes me hopeful, but it’s certainly not helping those folks right now.
For generations, America has been wiring neighborhoods for decline from the beginning, whether through overbuilt design we can’t afford to maintain or through financing boondoggles we can’t afford the payments on. Often it's both at once. But the kicker is: that also means we’ve had generations to grow to really love these places. We’ve had generations to fill these places with real people who have learned to call these virtually doomed blocks home.
I’m not giving up on B Street. Down the line, I can see my partner and I going back there and becoming the altruistic super-buyers I dream we could be, once we’ve made a modest amount off a few other buildings, hedged our risk with a few other easier bets, and built up our capacity and our skills. Maybe someday, when our current place is paid off and we can afford a bigger gamble, we’ll buy a house for ourselves to live in down there. We really do love it.
But for now, I’m doing what I can to make my town stronger. It’s not as much as I’d like. It’s not as much as my town really needs. But I have to believe this is the best way to get there.