biden tax changes impact on real estate investors

Violent crime rates have risen sharply since 2019. And while that’s happened in suburban and rural areas as well, the trend is far worse in major metropolitan areas.

Brian and Deni hold a candid discussion on whether or not this should stop you from investing in urban real estate.

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live off rents podcast transcript

Brian: Happy Tuesday, everbody!

Deni: We’re live!

Brian: Brian and Deni Supplee here from Spark Rental. How’s everybody doing?

Deni: Hey, everyone. Please let us know where you’re coming in from. Put it in the chat. Let us. Know how your day is.

Brian: Yeah. As you can tell, it’s casual and conversational around here in this podcast, which is why we do them live, you know, that’s what we like. So last week I interviewed Don Thornton. We talked about short sale investing and infinite banking and how to use infinite banking for asset protection and tax protection. Today we’re going in a bit of a different route and we’re talking about something that you and I have talked about before. To some extent, we’re talking about should rising crime rates in cities deter you from investing in urban areas? Deni and I were trying not to be biased about this, but we’ve both had such bad experiences with city real estate that it’s going to be hard to make this unbiased.

Deni: But maybe if anybody out there is watching and you have investments in a city and you’ve had really good experiences, let us know.

Brian: Well, exactly! And that’s that’s why we try to keep this conversational, you know, keep it going both ways. And not just a, you know, a diatribe of us ranting at you guys. So, Deni, let’s let’s jump in and start talking about some of the downsides in investing in urban areas. So why shouldn’t people invest in major cities?

Deni: We all know that things tend to be mean. So especially, like if you’re a new investor, you can probably get good deals. And if you buy like a duplex and if you’re a first timer and you’re going to live in one side, you can get all kinds of grants and stuff because they have first time homebuyer grants. And a lot of your cities I know we have them in Philly.

Brian: While we’re on that topic, can you think of any other advantages to investing in urban areas?

Deni: No, I truthfully, I can’t. I’ve had bad experiences managing in the city, so I don’t.

Brian: So Deni and I were talking before the show and the closest that I could come up with for a reason to invest in urban areas – So. Metropolitan areas have historically seen faster population growth rates and faster home price appreciation rates than rural areas. But you can take advantage of that. Those population booms and the the job growth by investing in satellite towns and suburbs, you don’t have to invest within the city itself to take advantage of that faster population growth rate in and around cities. And Shani here says cash flow as a reason to invest in urban areas. And so, Shani, I sort of agree with you. So on paper, urban rental properties have higher cap rates. That being said, my experience has been that in reality, you actually end up with lower returns because there are a lot of hidden costs that just don’t appear when you run the numbers on paper for cap rates. And we’ll talk about some of those higher expenses in a minute.

Brian: Well, I guess let’s just jump right in and start talking about some of the downsides to urban investing. So some of those hidden costs that don’t often show up when you’re calculating like net operating income and calculating expenses when running cash flow numbers and cap rates. Things like crime rates, vandalism. I’ve had the air conditioning condensers ripped apart at my urban rental properties so people could go in and steal all the copper piping out of them. Higher turnover rates I’ve experienced in urban real estate investing turnovers are where most of your labor and most of your expenses are as a landlord. So higher turnover rates can actually just destroy your returns and they don’t easily show up when you’re running the numbers on paper.

Brian: You also have higher property tax rates in cities compared to suburbs and rural areas which eat into your returns of course, and your cash flow. So, Shaniresponded here, class A versus class D. It depends on your goals and that’s certainly true. Cristina Colon says Class D or C are a big no no for her. And I’m with you 100% nowadays, Cristina, to give you a little bit of a background, I got my start investing in oh, it looks like we lost Deni here. She was having some Internet stability issues, so it might just be me for a minute, you guys. So I started out investing in Baltimore real estate, and they were more like lower end, affordable housing, single family rental properties, and I just got eaten alive with negative cash flow. Now, some of that was me being an inexperienced investor, but it was a total mess, high crime, high turnovers. I’ve had tenants that just destroyed my units. In urban areas you also have tenant friendly laws and regulations that are downright anti landlord in many cases. And that goes from not just the obvious stuff like rent control and rent stabilization policies, but also things like how long it takes to evict a tenant who hasn’t paid their rent. I’ve had it take 11 months to evict tenants before because they knew every trick in the book to keep prolonging the eviction process.

Brian: There she is. Hey, Deni, welcome back! Well, I guess maybe she’s back. Maybe she’s not. We’ll see. Deni, can you hear me?

Deni: Yes.

Brian: All right. So, Deni, I was running through some of the disadvantages of investing in cities, you know, from higher property tax rates to higher crimes, higher turnover rates, greater odds of tenant property damage, higher crime rates, of course. And in fact, Deni and I were talking before the before we went live. So during the pandemic in particular, there’s been a huge jump in violent crime rates after they had been they’ve been going down for several decades. Violent crime rates in the US have been going down since the early nineties and then in the mid to late 2000s or I’m sorry, 20 tens, they started ticking back up and then they just skyrocketed in 2020. And yes, they rose in urban areas, suburban areas and rural areas across the board, but they rose twice as fast in major cities as opposed to suburban areas and metropolitan counties. So to put specific numbers on those. Murder rates rose 34.2% in major cities in 2020 compared to 2019. And they grew at half of that rate in metropolitan counties and suburbs. So 17.4% increase in murders, murder rates in those areas. And that, by the way, that’s from FBI uniform crime reporting statistics.

Deni: Now much of that we have to take into consideration the population. I mean, you have closer and more population in the rural areas.

Deni: I mean, the urban areas compared to…

Brian: We’re not here to try to lay blame or say why these trends are happening. The point is that there are significantly higher crime rates in cities than there are in suburbs in rural areas. You can get political about it and try to explain it away one way or the other. I don’t care about any of that for these purposes as a real estate investor. I only care that crime rates are way higher in cities than they are outside of cities.

Deni: True that. True that.

Brian: And Shani says, I prefer A minus, B or C plus. And I hear you, Shani. So we did a co-investing deal – this is actually (I mean, obviously, this is anecdotal, but so) – last year we did a co-investing deal where with some of our students, we went in on a single family rental property in a suburb of Detroit C plus area, not a great area. And sure enough, we had a neighbor hit the fence with their car and did a bunch of damage to the fence. Wouldn’t admit it, wouldn’t fix it, of course. And we had the fence going along the property between our property and the neighbors. So there was no one else who could have broken this fence. You know, it’s not it’s not like someone could have swerved off the road and hit it. But they refused to admit it. Nope, wasn’t me. And that’s the kind of stuff that you don’t see as often in rural areas. And I’ve seen that happen many, many times in Baltimore City, where I used to where I grew up investing. Deni, you have some more stories from Philadelphia, I’m told.

Deni: Yes. I was monitoring a house also where they went in and stole. They broke in and did all kinds of horrible things. And then they wanted the copper tubing. So, you know. And that stuff is a lot of money.

Brian: Oh, yeah! You know, the quality of the tenants in lower end urban areas can totally destroy your returns. Deni and I say all the time that the quality of your renters determines the quality of your returns. And it’s very true. And yes, there are upscale areas in cities, of course, with terrible cap rates. Right. I mean, you’re not going to get better cap rates in those higher end urban areas than you’re going to get in, say, the suburbs. But you do get some of the disadvantages still in those higher end urban areas compared to equivalent socioeconomic levels in surrounding suburbs or in rural areas. For example, even in high end urban neighborhoods, you still have to put up with the tenant friendly laws and the higher property tax rates and higher crime rates, even in better urban areas than you’re going to have in equivalent salary areas in the suburbs. So you still get a lot of the disadvantages of city investing in high end urban areas without a lot of the benefits.

Deni: I think we also should mention that good tenant or not, and obviously we want to do our due diligence and make sure we get the best tenant possible city or suburb. But in the cities, a lot of the damage and stuff comes not even from within. It comes from without. And that you can’t control.

Brian: I had a really good tenant in a lower end urban neighborhood once, and they left after a year because the crime in the neighborhood was so bad and because he and his family had bad experiences with the neighbors. There were drugs and he didn’t want his kids around them. And so even when you do find good tenants in rougher neighborhoods or in any urban neighborhood, you can, they can still be driven away by some of the other factors in the area. And as someone who used to live, I mean, I’ve spent most of my life living in cities. I’m not anti city by any stretch. I live in a city today. But, you know, when I was out of college and as a young professional living in a more upscale neighborhood in Baltimore, downtown Baltimore, the trend was very obvious where people – it was a bunch of young professionals who lived there. They would hang out there for a few years, party, have fun, go out to nice restaurants in the city, you know, trendy stuff, go to art gallery openings and stuff. And then they would move out to the suburbs as soon as they were ready to get married and have kids. So once again, even in the better areas in the city, you end up with these high turnover rates, you lose the better tenants. And it’s just… It’s a recipe for lower returns as a real estate investor.

Deni: So what do you do then if you decide to go ahead and invest anyway because there is the like shiny brought up. There is instances obviously where there’s return. Good return.

Brian: Yeah. And you know, some people who live in cities like to invest in their local communities. So sometimes there are non financial or non-economic reasons to invest in a city. So one thing you can do is protect yourself by checking out or researching crime statistics. We can put a couple websites in the chat here where you can look up local crime stats for any neighborhood. You know, it also helps just to go visit neighborhoods yourself and see what the vibe is like in those neighborhoods.

Brian: Deni, What are some of the things to look for when you’re visiting neighborhoods in person and trying to get a sense for them?

Deni: You want to go at all different times of the day because that’s really helpful. And I tell people who are buying houses to do that in whatever neighborhood they’re looking through or whatnot. I’m one of the better times is around six, between six and eight for several reasons. You want to make sure, obviously, that we don’t have a bunch of teenagers and kids hanging out. Good sign is when you see a lot of kids playing. If a parent feels comfortable that their kid is playing outside, that’s good. It’s like Cani said, common sense. I mean, that’s somewhat common sense to check out. I also talk to your postman. I get more information from them than even neighbors and stuff because they know what’s going on, they know who’s getting the warrants in the mail and all of that stuff. So you can find out stuff through that too.

Brian: Absolutely and one other big downside to cities is that insurance rates can be a lot higher, both for you buying landlord insurance, but also the people who live there. Car insurance rates tend to be higher in cities. You know, homeowner’s insurance rates are higher. Again, these are big downsides to investing in urban real estate. I no longer invest personally in single family rentals in cities, especially tenant friendly cities. I will never invest in a tenant friendly city again. But yeah, I mean… Deni, any final thoughts about investing in cities versus suburbs and rural areas?

Deni: Just be realistic. Make sure you’re… (I don’t know whether you mentioned this while I was in Internet or wherever) But… You want to make sure the numbers work and then you want to include the additional numbers for insurance and even vandalism and stuff. You want to include all those things because those are it’s going to up your maintenance costs and repairs. So you definitely want to do that.

Brian: Yeah… And include a higher vacancy rate. When you’re calculating cash flow, then you think you’ll actually have because even if you can find new tenants pretty quickly when you have turnovers, those higher turnover rates will still hit you with higher maintenance and repair costs and higher vacancies, of course, higher marketing costs. So yeah, use higher vacancy rates in urban areas than you think you’re actually going to encounter.

Deni: And know how long it’s going to take to evict. Because some cities are crazy long, you know, like six months to a year. … I had a nightmare like that too. And maybe I’m wrong, but it seems like there’s more professional tenants in the cities. They kind of know their way and they use it more so well.

Brian: They can get away with it because of tenant friendly laws. I mean, it’s hard to be a professional tenant in cities and states with more landlord friendly laws.

Deni: So that’s true!

Brian: All right. On that note, we will wrap things up for this week. Let us know what you want to hear about in the weeks to come – [email protected]. We read them all. We will catch you on the flip side.

Deni: Right! You guys have a great, great day! Bye.

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