Investing in Blue States > Investing in Red States

[Scott Trench]

Intentionally triggering headline for this community, I know. 

But, hear me out. 

The policies that are so obviously destructive in many blue states (rent control, NIMBYsm for zoning, high taxes, regulations, fees) are huge obstacles that present real risks in the short-term and with very newsworthy headline outliers.

But, these same policies are also a landlord's best friend in the long-term. 

I saw a stat recently that San Francisco has added essentially zero net new rental units in 20 years. 

I believe that it's policies with respect to housing and related matters are directly related to this. And these policies, in turn, are directly related to the fact that San Francisco investors who have hung on through the decades are millionaires many times over and have their pick of the cream of the crop when it comes to prospective tenants with each unit turn. 

San Francisco and neighboring Oakland are not having a good couple of years, and may be stagnant or declining for the next few. But, in 20 years, if they keep it up, I predict that the same patterns will repeat, and prices and rents will soar. 

Policies like rent control, zoning restrictions, high taxes, lengthy permitting processes, and more reduce housing supply. It makes it impossible, impractical, and/or uneconomical to bring new units to market at any scale in these locations. 

Strict rent control policies mean that investors can't buy a dilapidated property, refurbish it, and drive rents up. It means that investors can't buy lots or existing buildings and build large multifamily complexes.

Policies like these mean that, long-term, landlords will see rising rents, huge pools of quality rental applicants, limited competition, and be able to essentially do the bare minimum to maintain their properties, while still seeing government sponsored appreciation and rent growth.

Of course, there are also costs and risks to investors with these policies. In the short-run, these policies increase risks of headline news stories like squatters, professional tenants, and lengthy evictions. And, a minority of landlords will experience tenants who stay put for years or decades paying under market rent. Last, urban blight all-too-frequently accompanies many of these policies.

But, on the whole, the coordinated set of policies implemented in places like San Francisco and Oakland, CA seem to just be incredible tailwinds to investor returns over long periods of time. Landlords who pay attention, are ready to wait, play by the rules of the local laws, and have enough volume or cushion to ride out the outlier experiences, have seen, and I believe will continue to see, the benefits of lack of competition accrue to them to the tune of millions of dollars. 

Think about investors in markets like San Francisco, vs places like Austin, TX. Obviously, Austin is growing like a weed and SFO is in decline. 

But, because Austin, TX is generally more landlord and developer friendly, more housing supply is being built in response to growth. So, there is more competition. They are literally adding 10% more rental units that will be delivered in 2024. Rents are declining rapidly YoY in Austin. SFO is chugging along. One city is seeing the market at work. The other prevents the market from working. Austin rents average $1700 per month, and the market is booming. SFO rents average $3300 per month, and... essentially no market response. SFO will increase housing stock by less than 2% in 2024.

In Austin, landlords have to make concessions and/or ease up on tenant screening standards. 

In SFO, landlords get dozens or hundreds of applications for each new lease. 

In Charlotte, landlords have to maintain their properties and fiercely compete for business. 

In Oakland, dilapidated structures can get by with a bare minimum of state required maintenance for decades.

The very policies that are intended to protect tenant rights, over and over and over again, seem to backfire, helping only tenants who stay put for decades, and in some cases who maintain a residence at thousands of dollars below market in the rent controlled city while also living in another location. Those policies penalize all future prospective tenants in those markets, and while landlords complain, ultimately accrete value to the landlord at the overall expense of the city's potential. Tenants have to compete with dozens or hundreds of others for incredibly high priced rentals, to the point where cottage industries spring up to help place tenants.

While I will never vote for policies that replicate the poor outcomes of other cities in my hometown of Denver, I do, sadly, recognize that just holding onto my properties and watching increasingly restrictive and destructive policies get implemented will lead to long-term appreciation and rent inflation relative to cities with more landlord and developer friendly policies. 

I suspect that markets with landlord and developer friendly policies will see more growth, in terms of populations, jobs, etc. But, returns for investors? I don't think that's as clear-cut. I think that the very policies landlords here on BiggerPockets seem to fear and hate, actually are their best friend in the long-term.

Please rebut. Let me know what I'm missing.