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Al Jacobs invites you to take a look at his most recent book, Roadway to Prosperity, which embodies the heart of his nearly half-century in the investment business.  You'll find a wealth of information there.

 

ROADWAY TO PROSPERITY

AFFORDABLE HOUSING – FOR REAL

If you’ve been paying attention, you’re aware California is suffering from a shortage of homes people can afford. As a single example, the $1,650 per month lease to a close friend on a small 1-bedroom apartment in a desirable area of Orange County recently expired; the price on his 1-year extension is $2,100. It takes a pretty healthy income to cover this, something not easily handled by most local residents.

In response to an increasing demand requiring something be done to address the affordability crisis, the lawmakers of the state are engaged in drafting legislation to demonstrate they share their constituents’ concerns. SB 2 from Senator Toni Atkins (D-San Diego) will add a $75 fee on various real estate transactions to raise $250 million to finance low-income housing construction. Assemblyman Richard Bloom (D-Santa Monica) introduced AB 1505 to allow cities to force developers to set aside a number of homes in their projects for subsidized residents. Other housing bills under consideration include a $4-billion bond measure to finance affordable housing developments.

Not a day goes by that someone with an official title fails to offer a legislative solution to the problem. The comments you may expect to hear will include such lines as: The biggest barrier to affordable housing is financing … the necessity of delivering affordable units to the market is critical … there have not been significant, dedicated funding sources to ensure the production of subsidized housing …  the most critical component in the equation – dollars – remains unaddressed … the solution to the housing dilemma must include governance in conjunction with a dedicated funding mechanism. As you see, any governmental approach must, by necessity, be mired in bureaucratic nonsense. In general, any proposed laws, if enacted, will simply raise money to be applied in some fashion to benefit selected groups of people. No inexpensive structures will be created as a result. Short of dictatorial mandate, there’s no way to legislate affordable housing.

The question now begging to be asked is whether any activity is possible to actually create lower cost housing of some sort, and which then becomes affordable to people in need. I’m pleased to report there are numerous ways such housing is created, but not the result of governmental actions. Rather, they’re often brought about in direct violation of rules and regulations designed precisely to make housing unaffordable. I’ll give you a few illustrations.

The owner of a home with an attached two-car garage modifies the 20’ X 22’ area by inserting a wall between the two car spaces, covers the inside surface of the garage door with drywall onto which a pair of closets are fashioned, creates a raised false floor at the same level as the house, and installs electric wall heaters in each space through doors now adjoining the house. The cost of these improvements come to $6,700, possible only because an unlicensed handyman performs the work in the absence of a city permit required for work exceeding $600, and in violation of several state and municipal codes. The end result: The homeowner rents each newly created bedroom – offering kitchen and bathroom privileges – for $500 monthly. The income to the homeowner represents an annual return of 179% on the investment, while two families of modest means obtain affordable housing.

Next example: Each 2-bedroom unit of an older apartment complex has a 12’ X 18’ rectangular living room. Its configuration permits a wall to be erected in which a 12’ X 8’ space created can be made suitable as a third bedroom, while the untouched area remains adequate as a living room. The modification cost to the owner, using his maintenance staff, is $1,700; a monthly rent increase of $150 is passed on to the tenant – who previously agreed to the work. Everyone benefits. The owner receives a 100% annual return on his investment; the tenant can rent out the bedroom for no less than $500 per month; the person(s) who rent the bedroom will enjoy affordable housing.

Another more obvious method of obtaining affordable housing requires no construction, legal or otherwise. Very simply, it’s going to where the cheaper housing will be found. My friend in Orange County, now forking out $2,100 each month for his admittedly prestigious location, might, if he found it necessary, rent an equally sized apartment in the city of Hemet, Riverside County, for $800. Though not nearly as fashionable, nor perhaps as convenient, it’s certainly a lot more affordable.

Another possible source of affordable housing is making itself available in an unusual fashion. Since the advent of our technological revolution at the onset of this century, a substantial portion of available commercial property is becoming excess. Pay a visit to any community where such properties as strip malls, free standing retail stores and office buildings are found, and you’ll note an increasing number of vacancies. The unfortunate situation is these spaces are becoming less in demand with every passing year. And with this reality lies an opportunity. Many of these unused and otherwise unwanted buildings could be structurally modified to accommodate residential use. 

I’m immediately reminded of a good sized building in a highly trafficked area in the city of San Jacinto, Riverside County. Though boarded up these past six years and displaying a faded “For Rent or Sale” sign, the two-story frame office structure of approximately 120,000 square feet appears to be in otherwise sound condition. An inspection would confirm whether it could be converted to apartments at a reasonable cost. If so, it might comfortably house one hundred families.

At this point, a disclaimer is in order. I harbor an uncomfortable feeling my proviso “at a reasonable cost” can never be fulfilled. To convert a very visible building in a prominent location to another use will require many forms of approval. City officials will no doubt need to authorize a zoning change, a conditional use permit and a number of variances. To satisfy building requirements, an engineer will be directed to redesign the structure. It’s likely any modification will require a licensed contractor to perform the work, with prevailing wages set as a condition. Finally, some pseudo-official agency will dictate terms as to the ultimate occupancy of the completed project and set the approved subsidized rent schedule. Whoever might be the owner of the building will, at the onset, lose all control over scope and costs. The prospect of a successful affordable housing project will quickly become a nightmare as the process grinds to a halt. In the end, nothing will come of it.

Now that we’ve returned to reality, let me offer my final thoughts on the subject of affordable housing. The subject will remain of concern to the many individuals hampered by their inability to find a suitable residence at a price they can afford. However, those persons whose housing needs are met to their satisfaction will offer nothing but lip service to the matter. As for officials who may be looked upon for a solution to the problem, they’ll go through the motions of acting concerned as they try to deflect whatever criticism they receive in some other direction.

As to any viable action to resolve the problem, each impacted victim will employ their wit and effort as productively they’re able. Some will fare well; others will end up badly. In the final analysis, those most destitute will, with luck, be taken care of by government in some subsidized fashion. Except for those persons who choose to do so, it’s unlikely many will end up homeless on the streets. It’s equally unlikely any real progress will be made to resolve the affordable housing problem.

 

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