As you can imagine, we’ve heard just about everything people have to say about investing in real estate during our twentysomething-year tenure in this industry. One of the complaints we see frequently is regarding ethics. Is it ethical to invest in real estate? Are landlords evil? Some people are thoroughly convinced that this investment method should be abolished altogether.
The Three Primary Ethical Objections to Investing in Real Estate
Obviously, we would disagree! That said, the question of ethics in real estate investment is essential. We don’t need to ignore how the industry can—and has—harmed people. What we can do is take in these criticisms, examine ourselves, and modify our strategies to promote ethical investing that benefits local communities.
Objection 1: Speculative investing ruins local markets for everyone else.
Speculative investing is most commonly a short-term strategy that involves snapping up properties in markets as they heat up.
Now, there’s nothing wrong with getting your foot in the door of a hot market! However, we often see flippers who buy properties, renovate them, and hold them vacant until they see the perfect opportunity to maximize capital gains. This drives up home prices artificially and can disrupt housing supply when done en masse. It can also disrupt local buyers who want to own and live in the properties and would like to benefit from the discounted purchase and renovation costs.
Objection 2: Real estate investors contribute to gentrification and harm vulnerable populations.
An individual investor can’t cause gentrification. (For those who need a refresher, gentrification happens when a wealthier demographic moves into a lower-income area, ultimately displacing the original residents.) This can happen when large-scale investment conglomerates develop large areas. Home values, costs, and rent may increase to a level untenable for vulnerable residents.
However, investment dollars from banks in the form of construction loans can be scarce and hard to come by, meaning abandoned and blighted properties sit vacant longer without renovation and threaten neighborhoods by creating the environment for other properties to fall victim as well.
Objection 3: Real estate investors exploit rental residents.
We’ve all heard landlord horror stories. It’s common to see them—and, by extension, real estate investors—vilified. And we’re not about to deny that some people and management companies do not treat their residents or properties respectfully. They may ignore significant maintenance issues, raise rent irresponsibly, and let their greed harm those around them.
Four Ways to Prioritize Ethical Real Estate Investment
So, how do we maintain responsible, ethical investment strategies?
1. Treat real estate investment as a people business
The bigger things get, the more impersonal they tend to be. We would do well to zoom back in and see people as people—not numbers, not vague demographics, not as a source of cash.
Investing in real estate is undeniably a relational business. The more you recognize the humanity in your partners, vendors, and residents, the more empathetic and ethical you’ll be. It’s just natural. You cannot push an easy button to have work done for you. There is not an app that can suddenly appear and replace the work and effort that genuine, human relationships can accomplish.
You can do this even if you’re a passive investor who never meets the people living in your properties. Hiring reputable, compassionate managers and quality vendors ensures safe, well-kept properties and transparent, fair communication with those living there.
2. Refuse to compromise on your standards
Plenty of investors choose to cut corners in one way or another. While this may seem like a good call in the short term, it harms your portfolio and those around you in the long run.
Don’t compromise your standards. Know what you will and will not accept, what is and isn’t typical in the industry, and what kind of investor you want to be. When you have a clear goal and high standards, you’re less likely to lose your way—and hurt others in the process.
Examples of compromising may include skipping on basic repairs that are needed but not threatening to the property. Another example would be not answering resident calls on holidays. A final example would be moving to evict a resident even when they are communicating and working diligently to pay rent on time.
When I say refuse to compromise, I mean in all things. Treat residents the way you want to be treated, and hire companies with the same philosophy. However, you should expect the same treatment from residents. This is the best way to hold a high standard.
3. Look for opportunities to improve sustainability
Sustainability isn’t just about being energy-efficient. It’s about making strategic decisions that improve efficiency and property longevity.
Simply buying and renovating a property that would otherwise remain vacant and decaying is sustainable. Renewing existing properties is good for the market and the environment. Your investments impact the market they’re in.
In cities like Memphis, which have been hotbed markets for long-term buy-and-hold investors, the majority of dollars spent renovating and revitalizing neighborhoods has had a tremendous, positive impact. It has helped keep neighborhoods intact and helped bring others back from the brink.
The impact we have as investors can be life-changing in some areas. Consider if that impact will be positive or not!
4. Be a long-term investor
Finally, we would encourage all real estate investors to consider the long term over the short term. Short-term investors typically cause issues with artificial price inflation and fan the flames of overhyped markets. They won’t be here long-term, so they’re not considering how their actions will impact the area.
A long-term investor, though, contributes to the local community. They’re a part of the ecosystem. As such, they’re invested in the health and stability of that market. And that mindset benefits everyone.
This article is presented by REI Nation
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
