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Wes Blackwell
  • Real Estate Agent
  • Phoenix, AZ
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How Universal Basic Income Could Change Real Estate Investing

Wes Blackwell
  • Real Estate Agent
  • Phoenix, AZ
Posted Jun 15 2019, 11:16

The other day I was having a discussion with some associates about the upcoming Presidential Election, and one of them brought up the Democratic Candidate Andrew Young and his Universal Basic Income Plan called "The Freedom Dividend."

From his site: https://www.yang2020.com/policies/the-freedom-dividend/

"Andrew would implement a Universal Basic Income, ‘the Freedom Dividend,’ of $1,000/month, $12,000 a year for every American adult over the age of 18. This is independent of one’s work status or any other factor. This would enable all Americans to pay their bills, educate themselves, start businesses, be more creative, stay healthy, relocate for work, spend time with their children, take care of loved ones, and have a real stake in the future."

While I must admit that this seems like a ploy to literally buy votes, I do think that Universal Basic Income (UBI) is an important thing to consider with automation on the horizon in the years to come. 

As a Realtor and real estate investor, I couldn't help but think how this extra $1,000/mo might affect the housing market.

INCREASED HOUSING AFFORDABILITY

The first implication of this extra $1,000/mo is that it would make housing much more affordable in most markets, potentially reducing the monthly costs by 33% or greater for most bread and butter housing markets.

A $250k home with only 5% down and a 4.5% interest rate has a PITI of roughly $1,700/mo. With the full $1,000 going towards the mortgage, this payment would basically be reduced to $700/mo, about the same if they had purchased a home for $100k at the same terms.

This is obviously a complete game changer for the housing market, allowing many people to afford homes that couldn't afford one without this plan, increasing the housing demand particularly at the lower end of the housing market.

INCREASED HOUSING DEMAND, WITHOUT INCREASED SUPPLY

At the bottom end of the market, this UBI of $1,000/month would suddenly allow many people who could not afford a home without it to suddenly purchase one. 

Using a DTI Ratio of 45%, a married couple would have an extra $900/mo (45% of $2,000/mo) to allocated to their housing expenses, allowing them to more than double their pre-approval amount in some cases.

Without UBI: Max Purchase Price = $117k at $800/mo

With UBI: Max Purchase Price = $250k at $1,710/mo (+$900/mo to take new DTI to 45%)

(Note: I'm not a lender, and surely there is more to this calculation than I am sharing here, this is merely just meant for illustrative purposes)

Further, the extra money would allow many people who already have the income and credit but no down payment to suddenly be able to save up for the down payment, creating additional buyers at the lower price ranges.

But without increasing the supply of available homes, the base floor price for housing would certainly be raised. Simple supply and demand.

MORE POTENTIAL MOVE-UP BUYERS

With more income available for housing, some buyers will be tempted to "trade up" and purchase more housing than they could normally afford. 

Suddenly you'd be able to move into that better school district or nicer neighborhood instead of settling for what you could previously afford. Thereby creating more demand in the mid-range markets as well (Under $500k in most areas).

But still, the increased demand would be felt at the bottom end of the price range where it already exists. I recently received 9 offers in the first weekend for a $150,000 home in Phoenix, and could easily see that number doubling to 20+ offers with a UBI plan for an extra $1,000/mo.

EFFECTS ON THE RENTAL MARKET

You'd likely see a similar trend in the rental market, with people moving out of their relative's house and into their own rental who couldn't afford to do so before. 

Also, you'd see renters at the lower end in not-so-nice neighborhoods suddenly move out into nicer neighborhoods that are safer with better schools.

The big question is how many landlords are going to jump ahead of this demand and automatically bump the rents a superficial amount now that everyone has an extra $1,000 every month.

QUESTION: If you were a landlord and had a 10-unit apartment building, and suddenly all your tenants are now receiving an extra $1,000/mo, how tempted would you be to raise the rent sharply for no other reason?

If that happens, you might see an even greater increase in demand for purchasing lower level housing, with tenants perceiving they're getting a bad deal in their current rental, motivating them to finally buy a home instead.

EFFECTS ON SHORT TERM RENTALS (STR)

Since short term rentals are associated with travel, which itself is somewhat of a luxury, I don't think UBI would have as much impact on the STR market.

Surely, more people that couldn't afford to travel in the past would suddenly be able to, but they may choose to spend that money elsewhere instead.

And that's the whole rub with UBI. When everyone has a larger supply of money, the demand for ALL things naturally increases. People will spend money they didn't have in the past on new non-essential items (things they only wished they could afford in the past, but suddenly now can).

LOW PRICED MARKETS BUBBLE FROM INVESTORS

With extra income every month, and a resulting increase in local housing costs, real estate investors would swamp lower priced housing market like Ohio where homes are under $100k. 

Investors who may not be able to invest locally because of the increased demand and raising of the lower home prices would look to other states where homes are already more affordable.

This could have a devastating effect on those markets who are already experiencing fierce demand in the lower price ranges from owner occupants, with an additional demand coming from out of state investors, making the housing situation worse than it was previously.

INCREASED PURCHASING POWER FOR MULTI-GENERATIONAL & EXTENDED FAMILIES

Probably the biggest opportunity for aspiring investors would be pooling the UBI funds with fellow family members to drastically increase their purchasing power.

Imagine a family of four adults: A married couple, one of their retired parents, and one child who is an adult teenager getting ready for college. Together, they would have $4,000/mo in UBI to spend every month, or $48k/year.

Which just so happens to be roughly the amount needed to put a 20% down payment on a $250k property, and be able to do this every single year.

Together they could purchase their first $250k home and owner occupy, paying the $1,350/mo PITI with the retiree's social security. The working income from the two parents could pay all other living expenses, and they could still save $4,000/mo from the UBI.

They could easily repeat this process every year, or even buy cheaper homes in other states as investments (see above). Sure, they'll run into a little trouble once they get enough loans, but if they took a break in buying from years 5-10 and focused on increasing the current properties value or accelerated loan pay-down, they could pick this strategy back up and continue to purchase property.

By the time the 18 year old teenager is 40, he'd be absolutely loaded. And this is just with a family of four. Imagine if an extended family of 10-20 people pooled their money together. They'd have $120-240k per year to invest in real estate, stocks, and other businesses.

UNIVERSAL BASIC INCOME CAN'T BE UNDONE

Probably the biggest consideration with enacting a UBI program is that it can't be undone. NO ONE will vote to give themselves less money and handouts, even if it's shown that maintaining the program is unfeasible.

For example, just look at social security. Since 2010, Social Security's Cash Expenses have exceeded it's income, with the combined reserves likely to be fully depleted by 2034.

https://www.pewresearch.org/fact-tank/2015/08/18/5-facts-about-social-security/

We've known this for quite some time, yet we all are still complicit in keeping the system up and running. Millennials pay into a system they'll likely never receive the benefits from, and Boomers would start a revolution if the benefits are suddenly taken away after paying in for their entire lives. Same thing with the coming Gen X getting ready to retire.

More likely, the system will be altered to keep it afloat and kick the can down the road to future generations, by changing the benefit formulas, raising the payroll tax, or makes other changes such as raising the cap on taxable wage income.

BIGGER PROBLEMS AHEAD

But combine this with Artificial Intelligence Experts predicting as much as 45% of all jobs could be replaced by automation by 2035, and we've got a serious problem on our hands.

Serious changes are ahead, and the government only has so much "bread and circuses" (UBI being the bread) before seriously addressing the issues at hand.

For now, UBI is presented as Social Security 2.0, but instead of just the retired population too old for most work it's going to affect everyone because soon there will be very little work at all.

And with humans projected to live 3-8 years longer than previously expected by 2050, and even with just the current US adult population of 250 million over 18 (UBI recipients under Andrew's plan), that's an additional $3 trillion per year UBI would cost us BEYOND the additional $3.2 to $8.3 trillion we hadn't planned to spend with our erroneous calculations.

Further, with an annual inflation of 3%, the buying power of a dollar today will equivalent to $2.50 in 2050, begging the question if $1,000/mo will even be enough by then?

And if Andrew does win the next election and successfully implements the Freedom Dividend of $1,000/mo, what's to stop a later presidential candidate like Elizabeth Warren from running on a platform where the freedom dividend is expanded to $2,000/mo or more?

Interesting times for sure... much to consider with the big changes ahead.

DISCUSSION QUESTIONS:

1. If you received $1,000/mo in UBI, how would your family use this money to better your lives?

2. What market are you in? How do you think $1,000/mo in UBI would affect your local housing market?

3. Would you automatically increase the rent on your investment properties because your tenants are now receiving an extra $1,000/mo?

  • Real Estate Agent CA (#01991457) and AZ (#SA674470000)

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