How Universal Basic Income Could Change Real Estate Investing

How Universal Basic Income Could Change Real Estate Investing

Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes

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?

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
7y

Hugo Chavez did something like this in Venezuela.  That worked out well, didn't it?

If this sort of thing ever passes in this country, it's time to leave.

See this reply in the discussion

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  • Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    7y
    Originally posted by @Jonathan W.:

    @Wes Blackwell so much economics ignored.

    Increased demand without increased supply will lead to higher prices.

    This post assumes so much that isn’t true.

    So much fake cause and effect assumptions

    Basic Economics 101 teachers just rolled over in their grave

    Having an intellectual argument on these three questions is at best as useful as arguing science fiction philosophy

     Perhaps you should enlighten us then.

  • Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    7y

    @Andreas W. Federal tax receipts increased after the tax cut. The tax cut is not the problem. Spending is the problem. Debt service on the huge national debt and entitlement programs increase every year faster than inflation, GDP, and tax revenues.

  • Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    7y
    Originally posted by @Lesley Resnick:

    There is a greater issue at hand.  The single largest employment for men 18-35 is driving, delivery, service, etc.  What happens when that class of job is replaced by driverless cars?  What will these lower skilled people do to create value and make money?  I know I don't want to start cutting checks for 1k a month to each of them.  Retraining a 35 year old with a high-school education to be a python developer seems far fetched.   

    Historically whenever enough people become disenfranchised, there is a change and it is violent.  

    Every Revolution 

    WWII (WWI was more ego and aggresive empire building)

     Completely true, which is why I mentioned bread and circuses. Unemployment is DEVASTATING to men, and that 18-35 year old segment are the "fighting age" men that could cause said revolution.

    Given our history (this country was founded on a revolution) and our 2nd Amendment, I think that without a job to keep them fed this surely a likely outcome without UBI or some other sort of measure to keep them pacified. 

    I think it's highly unlikely that Andrew Yang will be elected, or that we'll see a UBI program within the next decade. By 20-30 years from now when my son is my age the loss of jobs will be so overwhelming some sort of solution must be enacted, and it will probably be too late.

  • Los Angeles, CA · Member since 2019 · 512 posts · 301 votes
    7y

    @Wes Blackwell if you’d really like me to sure. In due time. Like the other guy said, longest post in PB history. I’ll tag you when I do

  • Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    7y
    Originally posted by @Matt Groth:

    I am a huge proponent of merit, and was sure I would disagree with Yang, and then I heard him on Joe Rogans podcast. While I agree with the others above,  that people will blow the money, how do we pay for it, etc., what do all of the low income workers do when the jobs are gone! As in, gone forever, not coming back. Kiosks at McDonalds, self checkout everywhere, Amazon, self driving trucks,  robots picking our fruits and vegetables. The list is virtually endless. It also isn't only low end jobs. Doctors are no longer entering radiology, because that job is getting replaced by computers that can do the job faster and more accurately. Ever heard of Betterment? Why hire an advisor when the computer can allocate my funds without emotion! 10 years ago, I didn't have a cell phone, because I "would never need one". We literally can't see the oncoming train. I have no idea how to fix it, but we must at least see that it is happening.

     I agree with you about merit... the idea of "merit" is ingrained into much of the American Psyche (at least historically speaking). We like the idea that if you work hard, you'll succeed. Which is why the recent college admissions scandals made national headlines, and why the idea of a UBI is so vehemently opposed (just look at some of the posts in this thread.)

    Currently, the internet has allowed for more opportunity than ever, but soon when lower-end jobs at all skill levels are replaced America (and the world) may no longer be such a land of opportunity. 

    The average IQ in America is 98, with 68% of people having an IQ between 85 and 115 (approx. 170 million people). So when they're competing for the few jobs left with people at a much higher IQ they will be at an extreme disadvantage.

    And let's face it... not everyone is going to be able to "learn to code" and the guy who used to be a janitor probably isn't going to be able to learn how to be an engineer.

    I think that given enough time, we could reach a Utopia of sorts (although I HATE to use that word) with much less need for mindless work and allowing mankind to pursue other creative endeavors, but the transition period between now and the time when a robot does all your chores and work for you is going to be a nightmare in my opinion.

  • Member since 2017 · 11 posts · 12 votes
    7y

    If you are one of the many asking where the $1000 would come from, listen to the  podcast about Andrew Young and interview with him on The Freakanomocs podcast #362.  He explains that he would get the money from companies like Amazon and Apple because they will be the major benefactors of all this automation and effectively kill much of the American job market.  I believe he said it would be something like a tax on every transaction but it would only be like a penny or a fraction of a penny because of their immense volume.  

     My thought is, without a job how much good will $1000 do you?  Unless like Wil says, people pool their money as families.   I also feel it will push up prices for everything, Young also addresses that in the podcast.

    Whether you like it or not, the automation is coming in the companies with the big dollars will be the benefactors.   It WILL change life as we know it.  And no matter what the solution America and its Leaders need to be looking forward and thinking about it.  

    Another good reason to get into real estate and become financially free now!

  • Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Robert C.:

    @Nick B., I’m only repeating what the candidate has proposed and I’m not necessarily a supporter (just reading up on most of them). He calls it a “dividend” because he views it as Americans sharing in the prosperity of the technological advancements that will be replacing their jobs and altering society. So the bulk of the money is meant to come from taxing the tech companies and returning that money to citizens. The argument is that tech is paying $0 in taxes right now. He sees it as a virtuous cycle where that money will be spent in local communities and some of it will also float back to tech companies as well through things like online purchases. 

    There is not enough profits that tech companies make to tax them at $3.6 trillion rate. 

  • Contractor · Grand Marais, MN · Member since 2016 · 249 posts · 417 votes
    7y

    I think the difference between ai and the changes Henry Ford made, are like the difference between Sears and Amazon. The potential scale of future unemployment is staggering. 

  • Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
    7y

    @Nick B., Never said it was a realistic explanation. :). But candidates like to promise things after all. 

  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    7y

    @Alvin Sylvain Loved your examples. Another good one - elevator operators. Automation put 10s of thousands of them out of work.

  • Dana WhickerPro Member
    Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
    7y

    @Matt Groth I don't completely buy your analogy. When an actual blimp flies out over my city and a drone delivers an Amazon package to my door, I'll rethink. I've been hearing that was coming for YEARS.

  • Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    7y

    Political hot potato. Well, the last time I got all heated up under the collar about far-flung political possibilities it was over government workers, some of whom I have certain longstanding grudges against, getting legal protection from being evicted during the government shutdown, basically having their short-sighted financial decisions subsidized at my expense as a landlord. Half my posts were deleted by the moderators, while posts rather directly implying that I was an idiot remained up and running. So this time...love the UBI idea, love the people who support it, love the people who oppose it, full of love and understanding and waiting for my $12K/yr. I will adapt and overcome.

  • Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y

    Big companies like Amazon are in the business of not paying taxes at all. No way in hell somebody is going to be able to put a $3.6b tax on Amazon and they are going to pay for it. They have the best and brightest working day and night to find every single trick in the tax book to make that never happen.

    Rich don't pay taxes, the tax code was written by rich. 

  • Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    Yep sounds like your typical insane liberal lunatic candidate . A chicken in every pot !! Of coarse it won’t really be worth even discussing his policies on here because the guy literally has no chance against Donald j trump. Donald will be the next president and we needn’t debate such a fact or debate about this no name guy no one has ever heard of .

  • Centreville, VA · Member since 2016 · 4 posts · 2 votes
    7y

    @Wes Blackwell Thank you for your post.  It brings up some very interesting points and certainly has led to a discussion here.  I'd love to answer your questions before I give my thoughts.  So here goes:

    1. I am personally a "single" male in his early 30's, with no children.  It would hardly effect my life at all to be honest.  Although, I am in the very small percentage of people that do not consume very often.  I would likely use the money to invest into long-term investments.  To be honest, investing in the Targets, Walmarts and gaming industry companies is not the worst idea.  They will likely boom in the near future if this was to be implemented.  

    2. The local market in my area would be even more competitive and expensive than it already is I believe.  The Washington D.C. area is already a very tough area to get a decently priced place in.  It would be great for the sellers though. 

    3. I personally would not, although I am certain I'd be in the minority.  Even now I don't charge anywhere near what I could charge for rent as I have more interest in helping others have affordable housing as opposed to creating a few extra dollars for myself.

    I personally think that people will certainly vote for him because of this, but I don't think it's the best use of that amount of money.  I think that increasing the literacy rate and education budget is the best use of that kind of money.  Handing out money to people that do not know how to harness its imaginary power is never going to end well.  I am very much for helping people in a tougher situation than I am in (see above), but hardly ever is the answer to give them money to help their situation.  

  • Contractor · Denver, CO · Member since 2019 · 12 posts · 4 votes
    7y

    @David Tsedaka No the tax code was written by Government Bureaucrats and approved by a Natuonal citizen vote to penalize the Rich. Than was repelled by the Wealthy class's smart Accountants. Hence still today the Middle Class now assumed the brunt of the pain by paying the difference.

  • Investor · Sewell, NJ · Member since 2016 · 68 posts · 48 votes
    7y

    @Wes Blackwell This will be the greatest election cycle of my lifetime. I can’t wait to see these politicians fight over who can promise the most free junk! We live in interesting times!

  • Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y
    Don't want to be Debbie Downer, but I am not sure I want to be around to see such a mess.  Without those jobs, my business falls apart and so does most of the BP community, without someone to rent my houses or buy the flips, I am dead in the water.  Most of my tenants rely on this type of income to pay their bills.   


    Originally posted by @Wes Blackwell:
    Originally posted by @Lesley Resnick:

    There is a greater issue at hand.  The single largest employment for men 18-35 is driving, delivery, service, etc.  What happens when that class of job is replaced by driverless cars?  What will these lower skilled people do to create value and make money?  I know I don't want to start cutting checks for 1k a month to each of them.  Retraining a 35 year old with a high-school education to be a python developer seems far fetched.   

    Historically whenever enough people become disenfranchised, there is a change and it is violent.  

    Every Revolution 

    WWII (WWI was more ego and aggressive empire building)

     Completely true, which is why I mentioned bread and circuses. Unemployment is DEVASTATING to men, and that 18-35 year old segment are the "fighting age" men that could cause said revolution.

    Given our history (this country was founded on a revolution) and our 2nd Amendment, I think that without a job to keep them fed this surely a likely outcome without UBI or some other sort of measure to keep them pacified. 

    I think it's highly unlikely that Andrew Yang will be elected, or that we'll see a UBI program within the next decade. By 20-30 years from now when my son is my age the loss of jobs will be so overwhelming some sort of solution must be enacted, and it will probably be too late.

  • Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    7y

    @Matt Groth the economics argument would be a novel to fully type out, but every major breakthrough in innovation throughout history have cause certain industries to go obsolete. At the turn of the 20th century, we still had a vast majority of Americans still working on farms and some of the top companies were saddle makers. Just because industrial agriculture and the automobile replacing horse and buggy doesn’t mean that we need vast government programs to try to save those jobs or just give free money. Markets adapt, and usually rather slowly and new industries will arise with job opportunities like they always have regardless of automation. And oh, as someone that works in the medical field, the radiologist argument is completely bogus. While AI programs may assist in identifying malignancies and other pathology radiologists used to spend plenty of time looking for, they now mostly focus on interventional radiology is still a growing field, with very competitive residency standards that isn’t going anywhere soon.

  • Investor · Sewell, NJ · Member since 2016 · 68 posts · 48 votes
    7y

    @Bjorn amen brother

  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    7y

    This is an excellent post, though much of the thread leaves something to be desired. Bertand Russell correctly predicted that as we become more technologically savvy, there will be less demand for a typical work week, much less the worker himself/herself. 

    You can see this at work in Middle East countries that have enjoyed exploding population only made possible through oil and gas money. In these countries, massive government largesse is necessary to placate the 50% or greater levels of unemployment amongst men under the age of 40. Without this aid - and even in some cases with it - revolution would be inevitable. 

    As a nation, we will have to come to terms with the fact that at some point in the future there will not be enough 40 hour weeks for all workers, and we will either scale back the work week or prevent some people from working altogether. 

    This is not necessarily a bad thing. In an ideal situation - see Plato's philosopher kings theory - people freed from struggle for survival could be great advocates for moving humanity forward. That said, I suspect most people would just waste those opportunities.

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  • Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    7y

    @Wes Blackwell,

    I didn't read the entire thread. So, this may have already been mentioned ...

    Sudden rent Increases?

    Do you have any rentals of your own? Do you understand the cost of replacing tenants?

    Housing Supply Vs. Demand

    We lost some 80% of builders and developers in the 07/08 crash. Supply already lags the demand by years and we're not making much progress catching up. Some, but not much.

    It may stimulate building of rental housing. I don't think it would do enough for potential home owners to stimulate residential (SFH) development.

    My $0.02 ...

  • Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    7y

    This is a pipe dream and will never happen. We are talking adding 2 trillion to the budget.

  • Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes
    7y

    @Robert C. We need to remember there has always been automation. Jobs will be automated out, but new jobs we would never have fathomed will be created. Won't be the first time; won't be the last time.

  • Member since 2019 · 1 post · 0 votes
    7y

    @Wes Blackwell

    I am a person who believes you work for the things you want in live and you don’t ask for handouts. Ayn Rand books really speak to me. But I also believe UBS is inevitable with the evolution of A.I. Will there still be money to be made? Jobs to be had? Yes but it will be for the creators, leaders, and entrepreneurs, but that’s not the majority of the population. The general population just want a “job.” Something they have just to support themselves.

    By that same token not everyone will aspire or take the steps needed to buy a home. Most people will likely not spend that money responsibly. A wise man once told Charles Barkley, “giving people with money problems, more money, doesn’t fix money problems.”

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