As part of your investment portfolio, you may have invested or intend to invest in rental real estate. If you have invested in residential real estate in the city of Port Huron, you may not be able to rent that property out.
If you haven’t already heard, on Monday, September 27, 2010 the city of Port Huron adopted a moratorium on new residential rentals in the city. It is no doubt that such an ordinance will have a profound impact on our city. But how well thought out can that ordinance be?
Whenever I make a major decision, I like to do a balance sheet with two columns, pros in one column and cons in the other. It must be the accountant in me. If the pros outweigh the cons, we go forward with the decision. If the cons outweigh the pros, it is generally wise not to proceed. So let’s take a look at the pros and cons of the ordinance.
There is no question that the city is deteriorating. The only pro puts the blame on all the renters in the city of Port Huron. The city administration’s reason for the adoption of the ordinance boils down to: we have a deteriorating city and this is caused by renters who, as second class citizens, don’t care about our city and are destroying our city, so therefore we have to limit them. This seems to be pretty loaded reasoning.
Let’s just step back a minute and not even attempt to analyze that reasoning and look at the cons. The easiest way to look at it is as Economics 101, supply and demand.
Because of the economy and other factors, there is an over-supply of real estate for sale, not only in the city of Port Huron but everywhere. There are limited numbers of purchasers.
Within the city of Port Huron, there is a glut of lower priced homes which are difficult to qualify for owner-occupied mortgages. This leaves the only pool of purchasers for these homes to be real estate investors for residential rentals. With the new ordinance, these purchasers will no longer be buying. By decreasing the pool of purchasers you decrease demand. Decreased demand causes increased supply. This results in lower prices. Not only would you depress the prices of the homes that are for sale, but all the homes in the surrounding area neighborhoods.
These lower home values would result in further reductions in assessed valuations. This reduction in tax assessments would reduce the amount of real estate tax revenues coming into the city.
Because these homes cannot be sold and cannot be rented, it will also increase the number of foreclosures. You would have investors who could not keep the homes with no rental income coming in. You would also have homeowners who no longer can afford to live in their own home be unable to sell. This increase in the number of foreclosures would result in increased vacant homes. These vacant homes would further deteriorate our neighborhoods.
In addition, with the increase in vacancies comes the decrease in the population of the city. And because revenue sharing dollars are often based upon population, this could result in decreased revenue sharing dollars for the city.
And it is so easy to get around the moratorium. If you have an unregistered rental that you were planning on fixing up and renting, now after fixing up, you just sell the property to your tenant on land contract. You set the monthly payment equal to the anticipated rent with interest only on the land contract.
At the same time the land contract is signed, the tenant would also sign a quit claim deed and an assignment of the land contract back to you, who would hold them until needed.
When the tenant defaults on the payments or moves out, you then record the quit claim deed and land contract assignment which makes you the owner again. If the tenant defaults and does not move out, you can evict them. Not only do you avoid the moratorium, your property does not have to be certified or inspected as a rental because you are not renting it, you are selling it. The tenant is the owner. And you could get homestead taxes on it because it is the owner’s principal residence.
If it is a two-unit, you could sell an undivided one-half interest to the tenants of each unit. Similarly, a one-third interest with a three unit. This will decrease the “rent” rolls and replace them with “homeowners”, but at what cost?
The first and second reading of this controversial ordinance on August 9, 2010 came as a surprise and shock to most everybody except a select few at city hall. The “Quality of Life” committee worked for months in relative obscurity on the proposed ordinance. When it came time to recommend the ordinance to the city council, the committee was told not to give a copy of the ordinance to anyone. The city even went so far as to collect the copies of the proposed ordinance from the committee members so they could not release it to the public.
The first time that anyone in the general public could obtain a copy, was on the city website on the Thursday or Friday before that first and second reading on the following Monday, a mere three or four days over a weekend. Similarly with the third and final reading of the ordinance on September 27, 2010. The public was not aware it was scheduled until it showed up on the city website.
Even though the city was working on this ordinance for months, city administration only allowed the general public three or four days, two of which were over a weekend, to study the proposed ordinance before action would be taken by the city council. So much for transparency in government. I guess it is business as usual at city hall, government by ambush.
This moratorium doesn’t sound like a win-win for anyone. The cons seem to overwhelm the pros. Is there an alternative? There most certainly is. We have the technology. The city has a blight ordinance and a rental inspection ordinance that would address much of these concerns.
Historically, the city council has not allocated the funds or supported a long-term sustained enforcement of these ordinances. The city council should now allocate the funds to support these ordinances’ enforcement. This would go a long way in slowing, halting or even reversing the decline in our neighborhoods. Then the real problems of substandard housing and neighborhood deterioration could truly be addressed. We have a gem of a city, but it is in the rough. Let’s work together to polish that gem and make it sparkle for all to see.
By: Matthew M. Wallace, CPA, JD
Published edited October 3, 2010 in The Times Herald newspaper, Port Huron, Michigan as: City’s rental moratorium math doesn’t add up