One thing that can be said about a gentrifying neighborhood is that the market trend is crystal clear. This should encourage entrepreneurs to jump to meet emerging needs. However, all too often, we neglect to provide services for less affluent residents.
With respect to rental housing, there is always a need to provide services to help people squeezed by increasing rents. They are ready-to-go clients, if your solution is viable. Serving this group is an important mission. Artists and civic leaders, especially those who worked to revitalize the neighborhood, are key components to sustaining the upward trend; they are passionate about making a good neighborhood great.
An Entrepreneur’s Place in a Gentrifying Neighborhood
Is it possible to build wealth by helping less affluent renters live in a trendy community? Absolutely! I personally believe that entrepreneurs are the solution to all social problems, so it is no surprise that I think we can alleviate the affordable housing issue.
Let me share one of my favorite ways to increase a rental property’s cash flow. It’s based on the premise that you can increase cash flow by helping tenants reduce their expenses, and then keep a portion of the savings for yourself. This is the landlord’s version of Tim O’Reilly’s motto, “Create more value than you capture.”
Create More Value Than You Capture
You can create affordability by using technology to help your tenants share a dwelling, while preserving their privacy at the same time. Yes, I’m talking about a high-tech rooming house; one where tenants can access luxuries and live in a neighborhood that they otherwise couldn’t afford.
Thanks to online rent collection practices, keyless door locks, microwaves, and mini-refrigerators, it’s easier than ever to rent out individual rooms. Also, space-efficient ideas courtesy of the Tiny House and RV industries allows tenants to pack an apartment’s worth of functionality into their bedroom.
Creating Affordability With All Inclusive Housing
One way to push back against gentrification is to create all-inclusive housing, which gives tenants everything they need for a price that’s 50% or even 60% of their take-home pay.
For example, let’s assume a three-bedroom, two-bathroom house rents for $1,000 per month, and three adults could comfortably live there. Assuming each has a monthly income of $1,100, you could reasonably charge each person $550 per month. You would gross $1,650 per month, and might pay only $350 for electricity, natural gas, Internet, and cable TV service. After paying for amenities, you would have created $300 more than market rent allowed ($3,600 annually), affordable housing for your tenants, and a way for tenants to share transportation and other expenses. Plus, you would also have a robust income stream to pay down your mortgage and build your wealth, along with a tax shelter to offset your W-2 income. Thus, you would end up creating a housing system that allows for tenants to have much more than they could otherwise afford living in their silos.
A Word of Caution
The credit-worthiness of your tenants is possibly more important than a typical landlord-tenant situation. It is especially important for you if your tenants rely solely on social security for their income. Social security cannot be garnished, so there’s no legal recourse for recovering back rent. You can always evict, but you can’t always collect.
Entrepreneurs can create affordability, which is a valuable commodity in an upwardly trending neighborhood. Helping residents live in areas they can no longer afford is a hard, but worthy problem to solve.
Consider creating a for-profit business that serves the less affluent. In doing so, you may end up creating the next big thing.
Al Williamson is a civil engineer and the founder of LeadingLandlord.com, where he helps landlords increase their incomes and grow their equity.
Checkout his three-day email course of building wealth with inner city rentals to learn more ways you can make a fortune creating improving the safety and prosperity of your community.