Four dollars doesn’t seem like very much. It can get you most of a meal at a fast food joint if you order off the value menu. It can get you into the movies if you’re at a 4th-run theater in a small town during matinee hours. It can get you a cold one, though nothing imported. It can also help your residential real estate business boom if it’s added on to the current minimum wage.
The minimum wage in California is currently $9 an hour. That’s very high – in fact, one of the highest in the country, which is remarkable considering the state’s huge agricultural base. However, the White House is calling for an increase to $10.10 an hour nationwide. To stay at the head of the pack, the California legislature is now considering a bill that will raise the state’s minimum wage to $13 an hour. That’s where the $4 can make a huge impact.
Raising the minimum wage to that level will have an overall positive effect on the residential rental market in California and real estate investors should be ready to get ahead of it. Rental prices, which are largely matched to area wages, should increase almost side-by-side with legislation. Combined with improving neighborhoods and property values, it becomes a great time to get into the residential rental market in California.
Higher Wages Leads to More Rental Opportunities
The math is fairly straightforward when it comes to housing affordability. If people are making more money per hour, rent and house payments will become more affordable. $13 an hour is generally not enough money to buy a house, however, which mean that the rental market should increase. This will mean a larger pool of renters for real estate investors developing multi-unit properties.
Even the downside of this argument, the contention that it will lead to layoffs, shouldn’t affect the rental industry very much. While that might be true, California’s strong job market seems to argue against it and the layoffs will mostly affect market sectors whose employees are not in the position to rent, anyway. One study from the Congressional Budget Office found that the segment of the population most affected by layoffs would likely be teenagers. This proved to be the case between 2007 and 2009 when the minimum wage increased from $5.15 an hour to $7.25.
Investing in Tomorrow’s Wages
It’s exciting to be in real estate when more people can afford to rent again. People who couldn’t afford nice places can suddenly afford to move up and have a better foothold in life. This is good on both a human level and a business level.
Rental prices are based on a few factors, but the most traditional one is what the community can bear. That has changed, though. Particularly in Los Angeles and Orange County, rental prices have dramatically outstripped wages. Between 2006 and 2014, rental prices in the area have gone up 11%, while wages have dropped 4%. At the same time, while LA has seen an 11% growth in rental units, it is far behind other cities, such as Chicago, San Francisco, or Philadelphia, which saw a 25% boom in rental units over that time period.
That’s why this wage increase is a good thing for investors. Many young people have moved back home – a phenomenon that has resulted in the label the boomerrang generation – because they couldn’t afford to buy or even rent. Now, as wages increase, they can catch back up to rental prices. This has the potential to bring more people back into the rental market, especially in Los Angeles and Orange County.
Additionally, as wages increase, neighborhoods will continue to improve as better stores, businesses, and restaurants move in to serve those who have more spending money, increasing development and improving the property value of your building.
The impact of wage raises trickles upward in other ways as well. It isn’t just a matter of rent – people will also potentially want to move into nicer places. This is especially true of younger single people or dual-income, no-kids families, who have extra income and want more comfort. They’ll be looking to live in apartments that have modern amenities and have been recently rehabbed. This gentrification process has been happening all over the LA region, including areas like Silverlake, Highland Park, and Echo Park. Older residents will remember when Venice Beach was a little rough around the edges, before the process began. Imagine being in on the ground floor of a transformation like that.
Hard Money Loans Help You Stay Ahead of the Game
Owning a building now means that getting a hard-money loan to rehab it makes a lot of financial sense. Your earnings can grow with your investment. Buying a building at today’s market prices and rehabbing it to meet tomorrow’s needs is how the smart investor stays ahead of the curve.
It’s amazing the factors that go into the real estate market. It is impacted by nearly every economic decision made on local, state, and federal levels. Knowing what is coming next and being ready to pounce is how the smart real estate investor adapts to the changing marketplace. And understanding the value of four dollars is a great place to start.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.
