Are Tenant Displacements Ethical in Real Estate Investing? | Ep 26

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both property and people so that together we can build our wealth while improving housing. And we are specifically going to focus on On that last part, improving housing.

Anyways, I'm James and this is my wife, Jessi. Still here. Still here. Survived the

Jessi: last day of summer, or the last day.

James: The first day

Jessi: of summer.

James: First day of summer. It was

Jessi: good.

James: Yeah. Yeah. Get some good teaching in.

Jessi: Yeah.

James: Nice.

Jessi: Fun with kids.

James: I hung out with them in the afternoon and they did pretty well. We had friends over and it was mayhem in the house, but overall.

Good summer. Yeah. We're making it. It's good. All right. We're going to be honest. I'm a little nervous about this particular conversation because I know that it's a big topic or at least it's a controversial topic, perhaps. And there are opinions, big opinions on this one. But I was asked a question from from another investor.

I thought it was just a really good question and he asked it when we were looking at the place up in Astoria, it was 40 units. And we were going to do a big turnaround project where these places were in very bad condition. We're going to go through and prove them all, make them better, raise the rents, improve the community, do that kind of stuff.

And one of the questions that he asked me was, how do I feel about displacing people? Because you know, what wasn't said in everything that I just mentioned for that property was in order to fix up the units and make them better. Some of these 40 people

Jessi: are

James: going to have to move somewhere else. Yeah. And which I thought was a great question and worth kind of talking about and kind of diving into and yeah, discussing it.

So I'm curious how do you feel about like that particular investment strategy specifically about displacing people?

Jessi: Yeah, and to clarify, you're talking more of like, a multi unit apartment complex type of thing. I think so. Yeah. Not necessarily like a single family house flip, although that could have the same types of

James: I mean, it depends.

Like, when I'm doing a flip that person has opted to sell to me, whereas with a multifamily, the tenant hasn't necessarily decided to move out. They're not the one

Jessi: selling. Okay. Yeah. Yeah. They're just kind of caught in the middle somewhat. Yeah.

James: Yeah. Yeah. Yeah. Exactly. Maybe they like where they're living, even though the condition and quality may not be great.

Maybe they like their community, even though they may be thugs. No, I'm kidding. Even though it just may not be the. At the very

Jessi: least, they might like the affordability of the current place. Yeah. And they're willing to put up with the,

James: probably not the least. That is probably the thing. Yeah.

Jessi: They're willing to put up with not the nicest of places because it's affordable and they can,

James: yeah.

We did that once. We bought a garbage house and we did it simply because it was affordable.

Jessi: Right. And it was worth it.

James: Yeah.

Jessi: Okay. So how do I feel about displacing people in order to do this rehab? Correct. Ticks up. Project. You're right. It is complicated because on one hand, if I put on my investor perspective, it's kind of like, I feel great about it.

What are you talking about? Just

James: feel great about displacing people, not

Jessi: displacing them, but the whole concept of like, okay, I understand that yes, there's this momentary hardship. However, it's like, this is going to be a much better place. And you're. more than welcome to apply, you know, and come back into it.

Maybe many of them will be able to come back and have a better place to live. That's statistically, that's, that doesn't happen. Probably not. But you are creating a better housing opportunity for a subset of the community and people. And so there is benefit to it

James: for those higher class, higher paid people.

Jessi: Well, it depends on what type of property you're creating, I suppose. If you are taking an affordable housing type of place and making it nicer and no longer an affordable housing type of place, yeah, that could cause some problems. Which

James: 99 percent of the time is the investment strategy because that's where the numbers work, right?

Construction costs are so much, you're better off to go for the high market. That is where the most return usually is. I mean, I suppose it happens.

Jessi: Yeah, which in that case is like, yeah, I mean, it can be seen as kind of a jerk move because it's like, there's these people and you are removing them from their housing and they have nowhere to go.

Or perhaps they have other places to go, maybe. I would, I would imagine if you're, if you're doing sorts of things that are either helping them find different housing or like if you're investing in. other ways into the community of saying like, yes, I am making this property into this nicer housing.

However, a portion of our funds goes towards section eight housing or, I don't know, something like that. Thinking bigger picture there's, there's potential to do that. Better or well, I absolutely can see though, from the tenant perspective being like, nope, this is the worst.

James: Yeah. I

Jessi: think isn't fair.

James: I think a lot of ways there's some analogies.

How do I say it? I think about companies like Apple or Nike, right? Big bands, big companies, they sell expensive products, but they would also make the argument that they could be a whole lot more expensive. And the reason why they are not even more expensive is because of different choices they make in terms of labor and where they manufacture things.

And, and I think companies like that, they have to be careful and they don't always do it right, but they have to be careful to not go too cheap. Right? And this is one of the complaints about Nike for a while. I don't know if they're still that way, but. At one point in time, it was, hey, you guys are using like practical slave labor type stuff.

And it was a problem. I think that landlords can have that similar type of thing, where they're, There inevitably is some part of investing that isn't great in order to do the things that we've talked about, where you are, you're building better housing communities. You are improving neighborhoods.

You are ultimately reducing crime. You're building better roads and parks as a part of the development piece of it. You're creating jobs from the construction, from the maintenance, from the management. Like those are all really good things. But there is an aspect to it that, well, in order to make something new, you know, in order to make the omelet, there's some eggs here that needs to break.

And that's hard. And again, I think like, Again, if you think about Apple, they make millions, probably, even more than that, of iPhones. And that's not a glamorous job. Heck, no one in the United States wants to do it for what they're willing to pay. And, and same with making shoes. And there's a whole bunch of jobs that are like that.

And so But I also will recognize that housing is one of those items on Maslow's Hierarchy of Needs that tends to come first. And so it's really important. So we're not just talking about a job that doesn't pay well. We're talking about housing. And so it is different. And it is this, it's a hard part, being honest, like of being a landlord, of being an investor, of recognizing like, yeah, if you displace somebody, it creates.

Financial strain, right? They had the moving costs. There's the potential for like losing time at work, right? Well, maybe even a loss of job depending on where they need to move. And typically they aren't moving into a place that is the same condition, same price. There's just higher living costs there.

And then there's just like the stress of the entire situation. There's potential loss of identity because of where they lived and what they did and a loss of a bunch of friends. And yeah. We could talk about whether or not those were good friends to have around and, you know, creating bad cultures and, and we can actually speak directly to that.

But it's definitely a thing and, and it is a problem and, and it is, again, it's one of those as long as we don't want to talk too often about it and, and in a flip, like I said, it's, it's a little bit different because like in the one that we're getting ready to complete. It was a guy who, he couldn't pay his monthly, he couldn't pay his mortgage.

Yeah,

Jessi: it's kind of like. He was

James: going to get the place displaced no matter what. And we actually came in and said, Hey, we can do something better than what the bank is offering you. We can actually get you some cash. We can give you the time. And he now has a place, has a job. It is in a new city. It is cheaper.

And so some of that, like loss of friendship is real. But ultimately. His situation is significantly better. And he, in some ways, opted into it.

Jessi: Yeah.

James: You know,

Jessi: is that, does that scenario even exist with like a multi family place that you're like, these tenants are kind of in the middle. Well,

James: I mean, someone doesn't pay their rent.

That kind of happens, but that's not

Jessi: what you mean. Yeah. That's not exactly what I mean.

James: No, it's, it's different. No, it's generally different. And oftentimes because the tenant has. You, we've, we may or may not have spent some time talking about this beforehand, but you made a comment earlier to me where you were like, one of the risks of being a tenant is that you lose control and it's the risk that you take for being a tenant.

Like you don't have control over the terms. You don't have control over who buys and you know, and ultimately how they change it. And that's just a risk, which is true to some degree. Some could make the argument that, well, housing is a fundamental right, and so it doesn't matter. Like, it's your place, you occupy it, therefore you have the right to it.

So that doesn't hold. But, to some degree, that's also true. Man, if you choose the rent, like, you could get displaced. I mean,

Jessi: both are true in the sense of, yes, you're paying as a tenant. That's true. to occupy the space, to use it, and to control your own area. But you're also signing an agreement saying that you're willing to pay an owner.

For the use of that space.

James: Yeah,

Jessi: and Nowhere in that contract does it say if the owner sells they have to give you this or that or this or that it might Yeah, you know it

James: it says the current owner has to the new owner You notice has to honor the existing rental agreement Sure, the rental agreement goes with the with the tenant not the owner.

So that's true So that's true, but in a rental agreement it gives whoever that owner is the option to do things.

Jessi: Yeah You

James: Yeah.

Jessi: So, I mean. And Oregon

James: tries really hard to clamp down on that to make it hard for an owner to do things.

Jessi: Right.

James: Which is fair.

Jessi: Which, I can kind of understand, I can understand both sides, I guess, is if you're an investor and you're approaching it from a certain perspective of you're working with an owner and you're buying and selling property, you know, yes, the landlord gets caught in the middle of that, or the tenant gets caught in the middle of that to a certain extent, and as a tenant, It is kind of one of the risks that you assume in paying somebody else to use their property.

James: Yeah.

Jessi: And, and ideally, like the systems that are in place wouldn't just kick somebody out, put them out on the street and be like, well, see you later. We're going to make this a mansion. Yeah. You know, ideally. So you're

James: essentially arguing it's sounds. Bad as it may seem right on the surface. Cause there are some safety nets.

Jessi: Yeah,

James: that's fair. So I had some thoughts on things that we can do to try to be more fair on it. And the

Jessi: things that investors can do. Yeah. Investors, landlords,

James: whatever owners. Yeah. Yeah. So one of them is to give fair compensation and support some sort of relocation assistance. Like for example, I was talking with with another investor earlier today.

And he's got a tenant who he's going to have to move out and potentially, but one of the things that he offered was, Hey, I'm willing to give you a thousand dollars moving expense to help you out. And I'm willing to give you half rent for the next couple of months just to help you make ends meet and find a new place.

Something like that, right? That's fair. Yeah,

Jessi: realizing there's a cost involved.

James: I think a huge one is just engaging with respect and communication and open communication with that person. Not just a long notice. Oh yeah. Right.

Jessi: To give them enough of a heads up. You know, of what's coming and what to expect.

And

James: yeah, I think another one, especially with larger projects is you can minimize your harm with planning and phase development for better management and support, you know, for that 40 unit one, if I was like all at once, like that would be hard for me to like, to get back to people quickly, to help people, to, to do all that.

Whereas if we phase it out, it goes a little bit better. I

Jessi: think

James: it's a thing that you can do to minimize it. And then another one is you can provide them with community resources. It's like specifically in Benton County, Love, Inc. is a great example of saying, Hey, here's some places that can help you or doing the research on the rental assistance 211.

org. It's a great website where you can say here's where I'm located and it will give you a list of all the different organizations that can support you.

Jessi: I didn't know that. Yeah. 211. org.

James: Yeah. And so I think there's, there's resources like that of being proactive. By the way, yeah. Whenever you give someone, it's not an eviction notice, but a notice, a termination of the rental agreement.

They now require you in Oregon to provide this like half sheet of piece of paper that in like, it's something ridiculous, like five different languages essentially says, visit two one one. org to get help and yeah, so it's a, it's a great resource. But there's things like that that I think you can do to help minimize the pain.

But at the end of the day, recognizing like, yeah, Like, in order for us to do these good things, unfortunately, the current situation isn't sustainable. And I think that's like one of those thoughts of like, I don't know, you, there's a balance, right? Like, if you didn't want to hurt anybody, you could be like, well, like, we're just never, never going to kick you out and we're never going to displace you.

But then the units never get better either and can create all sorts of situations. I was reading, I read an interesting book called evicted and and one of the things he talked about was this trailer park and it was really interesting the way he set it up or he talked about first life in the trailer park and it was a tight community and people are working together and they were all low income and making it work.

And when someone OD'd, they would help them and like help them figure it out and that kind of stuff. And they talked about how if someone didn't have enough money to get food, like she could. trade services with someone else in order to get food. He's like, we're all banning together. Yeah. And like, it really showed this positive community.

And then what he did, which I thought was super interesting. He then went and interviewed the neighbors of this trailer park. And I became very clear, like, this is not a healthy place. Like if someone, Oh, deed, instead of sending them to rehab, they would just say, Hey, just hold up in my trailer until you get better.

And the person like, and it was until you just get over it, you know, and like, it was that kind of thing. It never got people out of their situation. It just kind of kept them all spinning into it. And they all kind of decided, Oh, this is just acceptable. Like this is how life is. This is fine. And what they've shown is.

No, you actually got to like, you got to get people out of those communities into a quote normal lifestyle. And that's where they go. Oh, the way I'm living life isn't the most healthy thing because now they have other things to compare it to. So that old adage, you know, you're the average of your five, the five people you spend the most time with.

And their problem was they were always with these people. So they were in this slow death spiral and the places were genuinely getting more and more decrepit and unsafe. I was ultimately, what happened is the place. Wasn't even making money, turned out, because people weren't paying the rent. It was a problem.

A new company came in and they've had to bulldoze it. It wasn't even saved salvageable. It was that bad. Whereas he was like, had someone come in earlier and given some tough love, like the place would have been saved and yeah, it would have been hard on upfront, but ultimately it would have been good in the long run.

And is

Jessi: the, I can see that the dilemma is actually, You know, if you're coming in as a, as an investor and displacing these people and making the community better, you're making it better for whoever moves in. But the people who you displaced, they just are going to find some other rundown,

James: no good

Jessi: place, you know?

So is it really helping them, you know, take those steps to have a better lifestyle?

James: Well, I think about perhaps it

Jessi: could,

James: I think about our example where we had. Our apartment building, the 11 units and there were five people who are renting there and they were all sex offenders and we decided to go in and Displace all of them and fix up the place.

And yeah, it was hard. And we did a bunch of things like I mentioned at the beginning part, right? We, we paid all of them money to move out. We told them, here's who you can call, who'd be willing to rent from you. We even gave them a letter saying, Hey, this isn't their problem. This is something that we're doing.

There were things that we did and I think that was all helpful. And I distinctly remember, and this isn't for all of them. It was just one guy who. It was unit 11. We knocked on the door. Remember he like only half opened the door for us and we could tell he was just, he was upset about the fact that we were giving him a termination notice.

And, and I was hard, right? We're like, Oh man. And then we were doing the project and it was months later. I don't think it was a year later, but it was a while later. He was walking around downtown and we happened to run into him. And I, I don't know if you remember this, but he came up to us and thanked us.

Yeah. He was like, honestly, this was the best thing that could have happened to me. He reconnected with his family. He got to see, okay, here's kind of what normal life looks like. He was no longer in this self feeding community and he was like, man, my life is better. So hard, but it was better. And again, I don't know what happened to all the other guys, but what I do know is every single one of them found housing and, and I get.

There is definitely a housing shortage and that's a thing and it makes it hard. It's harder today than it was back when we even did it. But it's still possible. And and I think about that example of like, yeah, it was hard upfront. And we talk about those, our kids too. It's like, we'll do things to, to discipline them, to teach them.

And it's hard, but ultimately we know like the builds character makes it better. And in the future it will be better, but it's still hard and that's okay. Yeah,

Jessi: I think attitude goes a long way when you're, you know, as an investor, landlord, how you are approaching people and your value of people is going to dictate how you communicate with them and how you, how you make or how you facilitate, you know, moving forward with this type of decision.

James: Yeah, that's fair.

Jessi: Cause it is hard. But, but you can do it in a way that still honors them.

James: Yeah. And I think at the end of the day, when I think about it, there are negatives. There are also positives, right? I think the positives in most situations will outweigh the negatives. And I think part of it is you can do things to minimize the damage, like we talked about.

And I also think like my final thought here is that people are smarter and more resilient than we give them credit for. I think it's important to remember that personal freedom also comes with personal responsibility. And if we're going to give people the freedom to choose where they live and make some life choices, there's some responsibility there too, which also means there's some opportunity and yeah, it's hard.

In the same way that, yeah, being an investor isn't just like, Oh yeah, we're just rolling in money, Scrooge McDuck style. Like no, it's, there's some hard stuff there. We have sacrificed nights, weekends, trips, things like that. And it's just, it's, it's always, it's hard and it's just, you just got to recognize that.

Yeah. That's how it is. That's okay. It's all right. For things to be hard.

Jessi: Yeah. Yeah. And an accurate perception of reality on both sides. Realizing like, yeah, this is super hard for them. They might be in a spot where this is difficult. And from a tenant perspective, looking at landlords saying, okay, like I get it.

They are owning a business and managing things and

James: yeah, and we are making it better and there's a balance to all of this. Right. Like you said, I think it's like your attitude and approach needs to be important. It can't just be, here's your notice. Get out. I don't care about you. Right. Like it can't be that that's not right, but it also can't just be the, Ooh, I don't want to do anything to.

Right. To make any changes because that also isn't good. So yeah, it's a balance. It's hard. It's a tricky question. So how do I feel about displacing people? I don't love it, but ultimately I think it creates better good in the long run than not doing so I think is my very short answer. And if you want more nuance, go back and read, listen to this.

Yeah. But yeah. Any final thoughts on this?

Jessi: I, I, something you said previously that I don't, I don't remember if, I can't remember who said it, but it, it was this, this concept of like a, it's almost a biblical perspective of, of how to treat people. And I liked that. I think ending on that thought in Proverbs.

Yeah,

James: it was Proverbs 22 verses 22 through 23. It said, Do not exploit the poor because they are poor, and do not crush the needy in court, for the Lord will take up their case and will exact life for life.

Jessi: Yeah, which is just like, you don't want to be exploiting people.

James: Yeah.

Jessi: You have a business, but you run it well and you, The goal is to care for people.

James: And recognizing it's hard and sometimes companies, investors step over the line, but when they realize it, yeah, I got to step back, but yeah, yeah, there you go. Well said. All right. Thanks for that. That was a good discussion. So if you enjoy this podcast, we'd really appreciate it. If you left a rating, wherever it is that you listen to podcasts, and if you're interested in investing with us, you can check us out at furlo.com. And finally, thanks for listening. Have a great day.