Analysis: Does it pay to be a slumlord?

It sure does if community leaders let you get away with it.

The photo is of a blighted cut-up formerly beautiful home in Kutzky Park.

I originally came up with this example to illustrate some basic financial principles to my corporate finance students.  I hope I am not creating a new generation of slumlords.  I mentioned this in passing to a friend in the Kutzky Park neighborhood and suddenly generated a tremendous amount of interest.  The moral of this lesson is that if you have little regulation and no morals you can make a nice return being a slumlord.

If regulation and fees are created that dissuade people from operating as slumlords, neighborhoods can prevent new slum properties from forming.  In addition, even under restrictive Minnesota state laws there are methods that could destroy the slumlord industry.  The key is that cost assumptions must be fair and the policy must be applied in a consistent manor.

The attached financial analysis shows how the cash flows make slumlord economics viable, but only if a community allows it.

So what is a slum property?  Obviously there is a fair amount of subjectivity to how this is evaluated, but I will refer to the Supreme Court take on pornography.  “You know it when you see it.”  Such is also the case with blight and slums. My general definition is that it is a property that hurts its neighborhood through poor aesthetics or crime.

Many of our blighted properties are in core neighborhoods, but not all.  Just drive through Cimarron Court to see examples of what a low quality developer can do.  There is a myth that we should accept this low quality, the reality is that we can put these slumlords out of business with smart regulation and fair fees.  That is to the benefit of all our neighborhoods and the majority of property owners that do not believe in slumlord economics.

Some might claim that having high standards for new development and rental properties is anti-business.  Maybe it is, but I think elected officials have a higher obligation to the quality of life in our neighborhoods.  I see no distinction between slumlords, drug dealers, prostitutes, or meth labs.  All are businesses that I don’t want in my neighborhoods.

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