Debt-free Housing for Public-Benefit Workers

A growing number of non-profit organizations are appearing to solve all sorts of public benefit missions from health, education, assistance for the less fortunate.  Those that decide to work in these non-profit organizations often forgo  some of the financial rewards of those working in for-profit sectors.    Some large non-profits or government jobs offer job security and retirement benefits that are not common in smaller non-profits.    If we can provide some of these benefits to the workers in smaller organizations, then we might have further incentive to attract and retain people in this valuable sector.

I propose that we create subsidized housing for those that work in smaller public benefit organizations by recreating debt-free housing.   If we do this well, we can support many non-profits at one time, and can do this without government subsidy beyond possible tax waivers that come with to non-profit organizations.

I have been using the words “public benefit” rather than “non profit” because there are now non-profits that are simply political lobbying organizations that are used to hide the identities of rich donors in order to bend public policy.   While these are still officially non-profits, I do not take them as the same as charity work in that they are often highly paid political operators.   Since those groups are leading to law changes, we may see the “non-profit” structure in the United States be exploited and even destroyed in the future.  To distinguish those working for the public good from all non-profit workers, I will use the term “public benefit workers”, and it may need further definition that does not revolve around United States law.

What is debt free housing?   Debt free housing is housing that does not have a mortgage or any financial loans against it.    In some areas, such as San Francisco, it makes up the vast majority of the cost of housing.    The rest of the cost is in maintenance and taxes.  Therefore if we can get rid of the debt and keep it off, then rents can be much lower.

How would we keep housing debt free?   Since it is so tempting to take out loans, as we have seen in the housing bubble on the 2000's, we need strong prohibitions on this.   Specially created non-profit organizations that have part of its charter and pledges by board members could provide enough protection.    But better yet is for those that live in and run the housing units understand the benefits that they have accrued by this stipulation and feel a responsibility to pass on the benefits to others.

How do we create debt free housing?   Either people will donate housing or we will have to work off the debt.    Both are plausible, but the later has an advantage that it might spread rapidly.     With a long enough time horizon in mind, a non-profit could use seed money to buy an apartment building this could be done with a mortgage and rent it out at market rents.       These market rents approximately cover the cost of running the building including the mortgage and eventually would be paid off.     Even before the typical 30 year mortgage is paid off, the building will be charging more for market rents than it costs because of inflation.       At that point, the surpus, or profit, can be used to provide subsidized housing units or put cash back into some public-benefit organizations.    A portion could be used to buy more apartments, or at least pay back for the initial down payment from the funding non-profit.

How fast can these housing units be created?   It depends on how much upfront money is used to buy houses or if houses are donated.   It also depends on how fast units are paid off with market rents.     Lets calculate the first:  If we have a $1M non-profit that wants to buy housing, and if we assume that a 20% down payment is required to initially buy an apartment building, then the non-profit can by a $5M apartment building.   If the initial market rents are used to repay the non-profit the initial 20% by taking out a second loan (the last loan it can ever take out!), then this will depend on inflation or interest rate changes and the like.   If we estimate that this loan can be acquires in 7 years, then the non-profit can buy yet more housing units.   In San Francisco, a 1000 square foot apartment costs about $350k, so a $5M initial investment would by 14 units.    So every 7 years, there would be 14 more units going towards being debt free.    So for $1M in upfront donation to the non-profit, there would be 2 units per year.

How long will it take for a housing unit to become debt free?   If 30 year mortgages are used and these are never renewed, then at least it will be debt free in 30 years.    But given that inflation reduces a fixed mortgage relative to market rents, many of the units will be effectively debt free in a shorter period.   San Francisco is extreme because of its high cost of housing and low taxes, but maybe half of the units can be at half the prevailing market rents in 15 years, and the rest following rapidly.

How does this compare to other ways to invest $1M?    If we assume that rate of return can be 5% over inflation (which is much higher than my experience, but it is what is estimated in university endowments), then there is $50k each year, inflation adjusted.   In San Francisco, a rental unit is typically $2k per month, or $24k per year, so a $1M investment would support 2 housing units forever, or 4 units at 1/2 market rent.     Above we estimated that 2 new units would be created each year, but these would only start to become available after 15 years.    So this is not a system for immediate gratification, but has a strong long term benefit.

Fortunately, if we have $10m or $100m to start the program, or if apartment buildings were donated then we could start this program quite quickly and benefit thousands of families.     If we wanted 1000 housing new units per year to become permanently subsidized housing, then it would require donations of housing units or initial donations of $500M.    If a bank would allow less than 20% down payment than much more could be done with much less.