Ernesto is a carpetlayer. Benigno is a house painter. Nathan is a musician. Adriana is a hairdresser. Randy is a theater set builder. José works in a printing plant. They are all renters in a few buildings that I own cooperatively in the Pilsen neighborhood of Chicago, which for more than a century has been an affordable community for immigrants, with a sprinkling of artists and activists. And they are the kind of people who might have been priced out of the neighborhood in the last decade as property values rose, condos went up, property taxes rose, and rents increased.
My wife and I moved into Pilsen 12 years ago before there was much buzz about gentrification. As renters aspiring to ownership, we worried that we would get priced out of the market if we didn’t buy something. So in 2006, we bought a little two-flat to rent out. This small two-flat on a boisterous street wasn’t as appealing as the larger apartment we rent and live in on a quieter block, so we became accidental landlords, buying a “placeholder” building until we could afford to trade up to something we liked. A year later, we bought another building, using the rising value of our first building to fund a loan for the down payment on our second purchase.
It turned out to be the beginning of a vision—the idea that we could give something back to the community by providing affordable housing in a neighborhood where that was becoming more scarce.
The subsequent market crash changed the math of affordable housing preservation, creating both opportunities and constraints for the small-scale landlord and investor. The total cost of ownership dropped, making it more possible to provide affordable housing without government subsidies—but financing became more difficult, with higher down payments and better credit required to secure a mortgage. In 2008, in response to this drop in prices, we put in an offer on a short sale fourflat in the neighborhood. It took eight months, but the seller’s bank finally approved our offer, and I was ecstatic at the chance to double the number of affordable rental housing units we could provide. But during those eight months, some of my employment had dried up, and we didn’t have money for the down payment. With the tightened credit market, one now needed 30% down to buy a property; we had only a few weeks to come up with $60,000.
I’d heard from friends about the concept of the cooperatively-owned business, and it crossed my mind that perhaps I could raise money by selling shares of the building to friends and family. Banks don’t allow you to borrow your down payment from someone else, but if people actually gave us the money, it wouldn’t be a loan. So I did cash-flow projections for the building, figured out what I could pay investors as an annual rate of return out of the rental income, and put together a little investment prospectus that I emailed out to friends and family. I was hoping I could sell 30 people a 1% share of the building, at $1,750 each, to raise the down payment and closing costs.
In the end, I didn’t get 30 takers—only about 15 people were ready to invest. But some wanted to buy two, five, or even ten shares! I had no idea that my friends and family—teachers, nonprofit staff, retirees—had, or would want to invest, as much money as they did. I sold extra shares to finance some rehab work, and after buying the building, I ended up turning down would-be investors because I didn’t need the money. In fact, I turned down enough investment that it made me think I could purchase another building; one year later, using the same investor-share model, we bought and completely rehabbed another four-flat.
Today Ernesto, Benigno, Nathan, Adriana, Randy, Jose, and two dozen other people live in the four Pilsen buildings that I manage on behalf of about two dozen investors. It hasn’t always been a smooth path; there’s been an eviction, conflicts between tenants, breakins, floods, pests, and all the other things landlords have to deal with, especially when doing affordable housing. Investors have been patient when the rehab of the last building went wildly over budget and there was no money to do first-year dividends.
But we’ve found opportunity in dark economic times. Twelve housing units will now be relatively affordable for, I hope, decades to come. Working families and artists have safe, decent housing, and a few of the artists even have studio space in their buildings. The recession opened a window for affordable housing preservation that we were fortunate to see, and it is our hope that others will seize the opportunity as well. ◊
Mark Walden, Managing Partner, Jubilee Affordable Housing LLC, firstname.lastname@example.org