AMA - Should We Worry About Pension Liabilities?

Jonny asks:

"I invest in single family rentals in several different US markets. Most are midwestern conservative and stable environments with steadily growing populations and economies - there's modest appreciation, but solid and dependable cash flow.

The outlier is Chicago. I enjoy the very strong cash flow I receive from Section 8 tenants, but the impending pension crisis presents a precarious situation in the future. Chicago's pension situation looks abysmal with a future reckoning not far away.

While I see this down the road and pause with concern, I also know that there are few states and municipalities without a pension dilemma. The perenial question "Compared To What?" comes to mind. Also, even if there is a pension crisis that becomes fully actualized, people will still fundamentally need housing. Is this a matter investors do need to consider regarding long term buy and hold strategies or is Chicken Little saying the sky is falling?"

Jonny, that is a great question. My response is based on my personal experience and you should take my response as a point of view , or an opinion, not as the gospel.

With that disclaimer, here goes. One of my cardinal rules is to invest in growing markets. I like influx of jobs and influx of population. Both Chicago and the State of Illinois have lost population in the last several years. Illinois lost 115,000 population last year. That means that both the state and the city are experiencing a falling tax base.

Cities like Chicago are struggling with meeting the obligations of their entitlement programs, whether they be public housing, pensions, education, infrastructure maintenance, or public transit, all of these aspects can place huge demands for money on the city.

The City of Chicago has been so desperate for cash, that they sold their parking meter business to a private company. The private company paid a little over $2 billion for the right to collect parking revenue in the city of Chicago for the next 20 years. Shortly thereafter, parking rates in Chicago skyrocketed. Anyone with basic math skills figured out that the city did a bad deal and that the buyer of the parking meter business is on the path to tremendous riches.

I had some section 8 tenants in my properties in Chicago. The Chicago Housing Authority does pay a premium over market rent to landlords who except tenants with CHA vouchers. However, while these numbers look great on a spreadsheet, the extra $150 per month in rent did not cover the higher costs associated with meeting the extra ordinary demands made by CHA inspectors, nor to cover the much higher property maintenance and property damage costs incurred by many section 8 tenants.

We had experiences that should never happen. We had tenants who would smash the electrical cover plates on the outlets and then lodge a complaint with the housing authority that we were not properly maintaining the property. The Housing Authority with then fine us one month rent and refused to pay rent until the repairs were made. So we would lose $1,500 in rent because the tenant intentionally damaged about five dollars worth of electrical cover plates. That was one of many situations that made no sense whatsoever. The tenant did not benefit financially from this action. It was purely destructive action and we could not find any financial gain for any of the parties.

When cities are strapped for cash, they experience deferred maintenance. People don’t like to move into cities with crumbling infrastructure. Its not just about pensions. It's about how the city will manage itself financially, and will people leave as a result.