Investors traditionally turn to real estate for reliable returns that hedge against inflation and for passive income to supplement or replace traditional work. However, as we increasingly understand the long-term and auxiliary consequences of real estate decisions, investors can also use their funds to further principles they hold dear.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.
How Real Estate Affects the Country
Our real estate decisions may feel deeply personal, but the industry grips all corners of our daily life and how we experience the world. In the United States, it’s a cornerstone of our economy. In 2018, new real estate construction was 6.2 percent of the nation’s gross domestic product. New construction is just a small piece of the puzzle.
Residential real estate provides shelter, and for those who own homes, it is usually the largest source of wealth. The money we spend on housing impacts what we have left to spend on other items, which shapes the remainder of the economy.
Housing can reduce or accelerate racial injustice through opportunity, education funding, and access to services and jobs. Worldwide, real estate—including both production and ongoing operation—accounts for 49 percent of global carbon emissions.
Real estate provides the framework for our lives. It’s the most basic element of human survival and a necessity for dignity, but it’s also where our lives take meaning from work, play, culture, and leisure. Because of that, its reach is nearly infinite, which can make understanding the social impact daunting. Let’s narrow it down:
Ways to Analyze the Social Impact of Real Estate Investing
Investors may use information about the social impact of real estate investing to eliminate a project they deem irresponsible, but others use it as one more level of financial analysis. Overall, there are three main schools of thought regarding this type of investment evaluation: ESG investing, socially responsible investing, and impact investing.
ESG Investing
ESG stands for environmental, social, and governance policies, which are all considered with any investment. ESG investing posits that a company’s good behavior translates to increased profits, so ESG investing is a financial consideration rather than a moral or political one.
For example, responsible environmental practices avoid pollution, and by doing so, they also avoid the hefty federal and state fines and clean-up fees that come along with it. Or, consider when a company creates a culture free of discrimination, in addition to creating a safe workplace, it also diminishes legal fees and settlements with employees.
Socially Responsible Investing
Socially responsible investing involves actively excluding investments that do not follow the investor’s guidelines. There is no set scale, or features, for socially responsible investing; instead, it is based solely on preference, whether they be political, moral, or religious.
Rather than being a quantitative analysis like ESG investing, socially responsible investing sheds a positive or negative light on an opportunity that an investor must consider when evaluating a project.
Impact Investing
Finally, the last lens for evaluating investments is through their social impact. Impact investing looks exclusively for positive outcomes that benefit the environment or society.
Impact investing places emphasis on the goal or desired outcome rather than on a guaranteed return or result. For example, impact investing could include investment through a non-profit or non-governmental organization for affordable housing that may not yield a profit for decades.
Social Impact Factors to Consider when Evaluating an Investment
As noted above, socially responsible investing can be a very fluid concept dependent on an individual’s values and goals. However, there are a few commonly accepted tenets of socially responsible investing to explore.
Health and Well-Being of Occupants
One of the most basic principles of socially responsible investing is that residential real estate should provide a safe space for its occupants, enhance their lives, and overall create a positive environment for those that live there.
One of the challenges of socially responsible investing is that the goals change along with our values and knowledge, and this is one area especially susceptible to that feature.
On the most basic level, housing should be free of substances known to cause illness or death, but of course, that information changes with new scientific advances. Or, as we have seen over the last two years, health needs change based on current events
Economic Contribution to Community
The economic impact of a real estate project can be far-reaching and create unintended results, which is why thorough consideration of economic impact matters in socially responsible investing.
On its face, a real estate project simply creates short-term jobs during the construction, long-term employment for those needed to operate and maintain rental properties, and provides needed housing for the general workforce. However, the total impact is much more significant.
Real estate development shapes the character of a city and neighborhood, and some changes may be more welcome than others. Gentrification and resulting displacement are two serious negative consequences that may result from a real estate project.
Supporting Sustainability of the Community
The environment is a major focus of socially responsible investment, and real estate’s impact on the environment is huge; through the materials used, the ongoing emissions it creates, and further decisions inhabitants make based on the building’s use and location.
New residential buildings can support community sustainability by buildings near public transportation hubs and in the midst of service areas. Residents get the benefit of less expensive and easier transportation for their most frequent trips, and cars are taken off the roads.
Of course, new-build locations are only a small part. Existing buildings can implement solar energy, ambitiously reduce landfill waste production, or even become a bike-share hub.
Homelessness Reduction and Affordable Housing
Socially responsible developers create affordable housing and fill the country’s pressing need for low-income housing.
As a whole, the country faces a housing shortage of millions of units, but the shortage is felt most keenly at the lowest end of the price spectrum. Updated data will likely reflect that the pandemic worsened the existing problem as home prices skyrocketed, making housing even more unaffordable for a large portion of our population.
Multifamily housing developments can include mixed-income units, of which the benefits are many. Income diversity creates more equitable schools and job opportunities for all types of work.
They can also implement housing policies that provide opportunities for residents to rebuild their lives. Safe, stable housing is the cornerstone for quality of life as it leads to the ability to apply for and retain a job, for children to routinely attend the same school without disruption, and for families to work together toward an economic goal.
While property managers often focus on credit and background reports to determine the merit of a potential tenant, low-level policy changes make housing more accessible.
How to Find Socially Responsible Investments
Investors have more options than ever to find projects and investments that comply with their moral guidelines. Fortunately, companies exhibit increasing transparency regarding their practices as investor demand for information also rises.
Starting with Millenials, younger generations are more likely to avoid investment opportunities that do not align with their ethics. Consequently, companies make their good deeds a part of marketing to make themselves known to investors looking for such qualities.
Compliance and Lawsuit History
For those who want to consider past performance as an indication of future behavior, a company’s legal record will be telling. The company’s previous conflicts, and whether it has made changes since they happened, can give investors insight as to the results a company’s policies and practices create in the real world.
Governance Documents and Governing Body
Second, evaluate whether the company’s governing documents address any of your policy concerns. Additionally, know who comprises the board or other governing body and consider whether it reflects your values regarding diversity.
Invest Local
Finally, a major part of socially responsible investing is the final product. Does the project create a world in which you want to live? Chances are, those working in real estate in an area near and dear to them ask themselves that question many times over the course of a project.
Many of us work in real estate specifically to better our communities. Whether it is to revitalize a failing area where we grew up or to make our city better for our kids, syndicators often have a personal stake in an area that goes beyond profit. Learn more about why I invest in real estate in Indiana.
Final Thoughts
While it can be overwhelming to envision all the possible outcomes and impacts of a real estate investment, investors should take heart in knowing that they now have the opportunity to both grow their own wealth and do good for others, their community, and even the planet, through their actions. At a minimum, investors should employ a do-no-harm philosophy to discourage future unscrupulous real estate projects that often end in harm to the investors themselves as well as the community and people impacted by the project.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.
