What if you couldn’t trust the local crime report anymore? What if police officers in your area opted to turn a blind eye either as an unofficial department policy or as an unstated cultural shift? It would be really scary. You might move! Well, in the case of at least one police department, it’s happening already, and you might be invested in this white-hot market and need to know if changes are coming as this disturbing trend comes to light over the course of the next 12 months.
As a self-directed investor, you know that there is a fine line to walk when it comes to investing in cash-flowing turnkey rental properties when you’re talking about local crime rates. I suspect there is not a one of you out there with so much as a single real estate investment in your portfolio who hasn’t checked the local police blotter or crime map before you made a property purchase, and even if you didn’t, ya’ did when you bought your home, didn’t you?
But what if those statistics were skewed? I don’t mean some scurvy marketing scoundrel worked over the numbers. I mean what if the police just weren’t arresting people anymore, even when crimes were committed? What if they were opting to, as one officer actually put it in an interview (although he or she did decline to give a name) with a local newspaper in one market, “look the other way” when things looked suspicious, thereby not actively preventing crimes both violent and otherwise.
Well, I’ll tell you what would happen, at least at first. Perceived crime rates would fall, dramatically. But what would happen next?
Now, I’ve got a case study here to dive into and it’s really interesting. It’s a white-hot real estate market where the police are now arresting 25 percent fewer people than they were in 2013. These arrest trends have been exposed by the town’s own local newspaper, the LA Times, (that’s right, folks, it’s Los Angeles) and the LAPD has actually disclosed the types of arrests that are falling and been willing to comment on the trend. So all of that makes this a little atypical in terms of the market itself, but it’s an important insight into what is likely to be national trend that will directly affect your due diligence (or that of your turnkey property manager and investment advisor) into real estate markets.
So let’s dive into La La Land and see if we can figure out what’s going on and how it might relate to the rest of the, well, maybe slightly “realer” world.
So back in 2015, the LAPD noted that its arrests had fallen 25 percent from 2013 numbers. Incidentally, San Diego reported significant drops in arrests around that time as well, and statewide numbers also indicate that police made about 400,000 fewer arrests in 2015 than in 2013.
This was notable because although these arrest numbers created the impression that crime rates were falling, in reality 2014 was a banner year for serious crimes, which, LAPD Chief Charlie Beck told the LA Times, were still offenses that would lead to arrest and, further, that arrests related to serious crimes were actually still rising. “The decrease comes largely from narcotics arrests,” the LA Times reported after that interview, but felony arrests did fall by 29 percent between 2010 and 2015 and misdemeanor arrests fell by 32 percent during that same time. Not surprisingly, so did citations and field interviews.
Now, there were some legislative changes designed to ease the state’s overcrowded prisons (basically, if your offense met certain requirements indicating it would cost the state and, theoretically society, less to release you than house you for a few months, then you might not be arrested, although that’s a serious oversimplification of the policy and practice) that also played into this, as well as, in 2014, an onslaught of negative police publicity that has continued to this day.
As usual, folks, I’m not commenting on the politics of that publicity, I’m just saying it’s a component of this trend and you might as well evaluate it.
But still, the end result is this: there are far, far, FAR fewer arrests going on in LA today than there were four years ago, and that means that there is, at the very least, a new kind of law enforcement being carried out in LA neighborhoods.
Now, so far, that hasn’t affected real estate values much, at least on the face of things. Last year LA property values rose nearly 9 percent, and although they’re likely to level out in the next 12 months, I wouldn’t say it’s because of increased undocumented crime. I’d say it’s because they’re due to level out. Most people are priced so far out of that market that things can’t continue at the rate they’ve been going. It’s logistically impossible.
Here’s the lesson in this situation, however:
These arrest rates affect the value of the property in LA. Maybe not now, but over time the effects of these changes will affect housing values in areas where this trend is evident because no one wants to live in an area where they’re at risk of being a victim of a crime. And no one will if they have other options, which is why there are certain types of real estate that investors refer to as “war zones” because they’re very dangerous and tend to have large populations of individuals who feel that they have no options living in them. This population doesn’t tend to make for good tenants, although, of course, there are exceptions and there are also ways to go into those areas and implement meaningful, important change.
But for now, let’s stick to a simpler goal: buying in areas that will naturally attract reliable tenants happy to pay your rents on-time, in full, and at appropriately rising rates. And if you prefer flipping or private mortgage notes, this is still important to you, because crime rates affect property values and, by extension, the value you can get if and when you sell or call in your collateral.
Now I took a look at the LA Times’ crime rate maps, even though the Times recently announced how the numbers might, as a result of those falling arrests, be skewed. I removed the rising “violent crimes” neighborhoods (of which there are apparently seven) from the mix because the LAPD said that serious crime arrest rates are not necessarily part of this trend, and I focused on two neighborhoods with recent increases in property crimes (recent was since the end of August 2016). I ended up with two areas: Hyde Park and Mid-City, and I want to focus on Mid-City because someone at that city hall has been doing some serious promotion based on the idea that crime rates in the area are falling…
If you googled Mid-City LA crime rates and then clicked news, here’s what you’d find in terms of headlines:
“Personal Crime Dips Dramatically”
“Shoplifting incidents rise, but Violent Crimes Falling”
and a number of similar headlines.
Now, Mid-City crime rates are rising, in fact, but if you looked at the rates over time, you’d see that overall, crime rates in the area have been falling since 2004 although in more recent years, those rates have been climbing. However, you’d also see that local officials blamed the rise in arrests for violent crimes on “more aggressive reporting of assault,” and, if you’re HUMAN, if you had a chance to invest in LA in a way you felt was a good deal, you’d probably decide to take the risk!
And that’s fine, but you need to make sure that you’re taking the risk with all the information on hand, so when you’re looking at crime rates, here are some things to remember:
Crime rates are influenced by arrest reports.
Headlines can be as informative (or misleading) as actual statistics in this specific instance. If the police are feeling pressure to “look away” to avoid controversy, you’ll probably get a feel for that from the tenor of local headlines.
Crime definitions are important. For example, and this will probably startle you, the definition of RAPE can vary from place to place. Some police departments consider forcible intercourse of any kind to fit the definition, while others have some fine print, which is kind of weird to think about. So you need to know what you are actually getting when you’re reading information about crimes in various forms and fashions.
Now as you know, crime rates on their own are not one of the three BIG indicators that we use for the SDI traffic light system when we evaluate markets, but you better believe that after that first round of “greens,” we’re digging into this stuff, and you should too before you make any real estate investment no matter how good it looks at first and even second glance.
This is a transcript of a previously-aired segment of “Self-Directed Investor Talk” co-hosted by Carole Ellis, managing editor of Think Realty Magazine
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