Successful real estate investors are more than just landlords, they are savvy business executives. They operate much like portfolio managers and business managers who focus on maximizing profits while creating value for clients. This article discusses affordable housing investment as a business and investment strategy. We start with a definition of affordable housing and look at three groups that represent the best target market. Next, we discuss affordability which is the defining characteristic of the target market. Then we turn to profitability and marketability, issues that make a good investment great. Finally we look at financing, action steps, and wider business and social implications of affordable housing investment.
Seniors and People with Disabilities
People 65 or older and with disabilities are a significant percentage of the U.S. population. Studies show these numbers increasing and estimated record levels in the next 20 to 30 years. People in these groups need housing that is close to public accommodations and is modified to assist them in everyday living. Modifications include ramps instead of stairs, wheelchair accessible bathrooms, handrails, and modified cabinets and closets to name a few.
Student Off-Campus Housing
The growing numbers of adult and non-traditional college and university students have increased the need for off-campus housing. Adult students with families need private housing close to campus. International students need housing that is available year-round because it is less expensive and more convenient than frequent international travel on holiday and summer breaks. (Living on campus can have many benefits, but they often come at a price. To learn more, check out College Dorms: Good Value Or Ripoff?)
Military Off-Base Housing
Military service members have housing options on and off-base. On-base housing requires construction, property management and grounds maintenance, while off-base housing requires additional location assistance, custom construction and purchase financing. Off-base housing needs to be close to the base and easy to move into and out of. Military housing investors should be familiar with federal contracting as well as the specific guidelines for each branch of service.
Rehabilitation and Re-Entry Programs
Transitional housing for homeless people and families, halfway houses for recovering addicts and newly released from correctional facilities, and group homes for children and adults in state protective service and mental health systems need neighborhood-based housing. Apartments and boarding houses should be large enough to provide adequate facilities and privacy for residents, but must also facilitate needed security and accessibility levels appropriate for each group.
How to Determine Affordability
Affordability is important to investors because it determines two important things: profitability and marketability. Subsidized housing programs like Section 8 helps lower income families afford rent by paying a portion of the market price for rental units. Determine the median income for your area. There are several sources of information to determine median income. The U.S. Census Bureau compiles average incomes for states, counties, and cities. Real estate websites also provide this information for people interested in buying homes in particular regions Information is also available through state and local governments, economic development agencies and housing authorities.
- For affordable rent calculate 30% of median income. This is your expected gross income per affordable rental unit.
- For affordable homeownership calculate 35% of median income for principle, interest, property tax, homeowner insurance, and association fees. Then calculate your expected sale price by deducting the amount for tax, insurance and fees based on going rates for the area. Use the difference, principle and interest, to determine the purchase price based on going interest rates for your area. A banking or mortgage professional can help you quickly determine these amounts.
How to Determine Profitability
Start by determining your operating expenses. For rental units start with taxes and insurance you pay as owner. Do you pay the utilities, if so which ones? Calculate the cost for building and grounds maintenance for multiple unit buildings. Don't forget transfer costs such as inspection, occupancy certification, registration, and other fees required by your county or municipality.
For sale units, determine your financing costs, closing costs at acquisition and at the time of sale, material and labor costs for construction/rehabilitation and transfer costs. For both determine your marketing and advertising costs. The greatest project will flop if you cannot attract renters or buyers in a timely manner. Even a simple, effective advertising strategy will cost both money and time. Consider these costs of doing business that affect your bottom line.
Next, determine your income. For rental units use the amount of expected gross income per affordable unit. For sale units use the purchase price determined above. Use the standard formula: Income – Expenses = Gross Profit.
Consider your cash flow. If you pay utilities, some programs allow additional amounts to be paid by the subsidizing authority to cover a portion of tenant utilities. Finally, look at your income tax situation. Depreciation will affect your tax liability and will have varying affects on the actual cash flow or real net profit.
How to Ensure Marketability
Focus on locating and modifying units that meet guidelines for rental subsidies which are available through local housing authorities. For sellers focus minimizing construction and rehabilitation costs on units to be sold at market. (Investing in big buildings means big money - and bigger risks. For further reading, refer to Find Fortune In Commercial Real Estate.)
- Start with simple logic. If it is not profitable, it is not marketable. The reverse is also true.
- Take advantage of foreclosed homes. There are many single and 2 to 4 family homes and that have been abandoned due to foreclosures.
- Contact local economic development agencies who acquire these units below market costs and sell to or contract with local developers to rehabilitate and resell. Also, learn the ins and outs of Sherriff's sales in your area. Check the guidelines for each county you will target as guidelines may differ among counties in the same region or state. These units are often purchased site unseen and may represent significant rehabilitation costs and turnaround time to resell.
- Work with a realtor and learn about the local for sale by owner (FSBO) market. Here you will find opportunities for short sales where the seller or selling agent has made arrangements for a reduced mortgage payoff to facilitate a reduced price for quick sale. These units may be the least expensive to fix up and resell.
Successful investors know when and how to move in the market. Don't forget to perform ongoing buy-sell-hold analysis on rental units. If labor, material, and financing costs are high, now may not be the time to buy more properties. If there are more renters in your market, now may not be a profitable time to market units for sale even if interest rates are low. If market rent and median income in your area is high, now may be the most profitable time to retain property for the monthly rental income it can generate. Treat your real estate portfolio just like your retirement portfolio with a little more paint and fixtures. (For savvy real estate investors, times of lower prices reveal investment opportunity. For more information, see 7 Steps To A Hot Commercial Real Estate Deal.)
Research the various financing alternatives available to investors. Read websites for Fannie Mae, Freddie Mac, and HUD Multifamily Financing. Work with a local banker and a commercial mortgage broker or consultant to identify lender programs and find private investors. Join local homebuilder, remodeling, and real estate investor associations. Become a member of the chamber of commerce and affiliate with economic development agencies. Use these relationships to identify public and private financing and operating partnerships.
- Be informed. Learn about affordable housing across the country and in your area.
- Be involved. Make a market for affordable housing. Identify a niche in your area and fill it. Forge partnerships with likeminded investors and financing sources.
- Be a profitable investor. Function as both portfolio manager and business manager. Apply conventional investment wisdom and business strategy advice.
Don't just be landlords. Be a landlord, an investor and a business executive. As a landlord, incorporate the human element. Remember that you can create a market by helping families and your community. As an investor, create a blue-chip portfolio of real estate. Have the best properties, in the most desired areas, at the best prices, that turn the most profit. As a business executive, create a brand, generate goodwill and maximize the market value of your brand not just on individual units. Remember that your activities also create jobs and employment opportunities for construction workers and real estate sales agents. Your marketing and property managing activities help to attract workers to the labor force in the areas where you units are located. Not only can you create personal profits, but you can also create economic opportunities for people and communities through affordable housing investment. (Owning property isn't always easy, but there are plenty of perks. Find out how to buy in. Read Simple Ways To Invest In Real Estate.)
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