What Is Affordable Housing Investment?

Successful real estate investors are more than just landlords. They are savvy business executives. Property investors 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 The article first defines affordable housing and looks at three demographic groups that represent the best target market. Then, the article discusses the profitability and marketability of affordable housing as well as financing and the social implications of affordable housing investment.

Key Takeaways

  • Affordable housing is included in the porfolios of many property investors largely because of the associated government tax credits.
  • Property investors interested in affordable housing should ensure that such an investment is profitable and marketable in their area.
  • Investors should calculate the costs involved in buying, renovating, and maintaining affordable housing to determine whether it is a viable investment proposition.
  • Ideally, an investor will have the best properties in desirable areas at good prices to ensure adequate demand and profitability.


Understanding Affordable Housing

The concept behind affordable housing is to provide housing for those members of society with limited income. Owners of property receive tax credits if they use a percentage of their property as affordable housing (for example, so many rental units in a building). Renters also receive assistance from the government in paying their rent each month. Four groups of people are typically in need of affordable housing.

Seniors and People with Disabilities

People 65 or older and those with disabilities are a significant percentage of the U.S. population. Studies show these numbers are increasing and will reach record levels in the next 20 to 30 years. People in these groups need housing that is close to public accommodations and modified to assist them in everyday living. Modifications include ramps instead of stairs, wheelchair accessible bathrooms, handrails, and modified cabinets and closets.

Students

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.

The Military

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

A section of the population requires transitional housing. For example, the homeless and families, recovering addicts and those newly released from correctional facilities require halfway housing. Some adults and children in state protective service and mental health programs require group homes and neighborhood-based housing. Apartments and boarding houses should be large enough to provide adequate facilities and privacy for residents but must also facilitate the security and accessibility levels appropriate for each group.

Requirements for Affordable Housing Investment

Affordability is important to investors because it determines two crucial things: profitability and marketability. Subsidized housing programs, such as Section 8, help lower-income families afford rent by paying a portion of the market price for rental units. Investors in affordable housing should know the median income for their area to determine what type of return they might get when buying property and using it for affordable housing.

Several sources can help an investor determine median income. The U.S. Census Bureau compiles average incomes for states, counties, and cities. Real estate websites provide this information for people interested in buying homes in particular regions. Lastly, information is also available through state and local governments, economic development agencies, and housing authorities.

  1. For affordable rent, calculate 30% of the median income in your area. This is your expected gross income per affordable rental unit.
  2. 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.

Profitability

To determine the potential profitability of an investment, estimate your operating expenses. For rental units, start with the taxes and insurance you pay as the owner. Include any utilities, building and grounds maintenance costs, and 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 or rehabilitation, and transfer costs.

For both rental and sale units, determine your marketing and advertising costs. The greatest project will flop if you cannot attract renters or buyers. Even a simple, effective advertising strategy will cost both money and time. Consider the 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.

Marketability

The affordable housing investor must locate and modify units that meet guidelines for rental subsidies available through local housing authorities. For sellers, focus on minimizing construction and rehabilitation costs for units to be sold on the market.

  1. Start with simple logic. If it is not profitable, it is not marketable. The reverse is also true.
  2. Take advantage of foreclosed homes. There are many single and two- to four-family homes that have been abandoned due to foreclosures.
  3. Contact local economic development agencies who acquire these units below market cost and sell to or contract with local developers to rehabilitate and resell. Also, learn the ins and outs of Sheriffs' 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.
  4. Work with a realtor and learn about the local for sale by owner (FSBO) market. You may 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.

Financing

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 home-builder, 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.

Action Plan

  1. Be informed. Learn about affordable housing across the country and in your area.
  2. Be involved. Make a market for affordable housing. Identify a niche in your area and fill it. Forge partnerships with like-minded investors and financing sources.
  3. Be a profitable investor. Function as both portfolio manager and business manager. Apply conventional investment wisdom and business strategy advice.

Special Considerations for Affordable Housing Investing

An affordable housing investor must 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 your 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.