If you’ve been investing in residential real estate for a while, you’ve probably thought about what your first step towards diversification will be. If you’ve been successful with traditional single-family homes, you may want to switch things up a bit and start looking into how to invest in a different category of residential real estate: affordable housing.
Affordable housing is not property owned by the government. Instead, the government gives states and investors money when they choose to use their property to meet the needs of seniors, the disabled, students, and those who can not afford real estate in their area.
The Federal Department of Housing and Urban Development (HUD) defines affordable housing as “a household can obtain for 30 percent or less of its income.”
Affordable housing caters to those who classify as low income. But this classification differs from state to state and aligns with the median income of the specific area.
Renters who fall into these three categories can qualify for vouchers and government assistance to help them find housing that aligns with their income status. Typically, four groups of people qualify for affordable housing:
Many seniors across the country are looking for safe and accessible residences, but do not have the funds to afford typical real estate options. Social Security sometimes is not enough to cover rent, medical expenses, bills, groceries, and other expenses. The government offers a few different programs to help seniors find affordable housing just for them.
Investing in low-income senior housing is a smart strategy for long term cash flow.
People living with disabilities often find it difficult to find accessible homes within their budget. They rely on Social Security to help them pay for their expenses, but housing costs and rent are not covered. Affordable housing makes it possible for adults living with disabilities to maintain a level of independence without draining their bank account. Some adults with disabilities work in entry-level jobs and do not make enough to afford traditional real estate.
The affordable housing market is saturated with college students looking for a cost-effective place to live while they pursue their education. College students qualify for low-income housing if they:
When college students graduate, they typically have a lot of debt, limited income, and aren’t sure about which next steps to take. Affordable housing is a great option for this demographic as well.
Wherever this is a major college or university, there is a need for affordable housing.
In the US, more than 40 million people live below the poverty line. This means millions of families make significantly less each month than the average median income for their area and struggle to pay bills, buy food, pay for utilities, public transportation, and other expenses. These families have the option to find their housing or rent from the local public housing authority. The requirements for low-income families to qualify for affordable housing differs from state to state.
According to Investopedia, “Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially accountable—to itself, its stakeholders, and the public.” This is a way that companies and corporations in a particular area can give back to the community around them. They can do this in many ways, such as giving a portion of their profit to a local charity or volunteering in the neighborhood or investing in affordable housing.
As part of their CSR strategy, master developers can supply the real estate market with affordable housing and make it possible for the most vulnerable members of society to live in safe and accessible housing that aligns with their limited income.
One of the first things you’ll need to understand when investing in affordable housing is how inclusionary zoning regulations work. Inclusionary zoning refers to The idea that a certain percentage of housing in a particular area is dedicated to those who fall in the low-income category. This helps to keep a neighborhood economically diverse, but may not play as big of a role and the affordability of a city as one may think.
One of the main goals of inclusionary zoning is to incentivize private developers to build a certain percentage of their new units at a below-market rate. As an investor who is paying close attention to the local real estate market, understanding inclusionary-zoning will help you understand the market and narrow down your target area.
One of the first things you learn about investing is that diversification is a key component for growth. Some investors invest in traditional residential real estate and then jump into commercial property. While this can be a smart investment strategy, it does require significant capital upfront. You have to have the right finances in place to be able to purchase a multi-occupancy building, business loft, or office space. Affordable housing can be the stepping stone in between residential investments and commercial investments while still focusing on diversification.
Because the government offers financial assistance and tax breaks for investors, it can be a smart move for beginning investors who do not have a lot of available capital.
There are many reasons why investors choose to invest in affordable housing. As a member of the community, it can help investors give back and offer housing to those whose needs are not met by the local real estate market. As an investor, there are tax benefits and incentives that make it a profitable and smart business decision. The main benefits of investing in affordable housing are:
There is a definite imbalance between supply and demand when it comes to affordable housing. Builders are much more likely to build expensive apartment buildings with luxury amenities and charge higher rents than they are to build an apartment building that they know will generate lower rents. Builders typically only build low-income housing developments when they have assistance from the government. This is why you see so many new, luxury apartments popping up all over the city and limited options for affordable housing. This means when you invest in building a low-income property, you run into far less competition than when you invest in market-rate investments.
When a market-rate apartment is vacant, landlords and investors lose money. Unfortunately, traditional apartments see a 50% vacancy rate, leaving landlords and investors to scramble to fill these empty spaces to produce consistent cash flow. However, there is usually a very long waitlist for available affordable housing options, which means turnover rates are significantly lower than traditional apartments, and investors spend a lot less time and money filling vacancies.
Most people living in low-income housing receive assistance from the government to cover their rental costs. This means that investors can rely on a steady, long-term cash flow. Many seniors, those living with disabilities, college students, and low-income families sit on a waiting list for over a year to qualify for and find affordable housing. This means this type of real estate is almost always occupied by residents that have been waiting a long time to qualify and do not want to lose their eligibility status.
As with any investment, affordable housing comes with a unique set of challenges and risks. It is important to be educated about the processes associated with this specialty real estate niche. It is also important to set realistic expectations and know what you’re getting into before you start. Some of the most common challenges investors face when investing in affordable housing include:
If you choose to designate your investment property as low-income, you can expect a certain level of government intercedence. Some affordable housing programs will require government inspections to ensure the home is safe and livable and meets program requirements.
When you invest in traditional real estate, you have control over your lease terms and rental rates. You don’t have the freedom and flexibility to increase your rental rates when you want. This can limit your investment returns.
Investing in affordable housing also means letting go of some of the control you have over the rules and terms of your lease. If your lease sets specific rules regarding a deposit or fees and the Department of Housing and Urban Development has different rules about the same deposit, you will have to abide by the terms set by the HUD. This is the same for other lease terms such as eviction notices, and repair and maintenance responsibilities.
Any time you experiment with a new investment strategy, there will be a learning curve. Wow investing in affordable housing is similar to residential real estate, there are many new concepts, laws, rules, and regulations that you’ll have to learn. But this is the same with any new investment strategy. Affordable housing offers consistent and long-term cash flow, increased returns, and is a way to give back to the community.
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