Founder and CEO of Apartments Near Me, an affordable housing brand focused on multi-family communities in the United States.
The affordable housing industry is one of the most challenging sectors in real estate. A major factor contributing to this hurdle is indeed the housing market itself. While traditional renters more often pay attention to their financial situations, credit score and other important factors, the majority of affordable housing renters are unable to maintain that same standard. I’ve observed that in the low-income housing community, many tenants have poor credit or previous evictions on their record.
According to data collected by the Census Bureau from March 17th-29th, 2021, approximately 28% of households are not current on rent or mortgage and eviction or foreclosure in the next two months is likely.In addition, AP News reported in December 2020 that “in public housing, a small debt can get poor tenants evicted.” Oftentimes, a small unexpected debt can cause a snowball effect for low-income tenants who already have difficulty staying current with their bills.
Current Price Changes Vs. Cap Rate
In every market, there are cycles; this includes the real estate market. At this time, I’m finding that Class C and Class D properties (typically the affordable and low-income housing) are selling at a 5-6 cap rate. On May 2, 2021, The Hill published an article with the headline “Is the U.S. headed toward a new housing bubble?” The article went on to state that the median home prices have risen 20% year over year, thus insinuating a base for the bubble. Availability of funds and low-interest rates on loans are the main drivers behind the increase in housing prices.
The main problem is that the cap rate for the industry is changing and reflects the risk of the business. Low-income housing contains a high risk of cash flow, property upkeep, materials, maintenance, security and taxes, just to name a few, which make a cap rate of 6% just not acceptable. (Historically speaking, cap rates of high-risk real estate typically exceed 7%.) Another major contributing factor to the bubble is that new players are starting to have more of a presence in the market. For example, large pensions and insurance funds that are seeking new investments start funding and investing money on Class C and Class D properties that potentially have high returns rather than other traditional investments, which is putting the entire system at risk.
Before Covid-19, usually affordable housing investors managed the property by themselves or micro-managed the management company. However, now the management companies are the big winners, increasing their portfolio from investors who have easy access to funds and not accessing the affordable housing risk correctly. For example, before Covid-19 in Memphis, there were more than 20 multifamily properties sitting for sale, and as of April 2021, I’ve observed that there is barely a single property left as the management companies acquire the clients. This creates new risks and challenges to an already risky and challenging market.
Affordable housing is one of the most important sectors in America. According to research conducted by the Census Bureau in 2019, more than 25% of households in America are low-income (making less than $35,000 a year). 1 in 4 households in America live in affordable housing and the lower tier of income live in very bad conditions. Affordable housing is important for the growth of our society and can create a stable base for adults and children to have a better future. However, if mismanaged and neglected, the crime rates could increase, profitability will decrease and tenants, as well as management, will be displeased.
In order to achieve the right balance of business goals and community improvement, the investors, as well as developers, must take into account all factors including the base cost of said properties. This balance will be achieved by listening to the community first and then building a renting process around it. The target rent should reflect the max ROI and instead should be focused on long-term renters. The application process should be structured in a sensitive way, understanding that the market is not a regular renting market. The most important thing is to remember that affordable housing, when done right, can actually change people’s lives and allows people to be proud of their homes.
Source: Forbes
