In my journey as a real estate investor, I’ve focused primarily on properties with below-market rents. I’ve assumed that both rising costs of construction and competing housing options would pull rents higher over time. I’ve also counted on some downside protection on purchase price given the significant discount to replacement cost.
The basic strategy has been to invest in neglected assets and earn a reasonable return on that investment. If we do our jobs well, our residents will thank us for improving their homes. For this, they’ll often gladly pay an additional $50-$100/month, knowing that they’re still enjoying some of the most affordable rental options in the market.
It’s that economic return that incentivizes our investment in the more affordable rental stock. More passive owners often neglect maintenance as the property deteriorates with the short-sighted goal of squeezing out more cash. Regardless, rents still rise over time due to the imbalance of supply and demand.
Investors provide the funding needed to improve the quality of housing for low to middle-income renters. I vehemently believe providers of risk capital should receive a fair return for that effort.
I also believe that we have a moral duty to oversee this effort with compassion and find win-win opportunities that can benefit investors and residents alike. I’ll soon share some exciting strategies to support our communities in the areas of education and employment.
Amidst the raging bull market in real estate and every other asset class, we should remind ourselves how hard the pandemic has been for others. Asset price inflation doesn’t help if you don’t have any assets. Many of the most economically vulnerable in our country have lost the income and self-esteem that comes through work. Many have burned through their modest savings and damaged their credit.
As shown below, COVID delivered a disproportionate economic blow to renters of color, lower-income, younger rents. If you’re interested, The Joint Center for Housing Studies at Harvard University recently published a report on this topic: Renters’ Responses to Financial Distress during the Pandemic. It’s a sobering read.
An affordable housing shortage extends beyond the lowest income levels and across every state in the US. Reasonable people will disagree on how to fix it, but few will disagree that the problem exists. A recent report from the National Low Income Housing Coalition identifies a gap of 7 million homes needed for very low-income renters.
Neither government nor the free market alone can address that need.
On April 15th, the bipartisan Affordable Housing Credit Improvement Act (AHCIA) was introduced into the House and Senate. THe AHCIA reflects the need to do more to address our country’s unmet affordable housing needs, going beyond the increases already directed to existing housing programs. In a blog post, research and accounting firm Novogradac estimates that the AHCIA could potentially finance an additional 2 million homes over ten years.
Even if the AHCIA bill passes in its current ambitious form, real estate investors will have ample opportunity to provide lower-cost rental housing options. And they should continue to earn an attractive return for that investment.
Still, we should also challenge ourselves to find ways to deliver these returns while maximizing the respect and support for our residents. It’s good business. And it’s the right thing to do.