Affordable Housing Is the Golden Goose of My Real Estate Portfolio—Here’s Why
Affordable housing is becoming a crisis in this country and there is no solution in the near future. With home prices increasing at a faster rate than workers’ wages, things might not get better in our lifetime.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
As a real estate investor, this is why I am solely focused on C-class affordable housing to add to my portfolio. With rising rents and skyrocketing home prices, I look at affordable housing as my golden goose.
The Perks of Investing in Affordable Housing
1. Hedge against a recession
When the bubble pops (and you know it’s going to), people are going to start downsizing and looking for ways to save money. This is one reason I love affordable housing. It’s affordable!
With rents 15 to 45 percent below some of the A-class properties in my area, I know I’m going to have plenty of people wanting to move in. During these hard times, renters from the A-class properties tend to move to B- and C-class properties.
Although Class C properties' rents might not increase or even may go slightly down during a hard recession, you won't have to drop rents as far or offer concessions that some A-class properties' owners will.
Owning affordable housing is also a great way to secure financing. Most banks know that this is an effective hedge against the recession and prefer Class C and affordable properties. With the lower amount of vacancy and steady income stream, banks will be more likely to lend on this type of asset.
This is another reason you and the bank's underwriter need to stress test the property. I don't think it is possible to "overbuild" affordable housing in this country. That's why the banks are not as worried about a lack of people wanting to move into most Class C assets.
2. Longer tenancies
With affordable C-class housing, I find that my tenants stay longer and are more receptive to rent increases. Moving can be costly and not too many people I know enjoy it. With a moving truck, storage unit, first month's rent, and the security deposit for a new place, the bill adds up quickly.
This is why most tenants stay put in C-class properties. I have acquired tenants in apartment buildings who have lived there for 30-plus years, because they hate moving. Turnover is a huge expense for landlords, so appealing to the masses with affordable housing only makes sense.
If some of your housing is being paid for by government subsidies, they will usually require the tenant to stay for 12 months, too. In fact, a lot of Section 8 tenants who I have rented to in the past have lived in the same rental unit for five years or more.
This is because it is affordable, and they are usually on a fixed income. They don’t want to pay the high costs of moving, so staying in a nice, clean, affordable rental property makes perfect sense.
3. Sell fast
With C-class affordable housing being in such high demand, investors are always looking to get ahold of it. With supply so low and demand so high, this makes for a perfect asset to cash out of and sell when you are ready—or if you need to.
Most affordable housing lacks the large money pit amenities that some A-class properties have (such as a pool, elevator, gym, etc.). The less expenses and less capital expenditure reserves needed, the more net operating income can be increased.
Now, most of the properties with these amenities are getting higher rent. But they are also costing the owner more money.
Typically with the lower rung asset classes, investors know that their occupancy rate will be higher, as will their net profit. This can be a huge selling point when taking your property to market.
4. Steady cash flow
Paying a premium for property has its perks. It also has its downfalls.
Yes, you will be getting something that will hopefully be trouble-free. Yes, you will be getting higher rents. But odds are your cash flow and return on investment will be lower, too.
This is my favorite part of affordable housing: the cash flow. With low vacancy, steady rents, and a smaller mortgage payment, affordable housing usually outperforms most—if not all—long-term rental classes. As long as the property is being managed well and taken care of, you should have no problem making steady income and double-digit returns.
Of course, things will happen. Tenants will move out. Evictions will happen. Things will break. But you should be well prepared for almost all problems that come your way. After all, you stress tested the property before you bought it.
Having a Class C property that is affordable doesn’t mean you need to skip on repairs or rent to just anybody. It wouldn’t take long for your nice, clean, Class C apartment building to drop down to the worst building in town, just because you wanted to save a couple bucks.
Affordable housing needs to be taken care of, as all nice properties need to be. By keeping your property in great shape and remaining affordable to the masses, you can assure yourself that your asset will not only provide you with a golden egg, but it will also help provide many people with great housing.
How do you feel about affordable housing?
Share below in the comment section.