4 Ways Investors Can Help Alleviate the Affordable Housing Crisis (& Make Money)

by | BiggerPockets.com

Unless you live under a rock, you know all too well that there is an affordable housing crisis underway. And indications are that it is going to get worse before it gets better. I recently ran across some stats that paint a pretty dismal picture. One study estimates we’ll need an additional 4.6 million new apartment units by 2030. This equates to 325,000 new apartments needed annually to keep up with demand. Unfortunately, the number of new apartments projected to come online is about 70% of what is needed. Add to that an already low supply of affordable units and minimal government incentives, and we’ve got an ever-widening affordability gap.

However, as is often the case, where there are challenges, there are also opportunities. The affordable housing shortage presents not only opportunities for good investments, but also the opportunity to make an impact (that is, investments that will make you money and do good socially and environmentally).

If you have a genuine concern about the affordable housing crisis and want to be a part of the solution, read on. Here are four ideas on ways real estate investors can help alleviate the affordable housing crisis—and make money in the process.

4 Ways Investors Can Help Alleviate the Affordable Housing Crisis

1. Crowdfunding

Real estate crowdfunding is relatively new but gaining in popularity. Most readers of this article are likely to think of direct investment when it comes to real estate—buying a property ourselves to do a fix and flip or long-term rental, or investing in a specific project via private money loans.

But most of us are limited in the number of projects we can invest in at any one time. Crowdfunding expands the reach of individual investors and opens real estate investing to a much broader range of individuals. Some platforms have minimum investments as low as five dollars. With crowdfunding, the investor can often specifically invest in projects that will bring more affordable housing online. So, even though you may not have the funds to fix and flip a new affordable housing project on your own, with crowdfunding you can be one of several investors who help get the project off the ground.

Also, unlike direct investment that involves owning and managing property (and all the headaches that come with), crowdfunding is passive so you put your money to work without the stress and sweat equity that comes with owning property.

crowdfunding-benefits

Related: Why I’m Investing in Affordable Housing for the Long Haul

2. Investing in Homeownership

Another take on crowdfunding, these funds are made up of pools of distressed mortgages. These funds use investor money to purchase pools of distressed mortgages and then work with homeowners to find solutions that will keep them in their homes.

When you invest, you are helping not only individual homeowners but also the community by positively impacting affordable housing in the neighborhood. You make money by receiving returns from the profits.

3. Tax Reform and the Opportunity Zones Program

You’ve probably heard about Opportunity Zones, but just in case you aren’t up to speed on this program, here is a quick overview. Opportunity Zones are a new economic and community development program established by Congress in the Tax Cut and Jobs Act of 2017. The purpose is to encourage long-term economic development and housing investments in low-income communities nationwide.

The law provides for the creation of “Opportunity Zones,” which use tax incentives to attract long-term investment to neighborhoods that are continuing to grapple with high poverty and lackluster job and business growth. Housing experts and government officials believe investment in Opportunity Zones will help prompt development of affordable housing.


Related: How the Dire Future of the Retail Market Could Solve the Housing Affordability Crisis

Projects in Opportunity Zones will be eligible for funding through Opportunity Funds. Opportunity Funds are investment vehicles set up specifically for investing in eligible property located in an Opportunity Zone. To obtain the tax break, Opportunity Funds require that the investor use the gain from a prior investment for funding the Opportunity Fund.

Opportunity Funds create benefits for both investor and community. Investors who are socially conscious can put their money into the communities that need it most. Investors also benefit from tax advantages. Opportunity Funds allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years.

You can invest in an Opportunity Zone anywhere in the country, but if you are interested in keeping it local, you can find Opportunity Zones in your area by going to Opportunity Zones Resources and in the Federal Register at IRB Notice 2018-48. In Minnesota, where I live, 128 Census Tracts have been designated as Opportunity Zones.

4. Affordable Housing via Fix and Flips and Long-Term Rentals

There are direct opportunities for real estate agents, investors, and builders to be more socially conscious and to have a positive impact on affordable housing through regular business dealings. With a little forethought and planning, a lot can be done to help reduce expenses when building and rehabbing homes. Homes can be made more energy efficient, safer, and designed to incur less tax. All of these can benefit potential homeowners and make housing more affordable to more people.

What other investments have you come across that could help create more affordable housing?

Comment below!

About Author

M. Ian Colville

Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to CCM Finance. Ian is passionate about the many opportunities that real estate investments offer for both short-term and long-term financial gains. He is committed to helping local real estate investors turn those opportunities into profits. When not doing real estate deals Ian enjoys – well mostly he enjoys working on real estate deals. But if he does break away he is likely spending time with family or at the gym. Find out more about CCM-Finance and Ian here.

10 Comments

  1. Darwin Crawford

    I LOVE the affordable housing niche! The demand is sky-high, and if you can crack the code for buying/renting it and make money, there are qualified tenants lining up to rent them ahead of completion.

    We’ve had wonderful luck rehabbing tired multi-units and renting out utilities included apartments with solar panels on the roof, they cash-flow wonderfully, and have highly predictable rent increases. Tenants love them because it takes the guesswork out of the monthly bills, and are willing in my experience to pay a premium for that.

    Great article, and yes, being a socially conscious investor AND getting paid is very rewarding.

  2. Jacob Morgan

    How do you qualify “affordable?” With the pressures of gentrification and displacement in full swing in the modern urban focused economy, many of the projects and initiatives that are labeled as such fall short. If the goal of the project is to be affordable to 40-60% AMI and to have increasing high and increasing profits through regular (and usually steep) rent increases and added amenity related fees, that’s not really affordable for the people that need it the most.

    For the bulk of the lower income citizens out there, there needs to be something more than just the typical rental investment model. Up to now, it seems the only promising model is that of the nonprofit housing cooperative, one which sets rent values and all associated costs to be within that 30% of income limit, scale-able for any % of AMI range, but ideally for those at 20-40% which is where the dearth of housing options is most critical.

    I want to see more business models for investors like myself discussed that really get into the details about how to build a truly socially conscious property investment model that is actually affordable for those that need it, limits gentrification and displacement pressures, and provides an acceptable level of income for the investor.

    • M. Ian Colville

      Good points. Unfortunately one of the biggest challenges to making housing affordable is local zoning and density restrictions. These rules are hyper-local so it is challenging to talk about a single “model” that will work everywhere. City governments really need to step in and make a commitment to allowing the kinds of development that they haven’t in the past. Colin L (above) cites some excellent examples of progress in some locations with accessory dwelling units in California and the coming “2040” plan in Minneapolis that will allow for a lot more density inside of the city limits.

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