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

by | BiggerPockets.com

When you get started in real estate, it is best to choose a focus. That’s what I did. I decided I wanted to help working people in my community live in nice, affordable homes. It felt economically smart. Professionally, it filled me with pride. My chosen path is to buy affordable housing (grade C to B properties) with value-add components.

I planned my strategy to go this route based on greater economic conditions. I will continue to invest in this sector for the foreseeable future. As an advocate for buying affordable housing, I’ll list the factors that weighed into my decision.

Income Disparity and the Wealth Gap will Continue to Grow

Unemployment is low, but median income has not increased. The gap between the wealthiest and the less fortunate in society continues to widen. The middle class is hurting. The population in this segment is being squeezed out—either elevating to the upper class or moving closer to the poverty line. Logic says the majority of this segment will experience a trend in the direction of affordable housing. Demand for affordable housing is predicted to increase under these conditions.

Related: 5 Tips for Owning Low-Income Rentals in Less-Than-Ideal Neighborhoods

There is Limited Supply in the Market

Affordable housing is in tight supply with no signs of that supply increasing. Simple supply and demand dictates that tight supply and increased demand ultimately lead to increased rents. Assets generally become more valuable under those conditions. Increasing rents should be done responsibly. There is a fine balance between raising rents to keep pace with the cost of living and inflation and becoming predatory. There is no circumstance where becoming predatory with rental prices is justified.

New Construction of Affordable Housing isn’t Cost Effective

New construction is going up in major cities across the country. The caveat is that the constuction taking place is not for entry-level homes and apartments. The bulk of what is being built is catered to grade B+/A properities with luxury finishes and amenities. Generally, these are backed by institutional investors with vast amounts of capital to deploy. Their calculations lead them to the luxury segment in major metropolitan areas. It simply is not economically feasible or attractive enough for builders to enter the affordable-housing arena. Despite all of this, there still remains a predicted increase in demand for workforces.

Recession-Resistant Demand for Rents is Appealing

Markets are cyclical. Real estate is local, but it’s also cyclical. Economic indicators suggest we are closer to the top of a cycle than the bottom of one. If there is ultimately a downturn (and at some point there inevitably will be), affordable housing demand should remain strong. Predicting the future is a fool’s errand, but in a downturn, it is logical to assume that the asset class most likely to experience strain is the one most exposed to price fluctuation. These areas tend to be coastal metropolitan cities with luxury properties.

Related: Have Some Pride in Your Low-Income Rentals!

I’ll Stick with Affordable Housing Until I’m Proven Wrong

My first project with workforce housing was a former drug rehabilitation facility in a great location. Although the living conditions were horrendous, the rental demand was strong. We converted the building into apartments with extensive renovations and updates. My current project is a 74-unit complex in Memphis, Tennessee, and it has been a process of renovating units with new flooring and adding state-of-the-art security technology. With both of these properties, I have taken extreme care to update the living conditions. Tenant retention is always strong because of the care taken in the living environments. I take personal pride in caring for the people living in my properties and offering an affordable product. For the immediate future, I will continue to be a buyer in this space throughout the country.

We’re republishing this article to help out our newer readers.

Do you have any experience with affordable housing?

Share your experiences in the comments below!

About Author

Gus Ross

Gus Ross is a managing member of Ownup Capital. An accredited investor with goals of expansion, Gus is always evolving strategies for acquisition and analysis of properties throughout the country. An avid reader and seeking to learn and grow everyday, he has ultimate goals of philanthropy, business, and personal growth. A visitor at local REIA meetings, he is always seeking to network and meet investors and align goals and interests.

Ownup Capital

52 Comments

  1. Erik Whiting

    Very good piece, Gus! I too invest in affordable housing, mostly Class C. Sounds like we share a common philosophy in many areas. It sounds like you have quite a bit of experience in what you do, and I listen to the voice of experience.

    One thing I wonder about your choice of phrasing ‘predatory’ rent increases…. vs. what else? Maybe your market is different than mine, but in my town (population approximately 200,000) there is no one land lord with enough ‘clout’ (units) to be predatory about anything. Even the big boys top out around 5,000 units, so if they raise prices ridiculously high, their competition (i.e. me and other smaller land lords) can simply undercut them and bring them back down to Earth relatively quickly.

    Rents have gone up a lot in recent years, and in most cases higher than COLA. This has helped to make up for 2008-2013 where we saw stagnant rents. All in all, the market will pay what the market will pay, and I see no reason why I or anyone else should feel bad about raising our prices as high as we can if someone is willing to pay it. If they don’t want to pay me that amount, then there’s my competition…who is priced similarly. Simply put, the market in my town self-regulates. Maybe it’s different where you’re at.

    I too am proud of my units and strive for clean, safe, and functional. When one considers that puts my average tenant living better than 80% of the rest of the world, I can’t help but still feel good about what I’m doing even if I’m making the most money for it I can possible charge.

    I think so long as we aren’t forcing anyone to rent from us (and how would we even do that?), it’s all free and open to negotiation. The fact that we own our humble Class C abodes vs. cater only to exclusive clientele is a pretty upstanding service to start with, so I think we get extra “good boy” brownie points right off the bat. As you are aware, I’m sure, Class C tenants can sometimes be a challenge. Part of the reward is the very nice comparative cash flow.

    Not an argument with anything you said, merely a perspective.

    • Well, you SHOULD feel bad!! The price for renting is far beyond what most people can afford right now, and I have seen it happen in Florida in the Boston area in the last few years. Just because people are paying, does not mean that they can afford it. They have to live somewhere if they don’t want to be homeless. You would be fortunate if you don’t find yourself in a position that your tenets are in when you jack up the prices as high as the competition just because you can.

  2. Greg Parker

    I agree with both of you. I concentrate on B/C properties. That is where I have always lived, that’s where my friends live. I guess I understand the mentality, needs, and wants of those tenants/buyers. I won’t touch D, and there are too many volume developers in A/B+.

  3. My rents are the same as they were in 2000 when I purchased the units. When we bought them we actually dropped the rent 10% then we went in and upgraded the units with new first class cabinets and some with granite counter tops, recess all the lighting, granite bathroom floors and all new top of the line appliances. I would also give December for free! My units have the best windows and best insulation. I have lifetime tenants that look after my property, people would come to look at one of my units (6 tenant turnover in 17 years) and everyone would say the same thing “We’ll take it” and I would say it’s not a question of you taking it, it’s a question of will I take you! We are in class B but like to give class A service to our tenants.

  4. Andrew Cameron

    We’ve done over 50 affordable units for Seniors in our communities, and I am a huge proponent of affordable housing. The social benefit for affordable housing is huge, and there is money to be made in this market. Mostly because there will always be people needing affordable housing. However, there can be more challenges from dealing with tenants who require affordable housing.

    I’m Canadian and can get grant money from our Provincial and Federal governments for building affordable housing. Is there similar programs available in your markets?

    • Gus Ross

      There are similar programs that give tax credits but tend to be rather complex and need experienced operators to capitalize on them. It certainly represents a niche. Thanks for the comment Andrew and I wish you lots of luck on your next 50 units!

  5. Ronnie Howard

    Great article. Definitely make some great points. My question is how do you define “affordable housing”? Are you referring to Section 8 housing? Is the term “affordable housing” a defined subset of homes or is it a general descriptor? Hope that question makes sense, not sure the best way to phrase it.
    Thanks!

  6. Christie Gahan

    What is a predatory rent raise ? Look to the Portland, Oregon market. My rent is up over 40% in 4 years. Income has not increased in the area. The owners costs have not gone up. ( With the exception of hiring a lawn service.) There have been projects where entire buildings were told that there rent was to double. ( Usually with upgrades done.) It has gotten so crazy that the Portland City Council stepped in. They passed regulations that require landlords to give tenants additional time before they raise rents. ( 90 days ) and if rents are raised more then 10% the landlords are now required to provide rental assistance to the tenants who wish to move. $4,000 for a 3 bedroom. It is like a bucket of ice went over a hot market. The lawyers don’t know if these are legit. No test cases. How much do you try to get up front if you are looking at potential of $2k to $4k if your tenants leave under specified circumstances ? It’s a mess. All because people got greedy.

    • Cory Adams

      Portland is my home town. Do you not see a correlation between fed monetary policy, high property prices and thus high rents? If you bought a property, the market rents would be used to value the property and have an impact on what a new landlord would charge for rents.

      Your enmity should be placed toward the FED.

    • Deanna Opgenort

      At the risk of sounding heartless, the median home price in the past 4 years in Portland has risen from $250k to $425k. Your rent went up only 40%, while the value of the property you are renting went up almost 60%.
      You are renting an asset, not sharing in your landlord’s good or bad fortunes. This means the fair market value is the same whether your landlord got fired, got divorced, got cancer, lost $ in Vegas, or won the lottery. It’s also true whether s/he purchased the property 20 years ago or last week, whether it’s free & clear or mortgaged to the hilt.
      When you are calculating out the minimum fair market value it’s always useful to calculate how much would it cost just to control the equity value of the property. Here’s the math for a median home in Portland;
      a 4% non=commercial INTEREST ONLY loan on the median $425k home in Portland would be $1,416 per month.
      property tax $411.
      Insurance; $425
      So, the theoretical minimum asset cost would be $2,252 per month, without the additional cost of tenants (ie — no repairs, no vandalism, no wear and tear, no depreciation, no utilities, no management costs).

  7. Kate Damato

    I love this Gus. Thank you for posting and sharing your success stories. I am new to this world of investing in multifamily buildings. My goal is to also provide safe, clean, affordable housing so my tenants don’t have the stress of their home on their shoulders so they can move forward and live productive lives. I will continue to follow your story, and use this as inspiration as I continue to build my business. Thank you.

  8. Clint Bolton

    Definitely agree Gus. That’s been my strategy for the last 8 years as well. Where’s your 74 unit in Memphis? I do some investing in Memphis (I live in the Great Memphis market just across the state line in Mississippi). One of my next purchases will hopefully be a multifamily in this market. Thanks for shaing!

  9. Susan Maneck

    I like your attitude, Gus. I invest in SFR houses in working class C neighborhoods. Some of my tenants have professions but in a state where police officers are lucky to make $14 an hour and teachers start at 30K a year that may not get you into the middle class. ,

  10. Hope Fick

    Thanks for posting this. I’m a real estate agent and work West of St. Louis, MO. My little hometown has a huge need for small, energy efficient single family homes. Lots here are affordable – 15-20K. I found a 1,250 SF house plan that can be developed for $75 a SF. Mobile homes arerenting for $600-750 a month, plus about $400 to heating and cooling. I think this is doable, especially if I can get buyers through NACA. I’m also in a USDA 0 down area, but then closing costs come into play. Now to find someone who can finance my first one…

  11. Thanks for the positive article you shared. This is where most of the rental properties are at in the USA. When you go for higher end properties you greatly diminish the pool of potential tenants. I invest in Poplar Bluff Mo which is a town of about 20000. All I invest in is SF currently. I help my parents with their three SF and it has been my experience that if you rehab units and put in new cabinets, bathroom, and laminate floors the potential tenants will think they have walked into the Taj Mahal!!! There is a huge demand for quality in this area and there are not enough investors willing to put money into affordable housing so they produce a quality product. And lastly it needs to be left in the hands of private money instead of government tax credit programs because private money will be much more efficient and make better use of their dollars.

  12. Josh Koett

    i like the picture of the green granny flat in the top picture… is that something that would be a value-add to some of these properties that you are doing… is that about a 15 x 20 house? How much rent would you charge for something like that in oregon or california?

  13. Kurt Buchert

    This article is a little self-congratulatory. “Predatory” rent increases? What? Why can’t I raise rents however I want with my own property & listen to market cues if it will keep/attract good tenants & earn me an increased profit? If someone never raises rents at their property for charitable purposes, I absolutely salute you, but that doesn’t make sense for most businesses trying to improve their investment.

  14. april allen

    This article was a great read for me. Exactly what I’m trying to accomplish here in Humboldt CA. I also appreciated the Portland opinions expressed in the comments. I had been trying to get into that market but lost out in bidding wars. Think I will just keep it close to home, do the best for my tenants and continue to acquire more MF units for the C market. Love this site! And the comments are always another layer of information.

  15. Charles Morgan

    I have several affordable SFR’s in Texas and New Mexico. I agree that the demand for affordable housing is not likely to go down.
    I also maintain my homes as much as possible in safe condition and don’t mind doing upgrades when I can. It only adds to the value of the home.
    I have only raised rents rarely, on one home I have had to go up three times (in 8 years) because of insurance and tax increases.
    The flip side is that most of my renters have stayed for two or more years, one stayed for 6 years and re-floored the entire house for me.
    My cheapest home is $350/m rent, most expensive $900/m.

  16. Amy Morris

    I am exploring what areas I would like to invest in. This sounds right up my ally. There is a lot of improvement going on in the lower income areas in my town and I like to see the people that live in these areas to reap the benefits. Great article

  17. Beth Wicker

    Most of you are investing in what for me are large, metropolitan markets. No one seems to address small – really small as in under 10,000 – markets. My house was hit by lightning in August, and I’m in my second rental while repairs are SLOWLY being done. Have discovered there is a HUGE dearth of affordable rentals here, and equally huge demand. Am looking at getting into this market, but having trouble finding anyone addressing doing this in this small a market. Lots of things are different in small markets, one being there is no such thing as a “property management company” ha ha ha dream on! Anyone have experience in small markets?

    • Christi Hawkins

      HI Beth,
      You are so right and everything is different is small markets. I grew up in a small market and spent the last 20 years working in real estate as both a Realtor & Mortgage Loan Originator in that same small market. There is a huge demand for affordable housing in small markets but all we have in mine are slumlords taking advantage of these people. The problem we have here is no one cares about this population. We have a lot of groups and people who go to their Rotary luncheon meetings and pretend they are doing something about it, some even gets awards for just talking about it. The real problem (in my small market) is no one wants to get their hands dirty and actually spend time with poor people because of course, they are beneath them. If you are able to get involved in the small market to which you are referring, you should absolutely do it. You will never have a vacant property. Just be prepared to do on your own or create your own team. I think you would find the benefits of it immeasurable. I hope you decide to move forward and I hope you are successful beyond your wildest dreams

  18. Christi Hawkins

    Gus, there is a special place in Heaven for people like you. This is only my opinion and I have no numbers to back this up but I think this is most under served, overlooked and probably the biggest segment being taken advantage of by landlords. I fully believe in the free market and want everyone to make as much money as they can but the things I’ve seen happen to this group especially, make me sick. What’s worse is they usually accept the treatment because they don’t believe they deserve any better and their families have lived that way for generations. Thank you for giving these people a taste of what dignity and pride feels like.

  19. Alex V.

    Thanks for the great post Gus! I work on the institutional side of affordable housing and it’s nice to see it being posted about on BP. Have you ever explored using LIHTC or private activity bonds to finance your rehabs?

  20. Affordable housing became a great investment in about 1986 when the tax credit programs were set up by the federal government; and still is, i.e. A license to steal by ( the big) banks and others over a 9 year period of credits plus ROI income period; with no IRS credit recapture after 15 years of operation.

    After that when the building components are wearing out and failing, some projects are locked into the governments errant CPI or other calcs for rent increases. Facilitating the creation of projects that are problemmed and/or potential poorly maintained.

    Investing to get fed. tax credit may be a great way to go – with the right team/folks. Comments ?

    • sri ram

      I just have been researching the sale listings from CBRE. took me ever to get answers.
      Most of these developers have developed two properties one affordable rent restricted with 60% AMi and another market rents property. these properties share the gate ,pool and gym etc.
      The developer got tax credits and after listing for a year if no offers came they can convert the affordable property into market rent property. Apparently it is IRS loop hole. Anybody knows about these or has an experience with them?

  21. Frank Rodgers

    Hello Gus!,
    I loved your article on affordable housing for the “C” class. I just purchased my 1st 4 unit building in Cincinnati, Ohio, & it will be a seniors only building. I believe I will make this my niche market & also since I’m a veteran I wanted to purchase my next multi unit property & market it as affordable housing for veterans ( I used my VA loan for my 1st property with no money down). What do you think of this niche?, & do you have any advice for me going forward? I would appreciate any & every bit of advice you would give me.

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