Originally posted by biggerpockets.com | Gus Ross
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.
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 construction taking place is not for entry-level homes and apartments. The bulk of what is being built is catered to grade B+/A properties 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.
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, Tenn., 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.