Today, the affordable housing industry is a challenging domain in real estate. One prominent factor that contributes to this problem is the housing market. As the conventional renters focus on their credit score, financial situation, and other crucial factors, several affordable housing renters can’t keep up with this. In the low-earning housing community, several tenants have earlier evictions or poor credit.
The cap rate and the current price modifications
Each market, including the real estate market, has cycles. Currently, the Class C and D properties are getting sold at the 5 to 6 cap rates. One might think if the United States is moving towards a completely new housing zone. Today, the median home costs have increased by 20% annually, which insinuates the bubble base. The availability of low-interest rates and funds on the loans is the key reason for the housing cost increase.
Maxwell Drever says that the industry cap rate is changing, and it highlights the business risk. Low-income housing comprises an increased risk in property upkeep, cash flow, taxes, material maintenance, and security. All this doesn’t make a 6% cap rate acceptable. Usually, the real estate cap rates are more than 7%. The other factor that contributes to the bubble is the emergence of new players. For instance, the insurance funds and the big pensions that search for new investments are investing money and funding on the Class C and D properties which has an increased return compared to other conventional investments. It poses a risk to the entire system.
The situation before the pandemic
Before the pandemic outbreak, the affordable workforce housing investors managed every property by themselves. Today, the management companies are the winners. They have maximized their portfolio from the investors that have easy access to funds. Also, they can’t assess the risk for affordable housing correctly. For instance, before the COVID-19 outbreak in Memphis, over 20 multifamily properties were listed for sale. Today, there is hardly any single property. This situation is generating new challenges and risks to an already challenging and risky real estate market.
Hence, to arrive at the correct balance of community development and business objectives, the developers and the investors should consider all the relevant factors that comprise the base expenses of the concerned properties. And this balance gets attained by hearing what the community has to say at first. After that, one can develop a renting process surrounding it. Here the target rent needs to highlight the maximum return on investment, and it must focus on the long-term renters. It is necessary to conduct the application process in a sensitive and structured manner. Hence, it is crucial to understand that the market can’t get categorized as your regular renting market. Last but not least, the most critical aspect to keep in mind is this – the affordable workforce housing, when attempted correctly, has the potential to change people’s lives and enable people to take pride in their homes.
These are some of the challenges in investing in affordable workforce housing, according to Maxwell Drever. The situation needs more intervention so that it progresses correctly.