Unless you have been hiding under a rock the past few years, you’ve heard the United States has an affordable housing crisis. Lack of affordable housing is one of the top, if not the top, issues for the U.S. housing market. Prior to the housing market boom of the last two years, there was an estimated shortage of 7 million affordable homes. During the last two years, tracking the home price and rental growth as a metric reveals the gap in affordable housing supply has only widened.
The difference in the affordable housing crisis versus others is that solutions are closer than we think, thanks to the multitude of options and programs available to incentivize and attract investors into this arena.
Busting a Myth
An common myth is that investors have to jeopardize their return or sacrifice earnings to participate in the affordable housing arena.
That is FALSE.
Investors simply have to participate in the right ways with companies or assets that have a proven track record. One proven niche is manufactured homes on acreage. The beauty of this is it provides investors with an investment model tied to the appreciating real estate market that is also at the center of the affordable housing sector.
Why Invest in Affordable Housing?
Nestled perfectly between single-family homes and multifamily residential living, manufactured homes provide a product to consumers at an affordable cost without giving up land, space, or square footage. Given the sector’s economic resilience compared with other housing sub-asset classes, the affordable housing sector remains and will continue to remain an attractive strategy within real estate.
Here are a few of the reasons why all real estate investors should have some exposure to affordable housing within their investment portfolio:
- Even during recessionary periods, affordable housing is an essential need and demand stays steady.
- In fact, affordable housing demand rises during recessionary periods because incomes drop. Renters can’t afford higher-class, market-rate apartment units, spurring affordable housing demand. During the last three economic downturns, for example, affordable housing rent growth and occupancy growth outperformed traditional apartments.
- Affordable housing has proven to provide resilient cash flow during recessionary environments. Why? Because rent for affordable housing units typically remain steady, unlike rents for market-rate apartments.
- Given that a large portion of the housing market targeting a lower area median income profile is backed by the government (e.g., Section 8), risks are largely mitigated as the government makes direct payments to the property owner. This support can provide stability in rent collections, a key advantage differentiating this segment of the rental market from conventional market-rate apartments.
- There are numerous tax benefits associated with investing in affordable housing, included but not limited to the ability to deduct property-related expenses, deferring or eliminating capital gains taxes, and numerous other credits a knowledgeable real estate CPA can provide guidance on.
- It provides an opportunity to demonstrate direct social and environmental impact with favorable financial returns.
Affordable housing is the future in real estate investments. No one wants to be late to the party, so seeking out those investments sooner rather than later will provide maximum returns for investors. This type of investment can offer strong cash flows in a resilient sector and in challenging economic environments. Outsized demand for affordable housing, coupled with limited supply, positions the sector to have strong long-term occupancy relative to other rental housing subtypes. There is consistent demand for affordable housing throughout the economic cycle, but that’s not necessarily true for market-rate apartments, where demand is driven in part by economic growth and employment trends.
Justin Hamaker is the co-owner and CEO of Stromberg Investment Group and Stromberg Property Management. He has been investing in real estate for more than 13 years, starting in single-family and small duplexes. Hamaker worked in the automotive industry for one of the largest automotive companies in the world, overseeing their variable and fixed operations, before turning to real estate investment.