Ed Robinson

Philanthropy Equals Profits
by Ed Robinson

Are you stymied by the dwindling inventory for investment properties? Does it feel like every property you look at is priced too high for you to make your margin? Are hard money and real estate investment lenders shying away from all but the most distressed listed properties? Real estate investors can develop the skills to find a good property to flip; but developing that skill set will take some time and effort.

I started my Entrepreneurship in Real Estate as the Executive Director of a 501(c)(3) NPO in Tucson, AZ. I built 135 homes as a Land Trust to promote Affordable Homeownership and provide a cornerstone for long range goals. Throughout the next 12 years, from 2000-2012, there was never a time when there was a shortage of properties or buyers for my products.

Real Estate Entrepreneurs today have fallen into the trap that every property must be a home run. I spoke at a conference several months ago and, to a person, these so-called Investors expect $35,000 - $60,000 margin on every single family deal. Unfortunately, when asked how many properties they were renovating, the answers varied from none to 1 or 2 and most were none. This article will open your eyes to a new market with new funding options and a completely different perspective on how you view the path to profit margin. I offer you the Affordable Marketplace, a never ending trough of homes, money and people. The affordable-housing sector presents tremendous opportunity to investors, yet it remains one of the most commonly misunderstood product types. While an increasing amount of institutional and private capital has flowed to the sector over the past several years, a variety of common misconceptions persist. This is what investors really need to know about affordable housing.

Misconception 1: There’s not enough money in Affordable Houses

The US Government subsidizes ALL types of Affordability. Whether it’s multi-family rentals, single family rental or home ownership there are funds available to assist the buyer when they occupy the designated property. The funds are available to both the owner and the buyer and can be used to offset renovation costs, provide down-payment assistance, pay closing cost, offset development costs and incentivize developers. Just because it is down payment assistance doesn’t mean it won’t affect your bottom line:

Typical Homeownership budget:

Acquisition cost – $100,000
Renovation Cost - $30,000
3 Month Holding Cost - $3,250
Base project cost - $133,250
Projected Selling Price - $189,900
Profit - $56,650

Affordability is based on the area median income within a given jurisdiction. Example: The median income is higher in Los Angeles than it is in Barstow and higher in Charlotte, NC than it is Columbia, SC. Everything is based on the affordability for a given area. The above project would require a family of 4 to have a household income of $3,900/ month or an annual income of $46,800. Generally, to qualify for the subsidies that are available, the household must earn less than 80% of the Area Median Income. This example requires the AMI to be at $58,500 for a family of 4. Assuming the AMI requirement is met, the family will receive down-payment assistance and closing cost assistance to cover their acquisition of the property. Additionally, if the property happens to be in a designated HUD area, additional renovation funds are available which reduce the mortgage by as much as the $30,000 spent on renovations.

Households are standing in line for the opportunity to own a home. The market exists everywhere. In areas like NYC, Honolulu, Anchorage, San Francisco the subsidies are adjusted to account for increased cost of living. I challenge you to find an abundance of buyers anywhere that equals the affordable market just waiting for you.

Misconception 2: Affordable Housing is a Niche

Contrary to popular belief, affordable housing targets the masses and serves the primary rental population in the United States, with about 72 percent of renters falling into the affordable-housing category.

The average U.S. household income is $57,000 and, according to a 2017 U.S. Census Bureau report, 58 percent of renters earn less than $50,000 a year. Many affordable-housing investors serve households that make between $30,000 and $70,000 a year.

This means affordable-housing investors are targeting the largest swath of today’s rental market, while much of investment in the sector is geared toward luxury multifamily space.

During the past several years, there has been a rapid growth in luxury apartment development throughout the country. Investors and developers are pouring massive amounts of capital into the sector, and new luxury apartments are popping up on every corner. This has many wondering if a possible oversaturation of the apartment sector is on the horizon because these investors are targeting renters who make in excess of $100,000 per year and only account for about 15 percent of today’s U.S. renters. Naturally, a rampant increase in development and investment in a sector that only 15 percent of renters can afford would certainly be cause for concern. There is simply not enough demand to sustain this growth in supply.

Affordable housing, on the other hand, targets the largest segment of renters and gets the rap for being niche investing. So how did 15 percent become mainstream and 72 percent become niche? The common misconception is affordable housing only targets ultra-low-income residents, when in fact it provides housing to arguably one of the largest and most significant rental cohorts in the United States today: the average American.

Misconception 3: Affordable housing produces reduced returns

Many investors believe with an affordable-housing investment the opportunity for returns is much lower compared with market-rate apartment investments. This is a widespread misconception and could not be further from the truth. Affordable and workforce-housing investments increasingly provide risk-adjusted returns that are consistent and oftentimes exceed market-rate performance. The reason: Affordable housing is the only sector that has unlimited demand and very limited, and often diminishing, supply.

Compared with market-rate apartments, affordable and workforce housing are, in a sense, recessionproof and provide downside protection to investors. Exceptionally strong demand exists for affordable properties both in times of economic prosperity and economic uncertainty. In fact, demand in this sector is almost always growing. In times of economic prosperity, rents and home prices tend to rise much faster than wages, resulting in increased demand for affordable housing. In times of economic uncertainty, when economic growth, job growth or other factors may slow, demand in the sector goes up.

So, demand constantly increases, regardless of the stage of the market cycle. Yet supply cannot keep up with this growing demand and, in many cases, continues to fall behind market demand. Each year, more than 100,000 affordable units are lost due to obsolescence or substandard conditions resulting from poor management. Others are lost to conversion to market-rate apartments.

Many affordable-housing developments are developed using low-income housing tax credits, which require they remain affordable for a certain number of years. As these tax credits expire, the apartment unit risks conversion. This EPIC INFLUX of Market rate units can be seen in a variety of U.S. states. New York, for example, has 45,520 affordable units at risk of expiring and converting to market-rate in the next five years. California and Texas are right behind, with 45,140 and 32,265 units, respectively, at risk of expiration.

Because of this rising demand and diminishing supply, affordable-housing rental units experience little to no turnover and are almost always fully-occupied, consistently maintaining occupancy rates of about 98 percent.

This differs significantly from market-rate apartments, which average about a 50 percent turnover rate. These high turnover rates come at a cost, including lost revenue while the unit is vacant, and the administrative and marketing costs of securing a new resident, completing the lease process, and preparing and cleaning the unit. This ultimately cuts into investor profits, while affordable-housing properties encounter almost no costs associated with apartment turnover.

Overall, “affordable” does not necessarily mean smaller returns. Investor portfolios in the affordablehousing sector tend to have stronger returns on investment, increased and stabilized cash flows, and provide investors with downside protection.

Misconception 4: Affordable Housing is dilapidated and unsafe

Oftentimes, when people think of affordable housing they think of run-down, unsafe apartment communities likely in need of capital. Many affordable-housing projects today are developed to such high standards; they are extremely comparable to market-rate units. Most people would not be able to identify an affordable-housing project by sight. The affordable apartment communities of today feature the latest in innovative design, high-quality interior units and amenities, large-scale community rooms, and children’s “tot lots,” among other features. They are not the run-down properties that people imagine. They are well-designed apartments that provide safe and quality places for residents to live and prosper.

Ultimately, affordable housing is an industry that is commonly misrepresented by misconceptions, yet presents tremendous opportunities to investors. It is a sector that targets the largest rental cohort and delivers returns on par with market-rate housing.

The opportunity to realize substantial ROI through the Affordable Housing Market is great. You must be prepared to commit to the development for the betterment of the communities you will serve. Philanthropy is the offspring of wealth. Philanthropy is manifested from the best qualities of those who practice giving, and feel privileged to participate in making our country a better place for everyone. You each have a great obligation if you choose this path. Please feel free to contact me with your decision.

Ed Robinson
Dr. Ed Robinson is former Clinical Psychologist, who began his professional career in South Dakota. Dr. Robinson practiced for 23 years providing counseling, Hospice care and Human Resource Consulting. Upon retirement form his practice, Ed assumed the role of Executive Director of a 501(c)(3) Non-Profit Organization. Growing from a 135 home Land Trust to the largest provider of Affordable Homeownership in Arizona and Nevada, SALT became the dominant real estate entity for development in Arizona building, buying, renovating and selling of 450 homes between 2000 and 2012. Ed chose to take the model to Florida in 2013, establishing SALT in Ruskin, FL just outside of Tampa. Ed continues to provide Affordable Homeownership in Florida and North Carolina.

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