Q: I want to get involved in affordable housing as an investor, but I don’t have the time or experience needed to buy properties requiring a lot of work. What do you suggest?
A: You are wise to be looking at affordable housing as an investment opportunity. Here in Chicago, the real estate market in south side neighborhoods is rising even faster than higher priced middle- and upper-income areas.
According to the Chicago Tribune’s latest survey (see ‘Price Pulse,’ May 25, 2003), median prices are increasing at an annual rate of 13-31%! Home owners are experiencing unprecedented increases in the value of their properties. Investors jumping in now will enjoy unusually high equity gains and positive (tax sheltered!) cash flow.
Interestingly, this increase in property values is occurring just as the inventory of rental single family housing is shrinking at an alarming rate. One consequence is owners of single family rental housing experience high demand for their property, particularly among those prospective tenants possessing Section 8 vouchers. The Section 8 voucher program retains all of the prerogatives traditionally enjoyed by private-sector landlords, and the rents are guaranteed by the agency. It is a winning situation for savvy investors.
If you are not in position to actively rehab properties you buy, you do have viable alternatives. The most obvious is to buy superior properties offered on the open market, although even the best will require redecorating at the very least. Properties sold by the federal Department of Housing and Urban Development (HUD) through HUD’s exclusive agent, Golden Feather Realty, sometimes fall into this category. HUD resales are generally offered at about ten percent (10%) under market value and, at that price, often require little work. While HUD as a matter of policy gives preference to owner occupants, there are investor opportunities to be found.
A second strategy is to cultivate a working relationship with an experienced rehabber. In my rehab business we work closely with investors. The investor knows he will get sound value and reliable craftsmanship and, on our side, our company can work quickly with the assurance our product is effectively ‘pre sold.’
Since no brokers are involved in the transaction, and carrying costs are minimized, we are able to pass several thousand dollars in savings on to the investor client. With established clients, we often ‘structure’ the transaction to include assistance with closing costs and perhaps a second mortgage to reduce the cash required to close the deal.