What Does the Affordable Housing Crisis Mean For Real Estate Investors?

Posted by Residential Capital Partners on Apr 17, 2023 4:35:29 PM

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Unless you’re investing from under a rock, you’ve probably read the headlines: affordable housing in the US is hard to find right now—both for the typical homebuyer and real estate investors. It may be tempting to sit this season out until interest rates start to come down and inventory becomes more abundant, but this is exactly the right time to maximize your profits for both fix-and-flips and single-family rentals.

To make the most of this competitive market, first learn the factors at play causing the crisis and then take stock of the opportunities at your feet: fix-and-flips, rentals, and re-fis.

What’s driving the affordable housing crisis?

The latest research on the 2023 affordable housing crisis by the National Homebuilders Association shows that 64.5M out of 123.5M total American households are able to afford a $250K home. Another 39M can afford a $150K property. The kicker is that the median price of a new single-family home is just over $425K, a price out of reach for 73% of households in the US. Add in the high cost of land, lumber, materials and manufacturing issues still rippling forward from 2020, and you begin to understand why the gap between what US households can afford and what builders can deliver is, in fact, a crisis.

Likewise, high interest rates are keeping families from moving out of their starter homes. Just five years ago, a couple could buy a starter home for $250-$300K, live in it for a year or two while they raised some money for a down payment on a bigger house, maybe worth $450K. But the fed keeps hiking up interest rates, which means mortgage lenders are hiking theirs too, which means the average US homeowner can’t afford the bigger, more expensive house. They’re staying put.

So the supply of available homes available is tightening while the demand has remained the same or increased. Inventory is tight.

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Smart investors head into the storm

For real estate investors, the COVID-19 pandemic was like jumping into an ice bath. The government shut down. Wall Street-backed lenders closed up shop (we didn’t!), as did many investors. We counseled our investors to stay the course and, like the brave buffalo, charge on through the storm. And those that listened and invested throughout the pandemic enjoyed healthy margins.

Today’s market is less like an ice bath and more like slowly rising waters. Investors aren’t panicking, but it still seems “safe” to sit on the sidelines while interest rates rise and inventory is hard to come by. But much the same as sitting out the returns of 2020, putting your investment business on pause during this period of time is a big mistake, because deals are still getting done. Good buys on affordable houses do exist—you just have to find them and avoid overspending on repairs and updates.

Be tenacious and jump in with both feet on a good deal because once you rehab, you’ll likely have multiple buyers bidding up the sales price on your exit, resulting in a high profit for you. Affordable housing is always a good investment. Right now, it’s a little harder to find, but the payoff is worth the struggle. 


Related: Brush up on how to sell in a seller’s market.                                                                                   


Single family rentals are still hot

Today, the average household rent an American can afford is about $2,500 to $3,000 a month. The golden rule at Residential Capital Partners is for a rental property to be able to generate 1% of the value of the house per month in rent to cover all costs associated with the property (maintenance, repairs, taxes, utilities, financing, etc.).

Now, consider that an affordable house in America is currently defined at $250-$300K. And 1% of that number is $2,500 to $3,000. There’s the sweet spot: most folks can afford to either buy or rent a starter home from you if you are within that range to buy or rent. If they buy, you earn a handsome profit.  And if they rent, you’ve locked in a positive cash flow stream that yields you the opportunity to build wealth over time.

Rentals are also a great hedge against inflation. You purchase a rental property based on what it’s worth today, not 10, 15, 20 years down the road. So, you’ve locked in your basis and locked in your loan payments with a long-term rental loan while your property appreciates, and your rental income increases incrementally with annual rental adjustments of 2% to 4% or more—especially when there is high competition from multiple renters in a hot area.

Related: Learn how to decide whether to fix-and-flip or buy-and-hold.                                                             


Today’s purchase, tomorrow’s refi

What goes up must come down. There’s a silver lining to this current cloud of high interest rates; if you buy properties at a higher interest rate today with good cashflow, after you refinance in a year or two, that cashflow will be even better. The sun will come out tomorrow and when it does, you could be looking at a windfall of refinance proceeds.

Example: You financed a property for $200K and invested $25K from the down payment and payments towards your long-term loan. Interest rates lower from 8% to 6%. Now you can finance all of your equity out (and maybe another $25K) at a lower rate of interest. Now, your cashflow is even better. Better yield, more mailbox money, and your housing stock increased from 4% to 8%.

Your next property is out there. Go find it.

The affordable housing crisis in America is holding open the door of opportunity for investors. It’s still a great time to flip or rent an affordable home in America.

So keep your nose to the ground and always remember to run into the storm. There’s a pot of gold at the end of this rainbow.

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Topics: Property Investment Strategies, real estate investing