Tired of Urban Core Multifamilies? Consider Workforce Housing Instead

Feb 27, 2018

In cities around the country, America’s middle class is struggling to afford housing.

This is due to a number of factors. Both urban and suburban populations continue to increase, creating more competition for housing and spurring a rise in rents. On the other hand, wages have remained the same for the last twenty years, and new construction aimed mostly at the luxury market is far beyond the budgets of the average worker.

Thus, essential employees like police officers, nurses, teachers and retail workers end up priced out of most rental or newly constructed housing, forcing them to move further away in order to find affordable housing.

As a result, some investors are quietly investing in what’s termed “workforce housing;” affordable housing for the middle class. While often this term refers to government or self-imposed rent control, some investors are targeting the middle-class sector by renovating and renting out older properties.

What Qualifies As Workforce Housing?

In general, workforce housing is affordable housing for tenants making less than 100% of the median income for an area. This housing is intended to be located near employment centers in order to facilitate stable communities and prevent employees from having to make long commutes from their homes to their place of work.

In order to promote affordable housing in urban areas, some cities – like New York City – already have laws regarding rental prices, and offer rent-controlled apartments for limited properties. Other states have created affordable housing programs to provide rental homes for middle-class families.

Where The Demand Is

Demand for affordable housing

Demand for affordable housing is high everywhere, but demand for Class B and B+ multifamily properties is even higher. Renters from Class A properties are looking to move into less expensive apartments, while other renters who may not be able to afford luxury apartments but still want quality apartments are also driving demand.

In response, some developers are focusing on mixed developments, setting aside a percentage of apartments for affordable units. While these may not be luxury apartments, they are clean, in good working condition. Some developers have gone a further and begun introducing basic amenities such as a gym, children’s playroom, or rooftop terrace.

In general, investors are avoiding densely populated urban areas and focusing on suburban areas or smaller cities with steady household and job growth. In fact, because of the increased supply of Class A properties in the coastal cities, Class B is actually outperforming Class A.

Instead, investors are turning to cities like Phoenix, Dallas, and Atlanta, for example, is popular, with investors adding hardwood floors, granite counters, and washer-dryer units as a value-adding strategy.

Other investors are working together with developers to create manufactured housing communities. Manufactured housing is significantly cheaper than new single-family homes, with manufactured housing costs at a little over $76,000 and newly constructed houses starting at $312,000.

Manufactured housing offers consistent cash flow, with an average stay of rates of 13 years and a turnover rate at a mere 2% per year.

Still, there is a stigma that manufactured housing needs to overcome; there is a perception that properties are either of lower quality or look like tin boxes. This, along with the often time-consuming zoning and entitlement process, does require some planning in order to overcome.

How To Get Financing For Workforce Housing

How To Get Financing For Workforce Housing

The Low Income Housing Tax Credit Program was created by the federal government in order to give incentive to investors and developers to build affordable housing.

The LIHTC federal program gives investors a dollar-for-dollar reduction in their annual federal tax liability, over a ten year period in exchange for constructing or renovating properties and operating them for a 30 year period.

Only a portion of the units are required to be rented at below-market rates, and the subsidies, which are either 30% or 70% is meant to cover the low-income unit costs of the property.

The 70% subsidy offers a 9% LIHTC and is applicable to new construction as long as no other federal subsidies are received. The 30% subsidy offers investors a 4% LIHTC that is often combined with other federal subsidies or tax-exempt bonds.

In order to attract private financing, developers often sell credits to investors; this is considered a capital contribution to the project and reduces the developer’s debt-service costs. This program has resulted in the successful creation of nearly 2.8 million housing units for workforce housing, with approximately $8 billion in tax credits per year utilized.

Workforce housing is not only a recession-proof asset that offers good returns but investing in housing for middle-class families desiring stability helps build strong communities as well.

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