Real Estate Investors and the Rental Affordability Gap

Contributing Writer, B2R Finance | Real Estate

By Kerry Curry, Contributing Writer

The number of renters who spend more than 30 percent or even 50 percent of their income on rent is on the rise in America.

The number of cost-burdened renters reached 21.3 million in 2014, according to the Joint Center for Housing Studies at Harvard University. Of that, 11.4 million of these households paid more than half their incomes for housing, a record high.

The rental property affordability gap is one of the most highly discussed issues at a variety of think tanks, housing organizations and social policy research groups.

While the implications for renters are clear, this affordability gap in rental housing could also significantly affect residential property investors as well.

For example, rising rents and squeezed salaries may lead to is tenants being severely challenged to pay the monthly rent and become delinquent. These delinquencies could lead to evictions – a costly and time-consuming process in many locales – and potential difficulty finding credit-worthy tenants who can afford today’s rising rental rates

On the other hand, real estate investors may opt to explore adding affordable housing to their property mix, helping bridge the rental affordability gap in the near term.

How the rental affordability gap grew

Since 2000, rents have risen as the number of renters seeking low-priced housing has increased. Stagnating incomes, the foreclosure crisis, and rising demand for rentals have, in part, driven the growing imbalance.

Between 2000 and 2013, the number of extremely low-income renter households increased 38 percent to 11.3 million while the supply of available rental properties for these households increased by only 7 percent, to 3.2 million, according to the Urban Institute (UI).

Nationwide, only 28 adequate and affordable units are available for every 100 renter households with incomes at or below 30 percent of the area median income, according to the Urban Institute. UI notes that not a single county in the entire U.S. has enough affordable housing to meet the demand from its extremely low-income renters.

Among the 50 metropolitan areas with the largest number of renter households, the shortage of units affordable and available to extremely low-income households ranged from 21,073 in Fresno, California, to 609,731 in the New York metropolitan area, according to the National Low Income Housing Coalition.

Challenges faced by investors and developers

Real estate developers know that the cost of land acquisition and construction makes it nearly impossible to build and operate affordable housing without considerable federal or state subsidies, which can be complicated and time-consuming to apply for and receive.

Meanwhile, the stock of nonsubsidized affordable housing has been on the decline as aging single-family residential properties and apartments get demolished and replaced with more costly property types.

It can be a Catch-22 for real estate investors who want to reach their area’s low-income population with safe and affordable housing while also receiving an adequate cash flow to make their investments financially viable. Exploring opportunities to add these units to an existing portfolio could be an option for some.

What is being done about the affordability gap

This year, the National Housing Trust Fund will distribute funds to all 50 states to expand the supply of affordable housing. This is the first new source of federal funding in more than 40 years, according to the National Low Income Housing Coalition.

To be sure, some of the issues concerning the rental property affordability gap require action by local, state and federal agencies — a commitment to provide financial resources and a political will to increase the supply amid what can be a contentious issue.

The rental affordability problem is not something that residential real estate investors can solve on their own, although there may be individual opportunities to take older Class B and Class C multifamily properties, or single-family properties and renovate them into affordable rentals. There is, however, the risk of “over-renovating” which could make the properties unaffordable to low-income renters once renovations are complete.

Conclusions

“Addressing the challenge of affordability in a time of rising overall demand will require greater efforts from both the public and private sectors to expand the range of rental housing options,” JCHS said in a 2015 study, “America’s Rental Housing.”

Because the affordability gap impacts rental markets in every county of the United States, investors need to be aware of this issue, even if they can’t individually solve it.

B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.

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