I’ve always been a bit of a local philanthropist. There are a handful of local community groups that I support, either by attending benefit events or simply by giving regular (tax-deductible!) donations. Now, keep in mind, I am no bajillionaire—just a local private real estate investor. But lately I’ve been looking at how my business skills, rather than just my donations, can improve my community even more. Of course, I’d expect my investment to provide some returns along the way. I believe impact investing in affordable housing provides benefits for both local neighborhoods and me.
Challenges for Impact Investing in Affordable Housing
People often think about impact investing as a way to generously create positive social or economic change for the most vulnerable among us—in lieu of profit—but in the last few years the private sector has increasingly gotten involved. Looking at neighborhoods plagued with crime, unemployment, and poverty, many segments of the private business sector see an opportunity to help turn things around while also realizing positive financial returns. News outlets are now full of stories about how impact investments are bettering education, advancing clean technology, and delivering financial services to low-income families across the nation. In fact, sustainable and impact investing across numerous sectors has grown 33% since 2014.
And, real estate investors are a swiftly emerging part of that growth in impact investing. But cost is always a factor in creating affordable multi-or single-family units. That’s why most of the players in this field are large-scale developers. But while they often see profits, these large-scale developers are challenged.
Simply put, social impact projects are hard to finance. Due to the very nature of the enterprise, the project may not see positive cash flow when complete, so loans can be hard to come by. As a result, developers often must rely on multiple funding sources, including federal, state, and local programs for grants, loans, subsidies, or loan guarantees—as well as private money, including Real Estate Investment Trusts (REITs). Often, the different funding sources have their own distinct, and sometimes incompatible, project criteria. Few developers have the knowledge base or resources to juggle them all.
Another complicating factor is that large-scale developers tend to come from a removed perspective compared to the people they intend to serve. The most successful investments in affordable housing result from a “boots-on-the-ground” approach, working hand in hand with local residents to identify their actual needs and creatively plan how to meet them. This creates local buy-in and significantly contributes to a project’s long-term impact.
But that’s exactly where local, private real estate investors can show their strengths—and create better returns for both the neighborhood and themselves.
Investing in Affordable Housing Benefits Local Investors
To prove my point, let’s take a look at the real estate market in Queens, New York, which is exemplary of many growing urban centers nationwide. Queens is experiencing swift population growth and, subsequently, rising rents. Afraid of being displaced, many neighborhood groups have been loudly speaking up about the need for more affordable housing. The Mayor responded with a comprehensive rezoning plan that includes a Mandatory Affordable Housing stipulation, and the millions of dollars to back it up.
Their plan, however, relies on private real estate investors, like us. While large-scale developers remain focused on building new luxury high-rises, we are in a perfect position to retrofit or rehab existing homes and improve entire neighborhoods. That puts us in good stead with the neighborhood groups and our bank accounts.
It pays to be connected to your neighbors and the pulse of the local market. Let’s take a look at the numbers briefly. Let’s say the median home sale price in your area is $487,000, with an average market price for rent at around $3,000 per month. But luxury units go for an average of $1.2 million and can be rented out for just under $5,000. That amounts to more than double the initial investment with only a modest increase in monthly revenue potential—and a much higher exposure to market volatility.
In addition to investment stability, you are also making a difference for local neighborhoods. Buying a distressed property helps vulnerable people and families out of their difficult financial situation and rehabbing it creates local jobs. When an “ugly house” is renovated, property values for the entire neighborhood regain their market footing and the community is revitalized.
Revitalizing Neighborhoods, One Investment at a Time
It doesn’t take a room full of politicians or a conglomerate of public and private monied groups to make a difference in financially-stressed neighborhoods. Just one private real estate investor can positively impact their community for the better—while also building a successful business. The strategy, however, relies on finding distressed homes that can deliver the best returns for everyone involved. That’s why at HomeVestors®, we say we “Improve Neighborhoods One House at a Time!” HomeVestors’® widely recognized national brand ,“We Buy Ugly Houses®” marketing campaign and proprietary property valuation tool, ValueChek™, streamline this process for me. Perhaps it’s time for you to make a difference in both your real estate investing business and your community too. Get in touch with HomeVestors® today!
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