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What Is Affordable Housing?
As many people know,
GetPreconstruction deals.com has been a major advocate of
investing in the affordable housing area. While we were
certainly not unique in that stance, we do believe that now
many people are jumping on that bandwagon.. And we believe
that is good for not only investors but also for the general
population as well.
Some real estate pundits may say that there is quite a
substantial amount of available housing nationwide; however,
this available supply, generally, does not reach to
low-income earners in the country. The lack of affordable
housing indirectly impacts the nationís economy. How?
Companies and institutions are not being productive when
employees have difficulty coming to work because of the
distances of their homes from their work. Employers suffer
from having employees coming to work late and may have
employee retention issues as well. Employees, on the other
hand, also endure some difficulties from taking long commute
everyday to go to work, exhaustion from travel and not
getting to spend enough time for the family.
To give you an example of what is going on in my backyard,
which is the Destin, Florida area, we have a HUGE problem
where our area needs lots of moderate wage ($20,000 -
$50,000) employees but they cannot afford to live within a
45 minute drive to their jobs. Some employers are going to
the extremes of picking their workers up in a town located
35 miles away! Others, without families, are causing havoc
with landlords by group 5-15 people in a 2 bedroom
Furthermore, it is becoming more and more difficult now for
first time home buyers to secure a home loan primarily
because of the continuously rising housing costs. Required
down payment increases as well as monthly mortgage payments.
Mortgage lenders may have programs that can entice first
time home buyers but may still not be affordable for those
belonging to the low- and extremely low-income earners. As a
matter of fact, homeownership rate in the last quarter of
2005 decreased to 69% from 69.2% of the previous year.
Though the decrease is too small, it is the first time in 11
years that the rate did not increase from the previous year
according to the US Census Bureau.
Suffering from Housing Crisis
Letís take for example the state of Maine. Though Maineís
economy is only developing at a moderate pace, property
values are rapidly increasing. New jobs being created in the
state offer wages that could not even afford the available
housing in the area. According to Selinger, a real estate
property lawyer in Maine, the lack of affordable housing for
Maineís workforce is the reason why businesses do not
progress. Workers are stuck in long commutes due to a simple
lack of affordable housing.
The housing crisis does not only affect Maine. The issue on
the lack of affordable housing encompasses every state in
the country, most especially the high-cost cities such as
San Francisco, West Palm Beach and Honolulu, as well as the
highly-urbanized New York and Boston. According to the US
Department of Housing and Urban Development (HUD), almost 12
million households are now spending more than 50% of their
income in rent and mortgage payments; THAT IS HUGE!! These
households are indeed burdened by the high housing costs and
not being able to afford much of the other basic necessities
such as food, clothing and medical care.
Affordable Housing Obstacles
With all the aforementioned facts, the question now is: Why
are developers and builders not addressing this issue if
there is such a demand for affordable housing? Well, there
is only one answer to that: cost! Not only housing costs are
increasing nowadays but the cost of everything else as well.
To build housing projects, developers need developable land.
Due to the increasing commercialization in most areas, costs
of land are skyrocketing; materials and labor costs are also
rising, not to mention the increasing property tax to be
remitted to the government. If you live in Florida and other
hurricane prone areas, then you can also add in a sky
rocking cost of insurance. In essence, high construction
costs limit the development of more affordable housing in
Affordable Housing Defined
According to the US Department of Housing and Urban
Development, households spending more than 50% of their
annual income in housing costs are cost burdened, i.e. their
house is not considered affordable. So what then is
affordable housing? One good way to determine affordability
is to look at how mortgage lenders evaluate people applying
for home loans. Lenders evaluate applicants in different
ways including some key ratios to determine the risk level
of lending to borrowers. One of these key ratios is the
debt-to-income ratio. As the term implies, it is the ratio
of a personís debts and liabilities to his income earnings.
Letís take an example of a person with a household annual
income of $55,000. He is looking to buy a house with a
monthly mortgage payment of $1,800, including principal,
interest, taxes, and insurance. With the given amount, the
annual cost of paying for his house would be $21,600, which
is roughly 40% of his annual income BEFORE taxes. Generally,
the lower the debt-to-income or mortgage payment-to-income
ratio, the more affordable it is to make the payments for
the house. Lenders consider 30% to 36% being a good
indication of a debt-to-income ratio.
The US HUD (http://www.hud.gov/offices/cpd/affordablehousing/index.cfm)
defines housing affordability to be no more than 30% of a
householdís annual income. Spending for housing more than
this cap is considered unaffordable and households may have
problems in spending for other basic necessities. However,
the reality is that households spend more than the 30%
reasonable amount to cover for the housing costs.
Affordable Housing as Investment
The issue of affordable housing is well known and there is a
lot of investors looking to take advantage of this
opportunity. However, it is not as easy as one may think. As
mentioned above, there are several obstacles to building
affordable housing. Aside from the rising construction
costs, there are also other payments that need to be
considered such as mortgage payments, property taxes,
insurance and HOAs.
Cash flow may be an issue if one
will invest in affordable housing. Letís do an example like
Purchase Price :
$250,000 with 20% down
7% Interest only loan :
$1,167 per month
Taxes (1.5% of purchase price) :
$312.50 per month
$120 per month
$1,200 per month
With the above figures, the total monthly cost the investor
will incur is $1,599.50. The real estate investor needs to
make that monthly payment for 12 months plus the loan amount
at the end of the loan term. With the rent amount only at
$1,200 per month, the investor will then face a negative
cashflow of several hundred dollars per month. While this
may make sense in some circumstances, the investor then has
to do a careful analysis of this negative cashflow versus
expected capital appreciation.
At GetPreconstructionDeals.com, our philosophy on affordable
housing has been very simple: buy affordable housing in
areas 1) where demand is expected to continue sky rocketing
and 2) where quality properties can be purchased with
minimal cashflow consequences due to large buying power, and
3) where investors can reasonably enter and exit with
About The Author
Dr. Chris Anderson is the founder of
http://www.GetPreconstructionDeals.com and is referenced
in many venues including the New York Times and USA Today.
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