Caldwell Law Recommends California Real Estate Investors Target Low-Income Housing to Avoid Property Bubble
By Lawrence Shersher
A well-known commercial real estate attorney says declining cap rates and rising interest rates are contributing to a growing bubble in the multi-family housing market in Los Angeles. But he says one asset class that continues to provide high returns is affordable housing.
It is common knowledge that the real estate market is on fire in California. Thomas Caldwell, the principal of Caldwell Law in Woodland Hills, California, says that as cap rates decline and interest rates rise investors are being squeezed and assets could once again be revalued. “A tremendous amount of money is out there chasing the few properties that people want to sell. Cheap cash has created a feeding frenzy, even in secondary and tertiary markets. But affordable and low-income housing properties continue to provide high returns to savvy investors,” says Caldwell.
With Section 8 housing there is little credit risk as the U.S. government pays usually around 70% of the rent and there are rarely vacancies as most properties have long wait lists. Section 8 of the Housing Act of 1937 (42 U.S.C. §1437(f)), provides rental housing assistance to private landlords on behalf of approximately 3.1 million low-income households. Since many project-based affordable housing apartment buildings are not necessarily class A properties, they provide higher cap rates.
Caldwell acknowledges that there can be complications for investors who are unprepared. For example, low-income properties can become property management nightmares because of previous owners who have deferred maintenance, tenants who take less-than-stellar care of the units, and often troubled neighborhoods. Also, the Department of Housing and Urban Development's, better-known as HUD, compliance paperwork and inspections can be perceived as complex and highly subjective. However, for those willing to allocate resources to property management, these investments can be a gold mine - especially when partnering with an experienced operator with a large low income property management infrastructure in place.
Additionally, investors who partner with a nonprofit are eligible for complete abatement of property tax in many states, including California. This scenario also offers the added benefit of allowing an investor to improve the community. “Why not make an impact on this world for good? Perhaps your purpose in life is really to make a difference in the lives of others,” Caldwell says. He believes that when an investor owns and operates project-based low-income housing, the Federal government is entrusting that person to help to take care of some of society's more vulnerable and disenfranchised segments. Many non-profits provide social services that almost always result in lower vandalism and crime on the property and surrounding neighborhood. The knowledgeable staff at Caldwell Law, a real estate law firm, advises that investors consider targeting low-income housing as a safer real estate investment with a greater chance of upside growth potential.