Section 8 SFRs: An overlooked asset class for investors

One of the most heartbreaking problems in America today is the lack of affordable housing. According to an analysis of Redfin data, having a six-figure income is now essential to buying a median-priced home in nearly half of the United States. That creates a sharp increase in rental demand among those priced out of the housing market, but the average monthly asking rent of $1,964 as of January 2024 is also a challenge for many. According to the National Coalition for Low-Income Housing“The lowest-income renters in the U.S. face a shortage of 7.3 million affordable and available rental units.”

Because organizations like the Association of Mortgage Bankers While working on solutions to this enormously complicated problem, institutional investors may be overlooking an opportunity to go the extra mile. This “counterintuitive” opportunity lies within the Housing Choice Voucher (HCV) market segment. grew at an inflation-adjusted rate of 13% between HUD FY 2002 and FY 2019. Building a portfolio of single-family HCV rental properties would promote a flagship model for public-private partnerships that truly “do well by doing good” – expanding access to housing in working-class neighborhoods while providing attractive returns for committed institutional investors .

The demand for affordable SFRs exceeds the supply
The U.S. Department of Housing and Urban Development launched the HCV program to help very low-income families and others “to afford decent, safe and sanitary housing in the private market.” The The current program budget is approximately $30 billionand approximately 2,100 state and local public housing agencies in the U.S. administer it. These agencies provide housing vouchers to qualified families to enable them to obtain suitable rental housing, such as a single-family home.

About 2.3 million households have taken advantage of this option. Yet the need for high-quality SFR housing for HCV tenants continues to exceed supply. This is where institutional investors – by working with others in this ecosystem – can drive some systemic change while promoting their own growth. If they captured even a 1% market share, they would become major national SFR players. Furthermore, this segment not only delivers high single-digit and low double-digit returns without leverage; renovated, well-maintained, and professionally managed SFRs in lower-income neighborhoods have the potential for greater historic home appreciation than other SFRs. Small investors are already experiencing these benefits, but larger institutional investors are hesitant.

Fighting misconceptions
What’s holding them back? Since the 2008 financial crisis, they have stayed extremely close to their comfort zone (for example, single-family homes with a FICO score of 740 for the borrower), avoiding the risks of the unknown. They may also harbor many common misconceptions about the HCV/SFR space that impact their potential returns, such as:

• Tenants will pay rent late: on the contrary, the US government deposits 70% of their rent directly into operating accounts every month. Tenants are reliable payers of the rest, otherwise they lose their vouchers.
• Many tenants will cause problems that lead to eviction: basically their the average stay in these properties is 10 years.
• Investors will support slum landlords: on the contrary, this is an opportunity for institutional investors to support HUD’s intention to make quality housing available to all. This type of housing in work areas attracts tenants who care for the properties so that they can continue to live there.

Tackling complexity
Certainly, SFRs involving HCV tenants have many “moving parts” that require oversight – especially when institutional investors have a stake in 1,000 or more rental properties. But even if the paperwork is constantly changing hands between HUD, licensed housing agencies, landlords, tenants, property owners and property managers, this initiative is very doable. The institutional investment industry is already seeing similar performance with other large asset portfolios, such as Ginnie Mae Early Buyouts.

Combined with expert insights from trained professionals, they use technologies such as AI and blockchain to scale and streamline key processes such as sourcing, asset surveillance, reporting and analytics, governance and controls, and standards management, and to reduce inefficiencies and errors that drive down prices . and revenues. Now they are ready to repeat their success in this emerging field.

It’s just a matter of institutional investors saying yes. Yes to the truth: No matter how many steps away from the rental process, they are essential to helping everyone live a productive, fulfilling life in a comfortable home.