A recent article by BISNOW reports that 480,000 units are currently under construction, however, developers are not even close to building enough units to meet the growing demand for rental units in the United States. This startling fact calls into question how some could say a housing bubble is on the horizon while so much of the demand for affordable, quality housing remains unmet. Millennials are reaching the age in which homeownership is the natural next step. Many choose to wait until they are finally financially secure enough to move out of their parents’ or other relatives’ homes. High housing costs, low wages, the student debt crisis, and various other factors keep many from living independently well into their twenties. Still, some prefer the convenience of renting over the responsibility and burdens that homeownership entails. Others choose to rent out of pure financial necessity. Unlike past generations, young people are forced to continue living with their parents due to their inability to afford rent.
New developments, particularly multifamily developments, mean more housing choices for potential renters such as these. According to the LA Times, rents in Los Angeles are expected to continue to climb for the foreseeable future. High rental costs are not just a concern for renters, but a potential economic detriment for the state as a whole. Housing markets of in demand cities like Los Angeles and San Francisco are oversaturated, causing some developers and investors to turn to distressed neighborhoods as places to either rehabilitate current buildings or construct new multifamily buildings from the ground up.
The question here is: why should you invest in a distressed neighborhood? For small investment firms or individuals looking to start investing in real estate there are many development opportunities. Properties in distressed neighborhoods are often much more affordable for budding investors. Here in Los Angeles, we are facing a serious housing crisis. Homes are unaffordable to buyers. Rentals are nearly impossible to find at a budget-friendly price. This is all due to the simple fact that there are not enough rentals for the number of people looking to rent. For investors, this is a golden opportunity to jump into real estate investment by purchasing property in distressed neighborhoods, places where rents are steadily climbing and attracting the interest of young professionals unable to afford other neighborhoods. Distressed neighborhoods are indicated by factors such as low property values and high vacancy rates. The families who live in these neighborhoods are often the ones who could benefit most from additional housing.
Investing in distressed neighborhood has additional benefits for investors, such as special tax breaks or above-market rent for Section 8 units. Property owners are permitted to charge above market rate for Section 8 units up to a ceiling price determined by the Housing Authority simply because there isn’t enough vacant housing for Section 8 tenants. Although stigma surrounds Section 8 vouchers and their acceptance, they provide significant benefits to both those who use them and those who accept them (For more information on this go to Accepting section 8 in LA: What you need to know). Families, homeless veterans, and other individuals with Section 8 vouchers are able to benefit from the additional housing choice and security that Section 8 provides. By rehabilitating a property in a distressed neighborhood, your rental property becomes much more desirable to renters and therefore leaves owners with low vacancy rates. Since it’s not easy for low income families to rent a nice, redone apartment that accepts Section 8, many non-profit organizations will often provide additional incentives to property owners that do accept vouchers. Since Section 8 housing is difficult to come by, the clear solution is to incentivize property owners to choose their clients as tenants over others without housing vouchers. This may come in the form of a one-time payment equal to the first month’s rent or a double security deposit.
One common hurdle for developers in distressed neighborhoods is the plague of NIMBYism. NIMBY, which stands for “Not In My Backyard,” is a term used to describe those who halt the planning process for transit, property development, or other city-level alterations at all costs. In general, people want more housing, just not in their neighborhood. Despite this rampant NIMBYism, Golden Bee has had many successes communicating how the urgency of the housing crisis necessitates building new developments to Neighborhood Councils, neighboring families, and other stakeholders. Many of the people fighting the development do not really understand the overall positive effect that new development can and will have on Los Angeles.
In the end, investing in distressed neighborhoods is not only a wise investment for investors, but it also allows them to turn once wonderful neighborhoods back into desirable places to live with low vacancy rates and high returns on investment to match.
Benefits of Investing in Distressed Neighborhoods
- Purchase prices of properties are more affordable to investors
- Rehabilitation of units results in top dollar for new leases
- Housing costs are rising making these neighborhoods more desirable to higher income renters
- Distressed neighborhoods are occupied by Section 8 residents; guarantees rental income
- Low vacancy rate due to low inventory equals higher cash flow
- Section 8 provides monetary incentives for holding units due to low inventory
- Higher rents in desirable neighborhoods create an opportunity to revitalize a distressed neighborhood, which leads to gentrification and stability.