6 Surprising Advantages of Investing in Low-Income Housing With Your Self-Directed IRA
A self-directed IRA (SD-IRA) allows you limitless opportunities to invest your retirement savings in assets you want to invest in. Instead of being limited to stocks, bonds, and mutual funds, you can invest your SD-IRA funds in self storage facilities, equipment leasing, real estate, and of course, much more.
Real estate investments themselves offer endless options to investors. Some investors choose to invest in long-term residential rentals, while others invest in short-term vacation properties. Not to mention the investors who choose not to concern themselves with residential real estate, but with commercial or industrial opportunities.
Suffice it to say that real estate is a vast alternative asset class in its own right.
Low-Income Housing as a Real Estate Investment
An oft-overlooked yet potentially lucrative opportunity for real estate investors is low-income housing. At first glance, low-income or affordable housing investments seem not to make sense. How can real estate investors make a profit when their rental properties are priced below market rates?
Surprisingly, low-income housing investments can be profitable when investors are strategic. Although affordable housing investments don’t make sense in every location, investors who rent affordable housing units in desirable areas and who know how to optimize the advantages of affordable housing stand to enjoy high returns on their investments.
What Is Low-Income Subsidized Housing?
Low-income housing, also referred to as affordable, subsidized, or public housing, is defined by the US Department of Housing (HUD) as housing that costs no more than 30% of a household’s monthly gross income, including the cost of utilities. Government-back affordable housing programs seek to provide housing for community members with limited income.
Affordable housing is in especially high demand in high-cost areas where increases in income have not kept pace with increases in the cost of living. Both renters and property owners may receive government assistance or incentives when participating in affordable housing programs.
6 Surprising Advantages of Investing in Low-Income Housing
Investing in low-income housing is a facet of real estate investing that historically has gotten a bad reputation. Investors worry that the quality of tenants may be lower and that high turnover rates or risks of damage may eat into their profits.
However, these are risks inherent to most levels of real estate rental investments. When investors invest in low-income, affordable housing in the right locations (i.e., locations in desirable areas with reasonable home prices and high housing demand), these assets can still be quite profitable.
Here are six surprising advantages of investing in low-income housing.
1. Low Cost of Entry
One barrier to real estate investing for many people is the huge amount of cash it requires to invest in a single property, even if you’re willing to also take on debt with your real estate investments. Although there are plenty of ways to overcome this obstacle, investing in low-income housing is one way for new real estate investors to get their skin in the game at a lower price point.
Investing in low-income housing properties that cost between $30,000 to $50,000 may allow investors to invest in properties without taking on debt. Or, investors might be able to invest in a greater number of properties at this lower price point, mitigating the risk they’d be taking on with just one or two properties.
2. Potential for High Capitalization Rates
Additionally, the capitalization rates (cap rates) for low-income properties can potentially be higher than average cap rates on non-low-income housing investments. Cap rate refers to the metric that indicates the rate of return investors can expect to receive on their real estate investments.
To calculate a cap rate, divide the net income a property is expected to generate in a given year by the property asset value. To get the net income value, subtract the anticipated monthly operating expenses (repairs and maintenance, property management expenses, tenant turnover, etc) from the property’s expected monthly gross income.
For example, if a property worth $50,000 is expected to bring in $800 per month after operating expenses, the investor can expect to bring in $9,600 per year, which is 19% of the home’s total value. In contrast, a good cap rate for a non-low-income residential investment property may run between 8-12%, while average cap rates may be much lower.
Of course, savvy investors choose their investment properties with discernment. High cap rates on any type of property are certainly not guaranteed, and investors must learn to recognize the factors that may increase the potential for a high cap rate.
3. Diversification (Even Within Real Estate Investments!)
Investing in low-income housing can help self-directed IRA investors diversify their portfolios. Because the cost of entry is typically lower compared to other residential real estate investments, savvy investors may wish to purchase more low-income properties to mitigate the risks associated with owning a single property in a single location.
And for investors who already own different types of real estate properties, such as traditional residential rental units, investing in low-income housing is a good way to diversify their real estate holdings (more on this below).
4. Government Incentives (i.e., Tax Advantages)
The government incentives and tax advantages of investing in low-income housing can also offset some of the risks real estate investors take on. For example, the HUD Housing Choice Vouchers Program, also known as Section 8, allows investors to rent to low-income tenants at a lower rate while still receiving market rates in the form of government subsidies.
Additionally, the Low-Income Housing Tax Credit program allows investors to deduct funds for affordable housing development on a dollar-for-dollar basis to reduce their own tax liability. This program makes it easier for real estate investors to enter the housing development industry and realize enormous profits.
For larger real estate investors and developers, opportunity zones, state-specific affordable housing programs, and government bonds are other ways the government incentivizes low-income housing development. When investors take advantage of government incentives, low-income housing investments become more attractive, especially given the reduced risk from government subsidies.
5. High Demand
Luxury housing is particularly susceptible to shifts in the housing market, while affordable housing will always be in demand. Even when the real estate market experiences a downturn, people will still have a need for affordable housing options. Although there are risks associated with any kind of investment, some have called affordable housing investments ‘recession-proof,’ which is yet another opportunity to diversify real estate holdings.
6. Positive Social Impact
Finally, low-income housing investors can have a positive social impact on the communities in which they’re investing. By creating more affordable housing opportunities for low-income folks with better living conditions, low-income housing investors can improve their tenants’ quality of life or allow them more flexibility with their limited income.
Given the other five advantages described above, low-income, affordable housing investments offer investors the opportunity to make a huge positive impact in their communities without sacrificing their bottom lines.
How Chicago Trust Administration Services Can Help
At Chicago Trust Administration Services, we help investors diversify their portfolios and invest in what they want to invest in using a self-directed IRA. You don’t have to sacrifice the tax advantages of regular retirement accounts when you decide it’s time to invest outside the stocks and bonds markets. Invest in what you know with a self-directed IRA.
Our role is to help you invest in alternative assets without overlooking or infringing IRS regulations. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.