What Is Workforce Housing?
Workforce housing, also known as obtainable, attainable, or gray-collar housing, is typically for the renter-by-necessity tenant. These tenants typically earn between 60 percent and 120 percent of the area median income (AMI) and include teachers, nurses, first responders, retail employees, and other essential members of the community.
Unlike subsidized housing, which utilizes government funding to assist in tenant rental payments, workforce housing serves individuals and families who earn too much to qualify for government assistance but not enough to afford luxury apartments or have the means to buy their own single family home.
Nationwide, demand for workforce housing consistently exceeds the available supply due to several contributing factors.
Usually workforce housing product is at least ten years old. Much like buying a used car instead of a new one, older apartment buildings can be acquired for a lower price per unit than buying or building new. Where the value often lies in this investment is the gross rents of older apartments buildings are often higher relative to their acquisition discount. This allows the owner to achieve stronger rent to price ratios compared to newer properties.
Systems, such as exterior, HVAC, roof, windows, and unit interiors of older apartments have an expected life well less than the entire apartment building. Often, some of these components of the building will need to be repaired or replaced once the property is acquired. With the new owner making these improvements, the property’s curb appeal and unit interiors will attract tenants who are willing to pay higher rents thereby increasing revenue and, ultimately, the value of the property.
By renovating the property, improving the quality of the tenant and increasing the net operating income of the property, owners can drive the value of the property higher. Typically, these renovations occur over a period of one to three years. This strategy is not entirely dependent on organic market rent growth in the market, but any positive market trends will benefit this investment.
It is crucial to perform a comprehensive physical due diligence of the property and bid out any planned work to the property after acquisition to incorporate in the acquisition budget. Even with proper due diligence, being an older property, unexpected and unplanned capital expenditure needs will arise during the hold period, so it is important to hold a healthy contingency in the property’s budget.
Garden-style apartments, with in-unit HVAC, no elevators, and easy-to-access exterior components, are often less expensive to maintain and repair than towers, buildings with elevators, or converted warehouses. Simpler designs generally result in lower operating costs for maintenance and repair.
Look for submarkets with high occupancy and high levels of median household income and community redevelopment in the area inclusive of Class A product and single-family homes. In these areas, an acquisition of a workforce housing property can be the low-cost provider of quality housing. The workforce property’s rents will be pulled higher as the area improves and attracts higher quality tenants resulting in a better returns for your investment.
Given the assumed condition of the property, investors should analyze the current rent roll to check for non-paying tenants, audit of leases to ensure the leases are current and tenants are paying on time and what their lease states. Although the rent roll will turnover several times during the new owner’s hold period, it can be very difficult start to your acquisition of there are unknown bad debts and non-paying tenants at the property.
Upon the stabilization of the property in one to three years, the property is often sold or refinanced to allow for a longer hold period. The next buyer of this property will look to further improve the property or continue to operate it as a stabilized property.
Workforce housing provides a critical need for all parts of the country. Investors acquiring underperforming properties, often in need of various improvements, in otherwise strong markets with supporting demographics can improve communities while generating healthy, risk-adjusted returns for investors.
Important Information
This article is provided solely for educational and informational purposes. The views expressed reflect general observations regarding investment analysis, private markets, real estate investing, valuation methodologies, underwriting practices, due diligence considerations, and fund structures.
The information presented is not intended as investment advice or a recommendation regarding any specific investment, manager, property, fund, security, or strategy. Readers should conduct their own independent due diligence and consult their professional advisors before making investment decisions.
Investments in private funds and alternative investments involve substantial risks and are not suitable for all investors. Such investments are generally illiquid, may involve leverage, may have limited transparency, may be difficult to value, and may result in the partial or complete loss of invested capital.
Certain statements contained herein may constitute forward-looking statements. These statements reflect current assumptions and expectations regarding future events and market conditions.
Actual results may differ materially from those expressed or implied due to changes in economic conditions, capital markets, interest rates, tenant demand, property performance, financing availability, governmental actions, and other factors beyond the control of Valoran Capital Management.