Middle Class Housing: The Real Estate Opportunity No One’s Talking About
Middle-class single-family homes in Albany, NY
Image credit: UpstateNYer (Wikimedia)
Multifamily development in the Washington metro area continues at a historical pace. Despite concerns surrounding the affordability of rents in the region, luxury apartment projects continue to dominate the development pipeline. Lost in translation is the region’s middle-class housing shortage, a worsening epidemic that is causing working-class families to be pushed farther and farther outside the beltway. Why is this happening? Because land costs within the beltway are expensive, construction costs keep rising, and middle-class apartment rents can’t generate as good of a return as luxury housing. The current pipeline is leaving working-class renters with three options: 1) High-grade Class A multifamily units with good amenities and monthly rents unsupported by the area’s median income, 2) Older Class B or Class C buildings with fewer unit features and amenities, or 3) Government subsidized housing—where an income well below the area median is required to qualify for units. This means working-class renters, to avoid unaffordable rents, will live in older apartment buildings or limit their own income and social mobility to access affordable housing.
There’s been a lot of news documenting the shrinking middle class. In no place is it more evident than in multifamily development. There’s not enough profit in solving the middle-class housing shortage; there aren’t enough real estate developers willing to accept modest profits in pursuit of long-term, stable investments. Everyone is looking to make as much money as they can; no one is looking at the opportunity—high demand for a product that hardly anyone is building.
The good news is this real estate investment opportunity is widely accessible. Larger real estate investment firms aren’t interested in buying and developing two to four-unit multifamily properties—the types of apartments charging rents within working-class affordability. Individual investors are better positioned to capitalize on this niche in real estate. Even better: investors owning these properties can get better interest rates by living in one of the units for a year and renting out the rest of the apartments to help with mortgage payments. Limiting each site to only four units keeps the properties classified as residential, rather than commercial real estate investments—allowing for better leverage when acquiring properties. After a year, an investor can move, buy another property, if necessary convert the house into multiple units, and repeat the process. No, this investment won’t result in a ton of immediate profits. However, the properties will be easy to lease, they’ll have steady cash flow, and over time, they’ll pay for themselves—increasing an investor’s net worth in the process.