Why Local Real Estate Investors Are Critical to Housing Affordability

By John Beacham

Toorak Capital Partners' John Beacham on the role that local entrepreneurial owners play in creating and maintaining housing stocks.

Local real estate investors across the country are uniquely positioned to help alleviate the significant shortage of homes available to low- to mid-income families across the U.S., while creating job opportunities and promoting economic activity in the areas where they invest.

A National Association of Realtors report shows new housing construction in the U.S. over the past 20 years fell 5.5 million units below historical levels and, in the past decade, new home construction fell 6.8 million units short of what is needed to meet household formation growth and normal reductions to housing inventory. The data also shows that for every 100 low-income households, there are only 37 affordable and available rental homes. According to Pew Research Center, a rising share of Americans say the availability of affordable housing is a major problem in their local community. In October 2021, about half of Americans (49 percent) said it was a major problem where they live, up 10 percentage points from early 2018. In the same 2021 survey, 70 percent of Americans said young adults today have a harder time buying a home than their parents’ generation did.

But with challenges come opportunities. Local investors, working closely with private lenders and capital providers, improve outdated housing stock, convert industrial and retail properties into residential units and single-family properties into multifamily properties, and start new ground-up construction. Using their grass roots insight into local markets, these investors identify and flip properties to meet the housing needs of their communities, a trend that is increasing.

ATTOM’s 2021 U.S. home flipping report showed that 323,465 single-family homes and condos were flipped in the U.S. in 2021, up 26% from 2020 to a total not seen since 2006. Flips represented 5.5% of all home sales during 2021 or roughly one in every 18 transactions. Roughly 39% of home flips were purchased with financing. Toorak has funded over $8.5 billion of loans to renovate, stabilize or make available for rent, over 40,000 units for families since 2016. Toorak works with a network of loan originators around the country who in turn work with local entrepreneurs in their communities. The vast majority of these units are valued at $270,000 or lower and rented at $1,600 or lower, making them considered affordable in their respective zip codes.

Renovating Older Stock Another ATTOM report looking at the top 10 zip codes in 2021 where flips accounted for the highest percentage of home sales (>20%) showed that 6 of 10 were located in Detroit, a city with a poverty rate of 37.9 percent. Gross flipping profits realized in these Detroit zip codes ranged from $30,000-$35,000. Renovation, repositioning, and refurbishment of workforce housing in some of the country’s poorest areas can help to meet desperate housing need, and profitability can encourage further development and devotion of investor time and resources.

Toorak’s own proprietary data of more than 12,000 purchase loans where a rehabilitation budget was available shows that projects in the Baltimore MSA are the most profitable, yielding 37 percent profitability as measured by percent of dollar profit over purchase price plus rehab budget amount, followed by the Chicago MSA, at 33 percent profitability per budget spent. Baltimore has a 20 percent poverty rate and Chicago has a 17.3 percent poverty rate.

Creating new housing options improves the quality of life in underserved communities, supports local entrepreneurs who are driving these projects, and provides community-based employment for workers who often live in these same neighborhoods and have visibility into each neighborhood’s unique background, obstacles, and solutions for improvement.

Local investors help to alleviate the shortage of affordable housing but need ready access to capital to fund their projects and experienced partners offering predictable loan structures and underwriting to meet the transaction needs of the market. Their work aligns with several of the United Nations Sustainable Development Goals and serves to help communities and residents by providing new and improved affordable housing, repairing unsafe or unhealthy housing conditions, and improving quality of life in under-served communities.