Why local real estate investors are critical to housing affordability

John Beacham, CEO, Toorak Capital Partners. Image courtesy of Toorak Capital Partners

Local real estate investors across the country are uniquely positioned to help alleviate the country’s severe housing shortage for low- to middle-income families while creating job opportunities and stimulating economic activity in the areas in which they invest.

A report by the National Association of Realtors shows that US housing construction has fallen 5.5 million units below historical levels over the past 20 years and new housing construction has fallen 6.8 million units over the past decade , which is required to cope with growth in household creation and normal reductions in housing inventory. The data also shows that for every 100 low-income households, there are only 37 affordable and available rental homes. According to the Pew Research Center, a growing percentage of Americans say the availability of affordable housing is a major concern in their local community. As of 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 it was young Adults today have a harder time buying one at home than their parents’ generation.

But with challenges come opportunities. Local investors, working closely with private lenders and financiers, are upgrading aging housing stocks, converting industrial and retail properties into residential units and single-family homes into multi-family dwellings, and starting new construction from the ground up. Leveraging their fundamental insights into local markets, these investors identify and apply real estate to meet the housing needs of their communities, a trend that is growing.

The ATTOM US Home Flipping Report 2021 showed that 323,465 single-family homes and condos were flipped in the US in 2021, a 26% increase from 2020 to a total not seen since 2006. Upsets accounted for 5.5% of all home sales in 2021, or about every 18 transactions a year. Around 39% of home flips were bought with financing.

Toorak has funded over $8.5 billion in loans to renovate, stabilize, or rent over 40,000 units for families since 2016. Toorak works with a network of lenders across the country, who in turn work with local entrepreneurs in their communities. The vast majority of these units are valued at $270,000 or less and rent for $1,600 or less, making them considered affordable in their respective zip codes.

renovate old 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 out of 10 were in Detroit, a city with a poverty rate of 37.9 percent. Gross reverse profits made in these Detroit zip codes ranged from $30,000 to $35,000. Renovating, repositioning and refurbishing working class housing in some of the poorest areas of the country can help meet urgent housing needs and profitability can encourage further development and investment of time and resources for investors.

Toorak’s own proprietary data from more than 12,000 purchase loans for which a redevelopment budget was available shows that projects in the Baltimore MSA are the most profitable, generating a 37 percent return on investment measured as a percentage of dollar earnings over the purchase price plus the amount of the redevelopment budget , followed by Chicago MSA with a 33 percent return per budget spent. Baltimore has a poverty rate of 20 percent and Chicago has a poverty rate of 17.3 percent.

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

Local investors are helping to alleviate the lack of affordable housing, but need direct access to capital to fund their projects and experienced partners who offer predictable loan structures and acquisitions to meet the transactional needs of the market. Their work aligns with several of the United Nations Sustainable Development Goals and serves to serve communities and residents by providing new and improved affordable housing, repairing unsafe or unhealthy housing conditions, and improving the quality of life in underserved communities.

John Beacham is CEO of Toorak Capital Partners, a lending platform that funds personal, multifamily and mixed-use investor loans in the US and UK.

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