Is middle-income housing a better investment than its luxury counterpart?
A study from University of Texas associate professor Jake Wegmann and Southern Methodist University real estate researcher Mark Roberts reportedly found middle-income housing to have higher returns and lower risks than those in high-income and luxury properties.
The eight-month study looked at data in Atlanta, Austin, Dallas, Denver, Houston, Phoenix, Seattle, and Washington D.C. from 2011-2021. The data that was gathered and analyzed showed that middle-income rental housing performed well and behaved independently of stocks and bonds’ returns, the Austin Monitor reports. It also showed substantial returns despite capital costs that are higher than upper-income housing investments.
At the center of the study was Affordable Central Texas, the non-profit sponsor Austin Housing Conservancy, which began acquiring middle-income rental communities in late 2018. The study found that the organization had 9.4 percent higher returns than similar investments in high-income and luxury properties in these cities.
The study was sponsored by Affordable Central Texas and the Wells Fargo Foundation.
“When we put our fund together we modeled out what we thought would happen, but when you’re raising capital the fund advisers want everything verified by a third party,” said Affordable Central Texas CEO David Steinwedell. “This study verifies what we’ve been experiencing, which is that since the inception of our fund we’ve had returns north of 9 percent.”
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Steinwedell also said he hopes the study will have an impact on law making.
“There are some decent policies that have been put in place recently like Affordability Unlocked that will help some things. There are other challenges like the fact that we can’t get a [building] code change made, and that is really holding us back. There’s got to be a mix of public policy and private sector stuff like we’re doing, and together all of those things can make a difference.”
Affordable Central Texas currently owns seven multifamily rental properties throughout Austin, with 1,740 units under its management that keep rents affordable for residents earning between 60 and 120 percent of the local median family income.
Roberts, head of research for SMU’s Folsom Institute for Real Estate, said the study has the potential to change the way investors think about this market.
“I hope we’ve shed some light on the idea that just because there’s an apartment building where the rents are lower than luxury high-rise apartments that investors seem to be drawn to, that from a financial standpoint they won’t overlook the apartment type that produces higher returns and lower risk,” he said.
Wegmann, associate professor for community and regional planning at UT Austin, said the results of the study were unsurprising and that this could be a major win for ESG (environmental, social and governance)-focused investments. He said he would like to see middle-income housing more of a priority for major organizations, with standards in place to assure health and safety for residents.
“The ultimate vision would be for there to be some kind of defined standard because right now there’s some tension from the investment side because this sounds really great in terms of how it performs in terms of risk and return. If there was a standard it would give policymakers and those living in the buildings the confidence that there is some protection being offered to the people living there.”
— Maddy Sperling