Affordable Housing: The Surprising Asset Class That Outperforms

As we navigate 2024, the need for affordable housing has reached critical levels, fueled by economic uncertainty, rising living costs, and a severe housing shortage. At Ocean Ridge Capital, our mission to elevate the standard of affordable multifamily housing is more relevant than ever. But here’s the surprising truth: investing in affordable housing is not just impactful—it’s one of the smartest financial decisions you can make today. Here’s why affordable housing matters in today’s market and why it’s poised to outperform other asset classes.

The Widening Affordability Gap
Across the U.S., the gap between income levels and housing costs continues to widen at an alarming rate. Home prices have surged by over 40% since 2020, while median wages have only increased by about 5%, creating a dire need for affordable rental options. The Midwest and Sunbelt regions, where populations are booming due to economic migration, are particularly hard-hit. For instance, rents in cities like Phoenix and Dallas have risen over 30% in the past three years, far outpacing income growth. Affordable housing serves as a vital safety net, providing families with stable homes without straining their financial resources—a dynamic that ensures strong, consistent demand for these properties.

Economic Stability for Tenants and Investors
Affordable housing is more than just a social good; it’s an economically resilient asset class. For tenants, it offers a budget-friendly option that allows them to allocate more of their income to essentials like healthcare, education, and savings, reducing turnover and boosting tenant retention. For investors, affordable housing assets historically maintain higher occupancy rates and more reliable cash flows than other sectors, such as luxury rentals or office spaces, especially during downturns. According to the National Multifamily Housing Council, affordable properties experienced an average vacancy rate of just 4.3% in 2023, compared to 7.5% in the luxury sector, underscoring their resilience.

High Returns and Low Volatility: The Investor Advantage
Contrary to outdated perceptions, affordable housing investments often deliver superior risk-adjusted returns compared to other real estate classes. While cap rates for luxury multifamily properties in coastal cities have compressed to under 4%, affordable multifamily assets in emerging markets frequently offer cap rates between 6-8%, providing a more attractive spread. Moreover, the cost to upgrade affordable properties is typically lower, and rent increases, even modest ones, can significantly enhance returns due to the properties' lower baseline values.

Affordable housing also benefits from government support through programs like Low-Income Housing Tax Credits (LIHTC) and various state incentives that mitigate risk and enhance returns. When properly managed, affordable housing assets can generate annual returns of 12-15%, outperforming typical commercial real estate assets, which averaged about 8-10% in 2023. With steady cash flows, less exposure to market volatility, and strong government backing, affordable housing stands out as an investment that thrives even when other assets falter.

Investing with Purpose and Profit
Investing in affordable housing isn’t just about solid returns—it’s about making a tangible impact. Every dollar invested helps improve living conditions, stabilize communities, and support working families. At Ocean Ridge Capital, we specialize in turning around underperforming properties, transforming them into vibrant, well-managed communities that offer more than just a place to live. This mission-driven approach doesn’t just create better outcomes for residents—it enhances property values, increases rental income, and boosts overall investor returns.

Addressing the Housing Shortage
The U.S. faces a shortfall of over 7 million affordable rental homes, a crisis that won’t resolve itself without strategic investment. By investing in affordable multifamily properties, we not only help address this shortage but also position ourselves in a market with high barriers to entry, ensuring long-term demand and sustained growth. The lack of affordable housing options, coupled with rising construction costs, makes existing affordable properties even more valuable, driving rental demand and keeping occupancy rates high.

The Bottom Line: Affordable Housing Outperforms
Affordable housing is no longer just a social imperative; it’s a strategic investment that can outperform other asset classes, particularly in today’s high-cost, high-uncertainty environment. With the right approach, affordable housing can deliver exceptional returns, reduced volatility, and a positive impact on communities that extends far beyond financial gain. At Ocean Ridge Capital, we are dedicated to being part of the solution—improving lives, strengthening communities, and driving financial success together. Investing in affordable housing isn’t just smart; in 2024, it might be the best decision you can make.