This post was originally produced for Forbes.
“Our nation is in the midst of a true affordability crisis.” Daryl Carter, founder, chairman and CEO of Avanath Capital Management, sees that as both a problem and an opportunity. He’s found a way to deliver returns to investors while serving working families at the same time, that is, without being evil.
Let’s start by looking at the problem. “The median income of a renter in the United States is $36,000. To be considered affordable, renters should be spending no more than a third of their income toward rent. However,” Carter says, “in many coastal markets such as Los Angeles and New York, over half of all renter households are allocating more than 50% of their income toward rent.”
That threshold matters, because if you are paying more than half of your income in rent, it is difficult to also provide food, healthcare and education for the people living under that roof. “Historically, the reason that many neighborhoods have declined, whether it’s Detroit or Oakland, is not because of who lives there, but rather because there is a lack of investment in those areas,” Carter says.
Watch my entire interview with Carter in the video at the top of this article.
Carter points to an estimate from the Joint Center for Housing Studies that indicates that two million rent-controlled units will expire over the next decade. Most of these are supported by Low Income Housing Tax Credits. He says, “These units are at-risk for redevelopment into market-rate apartments.”
The problem gets worse. Every year, about 100,000 rental units are lost to obsolescence or failure to meet building codes. Most of those units are—or were—affordable.
Carter sums up the situation this way: “The bottom line is: people need quality, affordable places to live – now.”
“Targeting this asset pool is an additional source of investment opportunity for Avanath,” Carter says.
Carter says he is a beneficiary of affordable housing. “My journey as a social entrepreneur began on Detroit’s West Side, in a working class, African American neighborhood. My father, an autoworker, and my mother, a nanny, moved to Detroit to pursue the economic dream tied to the auto industry. With a combined income of $10,000 per year, they purchased a small two-bedroom bungalow in the 60s for $15,000. Their monthly mortgage payment was $130 per month or 16% of their monthly income of $833 per month.”
“While not picture perfect, this home provided a stable setting for my family to pursue the American Dream. My home incubated my dreams of the University of Michigan, MIT, and Avanath long before I had any thought about them. Today, this same dream is simply implausible for much of the population, based on a rampant rise in the price of housing in our nation,” he continued.
That foundation helped to motivate and inspire Avanath’s strategy of bringing institutional capital into areas where affordable housing is most needed.
One of the lessons Carter has learned is that keeping good residents helps to foster a successful community. This is a stark contrast to other investors, whom he says often seek to create a “new resident profile.”
Avanath, like other developers, will invest in upgrading the projects they buy. “When we renovate, we raise the rents but we raise the rents to a level that is affordable for the residents that are there. And we try to do what I call ‘smart renovations’ where we put in things like washers and dryers that benefit that family.”
He admits that they don’t do everything they might so they can keep rental rates lower. He says that when he shows his investors the projects, they’ll ask why the popcorn ceilings from the 60s or 70s haven’t been replaced. “They’ll say, ‘It would be great if you can get rid of it.’ And we say, ‘Yeah, it would be great but I’d have to charge $40 more rent.’”
The Avanath strategy for getting good investor returns include buying the properties on good terms. “We buy it on a very favorable basis because in many respects it’s been abandoned by the previous owner.”
Once purchased, Avanath works with the residents and the community, including elected officials to take what Carter calls a “holistic approach.” Not only does the company invest in the buildings but also in things like afterschool programs that will add value.
Carter explains the strategy, “Our investment strategy is to preserve the existing supply of affordable housing and add value to our communities by investing in capital improvements that enhance asset quality without sacrificing affordability.”
“Safe, clean, and affordable housing is the foundation for economically viable neighborhoods,” Carter says, speaking from experience.
“By acquiring affordable and workforce housing, making strategic improvements that increase quality of life without sacrificing affordability, and then investing in social programming such as on-site tutoring, sports programs and financial literacy courses, we are giving residents more than just a place to stay – we are giving them lifestyles, aspirations, and a path toward success.”
“Through this work, we have been successful in advancing positive social change, while also generating attractive, risk-adjusted returns to our investors. It is important to our mission to deliver returns that rival other commercial real estate investments.”
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Devin is a journalist, author and corporate social responsibility speaker who calls himself a champion of social good. With a goal to help solve some of the world’s biggest problems by 2045, he focuses on telling the stories of those who are leading the way! Learn more at DevinThorpe.com!