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August 29, 2019 at 03:55 PM
A puzzlingly common misconception in the investing world holds that investments that take into account environmental, social and governance considerations entail a certain trade-off: doing good for people/communities versus turning a profit.
While numerous meta-studies and academic papers have debunked this perceived trade-off, the stubborn misconception has persisted. This is true particularly in the real estate investment world, where many landlords or property owners seek to deregulate their affordable properties as quickly as possible, so as to cash in on higher market rate rents.
Although it may not seem as sexy as investing in gleaming new rental high-rises, affordable housing (Low Income Housing Tax Credit, Article XI, 421-A, and other programs) can actually be a more solid investment proposition than market rate properties. Moreover, affordable housing offers the opportunity to invest in an asset class that has the potential to produce market rate returns or better, that also enables mission-based or impact investing in the service of ESG considerations.
In much of the United States there is a demand for affordable housing, with increased renters throughout the country experiencing a cost burden (spending 30% or more of their income on rent). This demand and constraints on supply for affordable housing translates into high occupancy rates for affordable rentals; higher occupancy means lower volatility for investors.
Adding in ESG Techniques
By incorporating a few simple ESG practices into property management, including social programs and financial literacy training, affordable rental investors can help tenants stay in their homes, leading to less credit loss (from tenants not paying their rents) and lower turnover rates, further lowering costs.
