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Investors who typically stick to opportunities in safe markets like Class-A apartments are now showing interest in affordable housing, which industry insiders say is nothing new. They add, however, that the affordable housing market is complex and that speculators should watch their step, particularly if they intend to boost yields by quickly raising rents in those units. That may prove difficult to do when considering the requirements that have to be met by renters and the rent restrictions that are in place for government-subsidized housing. For more on this continue reading the following article from National Real Estate Investor.

Investors are seeking higher yielding investments, looking far beyond conventional, class-A apartment properties in prime markets. A growing number are bidding for government subsidized affordable housing properties.

“We’ve seen this cycle before. Conventional real estate investors come and play in our sandbox,” says R. Lee Harris, president and CEO of Cohen-Esrey Real Estate Services, a leading owner, manager and developer of affordable housing. “This is not a business you learn overnight.”

Harris and others shared their insights at AHF Live: The 2013 Affordable Housing Developers Summit, held in Chicago, Nov. 20-22. Affordable housing has become a relatively stable, strong business over the years, but poses challenges to speculators who aim to quickly raise the rents at affordable housing properties, according to housing advocates.

Buyers are paying high prices for affordable housing property, relative to the income produced at the properties. The average capitalization rate for a LIHTC property sold over the year that ended this October was 6.7 percent (a cap rate represents the income for a property as a percentage of the sale price), according to Marcus & Millichap. That’s not much higher than the cap rate buyers accept when buying an average garden apartment property that has no rent restrictions.

It’s not unprecedented that buyers interested solely in the yield produced by their real estate investments would buy affordable housing properties. The undeniably profit-driven real estate investment trust AIMCO holds the number three spot on Affordable Housing Finance magazine’s list of the top 50 owners of affordable housing in the U.S. However, AIMCO has been largely content to hold its affordable housing apartments and keep them in their affordable housing programs with restricted rents.

But the motives of the latest crop of yield-driven investors in affordable housing are still unclear. Perhaps some are hoping to dramatically raise rents, like the investors during the real estate boom who bought Stuyvesant Town, a giant rent stabilized workforce housing property in New York City. Their plan for Stuyvesant Town failed dramatically after the new owners’ unsuccessful struggle with New York City’s rent stabilization laws.

Every apartment financed with low-income housing tax credits must be rented to a household that meets the income limits set by the LIHTC program for 15 years—or else the investor will lose the ability to claim the tax credits and may also be forced to repay tax credits already claimed.

But even after 15 years, there are still restrictions on how high a new landlord can raise the rents. Properties financed with LIHTC also have a land use restriction agreement (LURA) that can keep apartments affordable for decades. The federal law that governs LIHTCs calls for at lease 40 percent of the apartments at an LIHTC property to remain affordable to households earning 60 percent of the area median income, or 20 percent to stay affordable to people earning 50 percent for an extra 15 years, after the first 15-year LIHTC compliance period has ended.  But that’s just the federal mandatory minimum. Many state housing agencies put land use restrictions on their affordable housing properties that stretch out for decades—50-year restrictions have become common in states like California or New York.

In less heated real estate markets, the rental price of an average apartment may also limit the ability of property managers to push up the rents at a more-than-fifteen-year old property. The income of the tenants living at property can also be a limiting factor. “If you’re tenants are paying more than 40 percent of their income towards rent, raising the rent might be a little tough,” says David Leon, partner with Broad & Cassel.

This article was republished with permission from National Real Estate Investor.