Section 8 single-family rentals: An overlooked investor asset class

One of the most heart-wrenching problems in America today is the lack of affordable housing. According to an analysis of Redfin data, having a six-figure income is now essential in order to buy a median-priced home in close to half of the United States. That's driving a surge in rental demand among those who are priced out of the housing market, but the median monthly asking rent of $1,964 as of January 2024 is also a stretch for many. According to the National Low Income Housing Coalition, "the lowest-income renters in the U.S. face a shortage of 7.3 million affordable and available rental homes." 

As organizations like the Mortgage Bankers Association work toward solutions for this enormously complicated issue, institutional investors may be overlooking an opportunity to step up. This "counterintuitive" opportunity lies within the Housing Choice Voucher (HCV) market segment, which grew at an inflation-adjusted 13% rate from HUD FY2002-FY2019. Building a portfolio of HCV single-family rental assets would advance a flagship model for public/private partnerships that genuinely "do well by doing good" — expanding housing access in workforce neighborhoods while providing attractive yields for dedicated institutional investors.

Demand for affordable SFRs exceeds supply
The U.S. Department of Housing and Urban Development launched the HCV program to help very low-income families and others "to afford decent, safe, and sanitary housing in the private market." The current program budget is about $30 billion, and approximately 2,100 state and local public housing agencies throughout the U.S. administer it. These agencies grant housing vouchers to qualified families to enable them to secure a suitable place to rent, such as a single-family home.

Approximately 2.3 million households have taken advantage of this opportunity. Still, the need for quality SFR housing for HCV tenants continues to exceed supply. This is where institutional investors — partnering with others in this ecosystem — could fuel some systemic change while advancing their own growth. Capturing even a 1% share of the market would make them major national SFR players. Moreover, this segment not only delivers high single-digit and low double-digit unlevered yields; renovated, well-maintained and professionally managed SFRs in lower-income neighborhoods have the potential for more historical home appreciation than other SFRs do. Small investors are already experiencing these benefits, but the larger institutional investors are hesitating.

Combating misconceptions
What's holding them back? Since the 2008 financial crisis, they have stayed especially close to their comfort zone (e.g., single family homes with borrower FICO scores of 740), avoiding the risks of the unknown. They may also harbor many common misperceptions about the HCV/SFR space affecting their potential yields, such as:

• Tenants will pay rents late: To the contrary, the U.S. government directly deposits 70% of their rent each month into operating accounts. Tenants are dependable payers of the rest because they lose their vouchers otherwise. 
• Many tenants will cause problems that lead to eviction: Actually, their average residence in these properties is 10 years.
• Investors will be supporting slumlords: To the contrary, this is institutional investors' opportunity to support HUD's intention of making quality homes available to everyone. This kind of housing in workforce areas attracts tenants who take care of the properties so they can stay in them.

Tackling complexity
To be sure, SFRs involving HCV renters have many "moving parts" that need oversight — especially when institutional investors have a stake in 1,000 or more rentals. But even with paperwork continually changing hands between HUD, authorized housing agencies, landlords, tenants, property owners, and servicers, this initiative is highly doable. The institutional investment industry is already accomplishing similar feats with other big portfolios of assets, such as Ginnie Mae Early Buyouts. 

Combined with expert insights from trained professionals, they're using technologies like AI and blockchain to scale and streamline key processes like sourcing, asset surveillance, reporting and analytics, governance and controls, and default management, and reduce inefficiencies and errors that drive down pricing and yields. Now they're ready to replicate their success in this emerging area.

It's just a matter of institutional investors saying yes. Yes to the truth that no matter how many steps removed they are from the rental process, they are vital to helping everyone lead a productive, fulfilling life in a comfortable home.