October 6, 2018

JF1495: 3 Ways To Make Your Deals Pencil For Affordable Housing

Eddie is a returning guest who is back today to tell us about affordable housing. We’ll hear why he chooses to go with affordable housing and why he thinks more deals can be made if you can do affordable housing with your properties of potential deals. He also enjoys it because he likes to be able to help with the housing crisis. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Eddie Lorin. How are you doing, Eddie?

Eddie Lorin: Great, thanks! And you?

Joe Fairless: I’m doing great as well, and nice to have you back on the show. Best Ever listeners, you can listen to Eddie’s best ever advice, episode 1211; it is called “Good deals are made, not found.”

A little bit about Eddie’s background – he for the past 30 years has purchased and transformed over 3 billion dollars’ worth of multifamily real estate. He’s made it his life’s mission to fix the housing affordability crisis in America. Based in Los Angeles. Website is ImpactHousing.com.

Today, because it is the weekend, we’ve got a special segment called Situation Saturday, and it is the current housing crisis facing the U.S. working class, and steps that we can take to capitalize on it or just be more aware of it. With that being said, Eddie, will you give the Best Ever listeners a little bit more about your background, just as a refresher, and then we’ll get right into the housing crisis?

Eddie Lorin: Sure. I’m a NOAH guy. What’s NOAH? Naturally Occurring Affordable Housing. You can build for $500/door in urban areas, or you can buy at $150-$200/door (or even less) and deem it affordable. That’s what I’m trying to champion. Let all the new product go to the people that can afford it, and let the existing product that’s older, and basically less expensive, go to the working class. That’s what it’s about.

The problem is that a lot of people are still stuck and staying in these rent control departments, and they don’t belong there… As well as they’re just staying put, and we need to push them up, and we need to push in the people that have one foot on a banana peel. I’m a crusader for the fellas that are just hard-working, decent human beings trying to make ends meet.

Joe Fairless: And how does that come to fruition with what you do?

Eddie Lorin: Well, here’s a prime example. I did the first NOAH deal in the city of Los Angeles; I’m very proud, we’ve just closed it yesterday. We took 50 units in Korea Town, and through government-sponsored opportunities i.e. property tax abatement, we were able to cap the rents based on the area median income of what people make. The affordable housing business is based on what’s the area median income and the rent associated with that. No one should pay more than 30% of whatever they make. As a result, the rents are capped at a certain level. And again, the quid pro quo is to have a property tax abatement, and you need the right capital to invest. The returns are still very solid, but it’s a longer-term play and less cashflow, because of course, if you’re gonna cap the rents and make things affordable, it’s more like a 4%-5% return than the normal 8%-10% returns that we get from market rate investments, cash-on-cash, day one.

Joe Fairless: You mentioned a longer-term play, too…

Eddie Lorin: Yeah, 15 years is what we’re gonna be looking at here on this first property. It’s a 1920’s building, it’s studios and ones, it’s ideal for transitional housing and some of the homeless people that are on vouchers… That’s what it’s earmarked for.

So every vacancy will be earmarked for these people, that are through a non-profit which is called People Concern, and they basically provide counseling services and social work and check-up on all their meds, and retraining workforce… They do everything, they package it up, and every time we have a vacancy, they’ll come in.

These are people that are gonna stay for a long period of time, because they’re trying to make their transition back into the workplace. They really can’t afford the rent anymore. In Los Angeles alone it’s estimated by the USC’s Price School, which I’m very involved with, 50% of the homeless are not homeless because they’re talking to themselves and they’re crazy, or whatever you wanna say, or they’re mentally ill – they actually just can’t afford rent anymore.

People think the homeless are all pathetic, and some of them are, and it’s sad, but we don’t deal with those people. We wanna deal with the people who can function, and still have a job, but their job is not enough to pay the rent. You can be paying 50% of your income on rent; let’s say you make $40,000, and you could be paying $20,000 a year in rent, and then if you add in your transportation costs, you’re actually paying 70%. So we’ve gotta make sure that people can live where they work, or somewhere close, and near public transportation… Concepts like transit-oriented development (TODs). These are some of the concepts.

Joe Fairless: Why 15 years?

Eddie Lorin: That’s the California pre-payment penalty on this particular program. But we need to come up with more creative programs, not just the government, to be able to finance this stuff. We need private foundations and individuals and wealthy people to step in where the government really can’t. This is just a pilot program. There’s only so much doe set aside for this, what we can do. It really needs to expand to a multi-faceted level of different colleagues and constituents and stakeholders. It’s a very complicated issue. We need to build our way out of the problem, we need to buy and deem product affordable, and we need to bring in many levels of tranches of different financing and equity to make these things happen.

Joe Fairless: From an investor’s standpoint – you mentioned 4%-5% in general, and like a 15-year project… What’s the exit plan at the end of 15 years?

Eddie Lorin: Well, you’re riding up area median income. It’s a different mentality, different model, it’s a longer-term play, but area median income does go up over time, and rents will go up in conjunction with area median income, rather than market forces.

Look, in New York stuff trades for 600k-700k/door; that’s old product. Here in Los Angeles we’re still at 200k/door for old product. I think there’s a lot of room for opportunities of appreciation… And there’s rent control in New York, so it’s a trade-off, but there’s still plenty of headroom to make money long-term in urban real estate, because it’s supply and demand. Look, we have a huge housing shortage. L.A. alone – 500,000 units short. Across the country is four million units short. You can’t lose, potentially. The SEC will get mad at me for saying that. [laughs]

I mean, how could you lose money if you’re investing in housing? Not A-class, not $3,000-$4,000 rents, but $1,000-$1,500 rents. It’s hard to imagine how you can get hurt, that’s all I’m saying.

Joe Fairless: As a listener who’s listening to this somewhere else other than Los Angeles, and they’re a multifamily investor or aspiring multifamily investor, or just any type of real estate investor, what action can be taken on their behalf?

Eddie Lorin: Well, it’s gotta be a public-private partnership. If you wanna do it yourself, you’ve gotta go to the local jurisdiction and say “Look, I wanna supply affordable housing.” They’re gonna say “I love you. Step up, please. How can we help?” You’re gonna say, “Look, I need a property tax abatement, I need some low-interest financing, I need some supplemental vouchers, because if all I’m gonna get is $800 from the Section 8, I need $1,000 rents to make this deal work. Where do I get the $200/month?” “Oh, well this local foundation is in touch. They wanna help to solve the problem.”

Look, it’s not easy. I’m a crusader. I’m pushing a rock up a hill trying to get these people to step in, and it’s very slow and it’s very hard. If you’re not patient and you’re not passionate about solving this problem, I wouldn’t bother. It is a difficult situation, it is gut-wrenching, but it’s rewarding when you can finally get something done.

It took me two years to get one building done in the city of Los Angeles. But more people have to fight the fight, and it’s not easy. Or you can invest with a guy like me, and that’s the difference. In Maryland we’re buying a deal, and actually the county had the right to purchase it, and in order to keep them from purchasing it, we put on restrictions, and I’m asking them and I’m hoping they come back with low-interest financing as a quid pro quo, because they’re not gonna give a property tax abatement… There’s gotta be some offset for putting on rent restrictions, if you wanna do that.

My theory is that Amazon’s going to the Beltway, but that’s a different story. But I think investing there is an amazing opportunity, and there’s such a need for affordable housing there… And if you bring 50,000 units to wherever Amazon ends up – again, I think they’re gonna end up there – you’re gonna have massive, massive–

Joe Fairless: I agree, by the way. I think it’s going to DC, too.

Eddie Lorin: Yeah, he owns The Post, he has a 23 million dollar house, and the third thing is he’s got a sales tax issue politically, and “Wink-wink, Washington… I’ll bring all these jobs here, and we won’t have to charge sales tax.” Again, my theory. I don’t know.

Joe Fairless: Yeah, my theory, too. Who the heck knows… Speculation, but I agree. I didn’t initially, but then once they announced the second or the finalists, that’s what I thought, too. Well, affordable housing – there are three things you can do to help make the numbers pencil out; one of the three things, or multiple of the three things you HAVE to do to make the numbers pencil out, most likely – one, you said property tax abatement; two, low-interest financing, and three, supplemental vouchers. Where would you go for each of those three?

Eddie Lorin: [laughs] Property tax abatement is purely government, pushing the rock uphill and telling them “You want affordable housing? It’s a hell of a lot cheaper to just give up property tax a year, rather than fund all these new developments, which are so expensive. It’s cheaper to do it this way, and it’s faster”, and it avoids the [unintelligible [00:13:12].13] problem, right? If you buy existing product, there’s no neighbor who can complain “I don’t want the homeless here” or “I don’t want low-income housing here.” It already exists, they can’t stop you. So this is the crusade with the government agencies, and it’s tedious and time-consuming and it will be something that’s a love of your life for years… But again, we all have to fight the fight, and I’m trying to lead the fight. So that’s the government, on the property tax abatement.

Joe Fairless: But specifically, when you say the government – specifically where do you go for–

Eddie Lorin: The town hall, or whoever you pay your property taxes to, the county assessor; you need to start there, and then you need to see what politically needs to happen in order to get this approved for a property tax abatement. Every county is different, I don’t know.

Joe Fairless: What are some examples for what you’ve come across, what needs to be done?

Eddie Lorin: I’m doing this program through CalHFA, which is a financing agency in California, and they’re associated with what’s called the LURA – Land Use Restriction Agreement. And in the state of California, it’s statutory that you can avoid property taxes if you keep your rents at a certain level, based on area median income. So that’s one example.

You have to dig, and dig, and dig, and fight, and put up with a lot of rejection. It’s not easy. Sorry to be so blunt.

Joe Fairless: No, you’ve made that clear, we got that. Okay, so – property tax abatement, that’s how we follow the process. The next one is low-interest financing.

Eddie Lorin: Well, that can come from the government agencies. Again, you network around local foundations and wealthy people who are interested in helping the world, and helping to solve the problem. There’s a certain bucket called “Program-related investment.” Let’s say you’re a billion-dollar foundation. The IRS says you must give away 5% of your money, or 50 million dollars a year. Give away, or you can do a low-interest loan called a program-related investment. It stays evergreen on your balance sheet, rather than being gone, in the form of a grant, as long as it’s not a market rate investment, it’s below market… So you can loan money at 2%-3%, which if you’re buying a 4-cap, you’ve gotta have equity that’s cheaper than a 4-cap if you’re financing [unintelligible [00:15:29].16] So that’s what you need, is that low-interest financing from wealthy people, or a foundation, or a government agency, or whoever it’s gonna do it, and that’s it.

Then the third is also government and foundations, to do a supplemental voucher. Now, it’s illegal as it stands now to put any supplemental vouchers behind a Section 8 voucher. That needs to change. I don’t know how to change it, but it must change, and there must be some way for people to be able to supplement their rent if they’re getting vouchers. Let’s say the rent is $1,000. Someone is making minimum wage. The most they’re supposed to pay is 30%, so the most they should pay in rent is $550. They’re going to get $450 in a voucher from the government to the thousand dollars, right?

Joe Fairless: Yup.

Eddie Lorin: Well, what if you need $1,200 to make the deal pencil, because it’s a competitive environment, and the pricing is too high to make $1,000 rents work? You need to underwrite another $200. You’ve gotta find it somewhere, and it’s gotta be lawful, and I’m trying to figure it out. But you asked me a solution, and I didn’t say it was possible. It needs to be possible, it needs to happen, and I will make it happen, or someone will.

Joe Fairless: What’s the easiest part of the process?

Eddie Lorin: Finding a deal that’s cheap enough to work, or finding the benevolent capital who’s willing to take a lower return short-term for a long-term appreciation, who believes in the market and believes in the demand for affordable housing. Look, it’s all about your cost of capital in any real estate investment, and you have to be able to make money in the process. It’s a lot of work, you can hear it in my voice; I need to make money too, right? I’ve got a staff, it’s a lot of work, and to find the right investor is the key. Someone who really says “You know what, I love what you’re doing. I don’t need to bust your balls and make a 20 IRR. I’m happy with less. Let’s change the world together, one apartment at a time.” That’s what is needed the most, it’s capital.

Joe Fairless: What does the IRR pencil at to the limited partner after 15 years averaging 4%-5%?

Eddie Lorin: Well, including the sale, it’s probably 11%-12%… Which is fine, but they say “Ew, it’s affordable housing. Ew, it’s old product. Ew, it’s this, ew, it’s that. I like shiny product.” One excuse is as good as the next, is the issue. But people need to be willing to roll up their sleeves and believe in the long-term and look at other urban areas, how prices have jumped, and you’ve gotta hold your nose and say “Oh my god, 200k/door for this?” Soon it will be 400k a door, in 15 years, just based on “Buy buildings, buy real estate. They’re not making any more of it.” Basic.

Joe Fairless: Anything else as it relates to affordable housing? You actually talked through how to act on it, which is great for the Best Ever listeners who are looking to do this… The three things, which I’ll summarize in a little bit. Anything as it relates to this topic that we haven’t talked about, that you think we should?

Eddie Lorin: Look, the government needs to be more involved in solving the problem. This administration unfortunately is not doing enough. I’m not gonna get political; I’m just gonna tell you that instead of cutting the budget at HUD, we need to increase the budget at HUD, and there’s nothing any of us can do, other than voting the people who do believe in this.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Eddie Lorin: It’s ImpactHousing.com. You can find me there, and e-mail me through there. It’s really a complex issue, but its’ pretty simple if everybody would get on the same page and not be afraid. So anybody who wants to be part of the solution, anybody who has capital that they feel they want to invest for a special purpose, please let me know.

Joe Fairless: Three ways that you can approach having affordable housing make sense when you’re running your numbers. One is property tax abatement – you talked about that. Two is low-interest financing, and three – supplemental vouchers. You went into detail with each of those three, as well as just talking about the overall approach and why it’s needed, and the 50 units that you did in Koreatown. Congratulations on that.

Thank you so much for being on the show again. I hope you have a best ever day, and we’ll talk to you soon.

Eddie Lorin: You too, thanks.


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