01 Jun How HUD Projects Are Good for Investors
One of the more frequent questions we hear from our friends and investors is why Presario seeks out multifamily development projects and acquisitions insured by HUD (Housing and Urban Development). It’s a good question, and here we take a closer look at why HUD projects are good for investors.
“HUD multifamily projects are some of the most cautiously vetted in the commercial real estate industry,” says JR Lephew, a Principal and Technical Director for HUD Services at Partner Engineering and Science, Inc.
They have fixed-rate loans, long amortization timelines, and carry very low interest rates. HUD projects are also underwritten by both HUD and the specific lender of interest and have annual audits. This provides redundant third-party oversight and should give investors a greater sense of security.
HUD allows a relatively high loan-to-value ratio which means the equity requirement is low compared with more typical market-rate multifamily projects. Higher LTV, with a lower equity requirement, allows for greater cash flow under normal circumstances.
Multifamily projects backed by HUD-insured loans can be strong performers as long-term hold assets and can create significant value as part of a diversified real estate portfolio. This is due, in part, to the elimination of interest rate risk.
As approved HUD sponsors, Presario frequently uses HUD 221 (d)(4) and HUD 223 (f) debt financing. This allows us to partner with strong sponsors and developers and implement flexible partnership structures, which in turn provides access to high-quality multifamily real estate developments.
HUD pre-approves the asset location after an exhaustive market study to determine the ongoing need for housing in a specific market. In general, this provides a location with a pent-up need for housing units and thus, potential for stable returns.
HUD Projects Benefit Residents, Investors, and Developers
Around the country, affordable housing is in high demand. There is an opportunity within secondary and tertiary markets to help fill that demand, particularly in leveraging public-private partnerships.
Presario often tries to work with local municipalities to produce public-private partnerships, including endorsed Affordability Housing Development Assistance Bonds, that further enhance the affordability component of multifamily projects.
Such partnerships can usually produce more units at an even more affordable price – a win-win for all stakeholders involved. The region gets quality, affordable housing, the renter has access to top quality construction at a reasonable price, and the developer can execute the business plan within this framework.
“HUD’s…risk exposure and default rates have shrunk,” says Lephew. “With expanding green lending incentives and affordable housing shortages, multifamily is a robust and growing sector for developers, and if a future economic downturn happens, it will only grow in value. Currently, we are seeing high volume in new construction and refinances/acquisitions as a result of the overwhelming demand for affordable, efficient housing.”
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