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Affordable Housing
By Hemant G.
According to the US HUD when more than half of the annual income of the households is spent is housing costs their houses are not termed as affordable. Then the question arises what is affordable housing? Well one simple method of detecting affordability is to observe how the people applying for home loans are evaluated by the lenders. Lenders generally make use of some key ratios to find out the level of risk in lending to particular borrowers. One of the commonly used key ratios is the Debt-to-Equity ratio. In general terms it is the ratio of a person’s debt and liabilities to his incomes. Let’s have a look at an example:
A person with an annual income of say 50000 dollars is planning to buy a home with a monthly mortgage payment of 2000 dollars including interest, taxes and insurance. Thus annually he will have to pay 24000 for his house which is around 40% of his annual income. Normally less debt-to-income ratio means more affordability in making payments for the house. Lenders generally consider 30 or 35 percent to be a good debt-to-income ratio.
According to the HUD housing affordability should not be more than 30 percent of the annual income of the household. Spending more than 30 percent of the annual income in housing is considered as unaffordable as households may find it difficult to save money for their other basic needs. But the reality is that the households spend more than 30 percent of their incomes to fulfill their housing needs.
The issue of affordable housing is quite popular and lots of investors try to take advantage of this opportunity. However there are many hurdles in building affordable housing. Rising construction costs, property taxes, insurance etc are various payments that must be considered. The biggest issue is cash flow if anyone is planning to invest in affordable housing. There is a simple philosophy regarding affordable housing:
Purchase affordable houses in areas where you expect demand to rise considerably.
Purchase affordable houses where you can purchase quality properties with minimum cash flow consequences
And, purchase affordable houses where there is safe entry and exit for the investors
In today’s world where real estate investing is on top people consider the purchase of houses in affordable housing area as the best option and that’s true it is not only beneficial for the investors but also for the general population.
