US Real Estate Development Investment
Overseas real estate investment in the United States has been increasing over the past decade. The main reason for this is the stable US economy. Although there have been fluctuations, the GDP has continued to grow at approximately 2% since 2010 after the Lehman Shock.
The current population of just over 300 million is expected to increase to the 400 million range in the next 50 years.
Differences between the real estate situation in the United States and Japan (example)
Japan
USA
New
vs.
Used Market
Fluctuations
in asset values
Depreciation
Vacancy rate
Landlord's Rights
Transparency
of information
Newly built homes are very popular, accounting for approximately 80% of the housing market. As buildings age, there is a strong tendency for their value to decrease.
The market is dominated by second-hand homes, with newly built homes making up only about 20% of the total. Even after many years, homes often maintain their value through regular repairs and renovations.
The value of a building tends to decrease with age, and it is common for wooden houses in particular to have a value of zero after 22 years.
The value of buildings often increases over time, with the price of used homes increasing approximately eight-fold over the past 40 years.
The useful life of a wooden house is 22 years, after which it can no longer be depreciated.
Each time the owner changes hands, the property can be depreciated over 27.5 years, meaning that even a 100-year-old building can still retain its value.
Even in Tokyo, it is common for vacancy rates to be over 20%.
Los Angeles has a serious housing shortage, but the average vacancy rate over the past seven years has been low at around 4%, making stable real estate management possible.
Tenants' rights tend to be strongly protected.
Landlords have strong rights and forced evictions are relatively easy.
Information about real estate transactions is limited, and systems such as escrow systems are often not in place.
The escrow system and information disclosure through the Internet are well underway, making it easy to conduct safe transactions.
Types of Real Estate Investment
Real estate investment can be done using the following three methods. We will compare the advantages and disadvantages of each method.
Buy and hold
Pros
-
Prices will rise slowly and steadily, following the trends of US real estate price increases
-
Rental income can be increased every year
-
Fastest depreciation in four years for Japanese corporations
Cons
-
Profits and losses are affected by the market
Real Estate Flip
Pros
The flip period is around 6 months to 1 year, so there is no need to take a long-term view of the market.
Profits can be predicted before investing
More profitable than buy and hold
Cons
-
High level of experience and skill is required to acquire good real estate
Real Estate Development
Pros
Higher profit margins than flips
You can also borrow from a bank
Rental income can be increased every year
Cons
-
Development in LA takes 2+ to 3 years from application period to completion.
Hot investment areas
The charm of South Bay (Los Angeles County) beach cities
Economic strength
Los Angeles is an economically strong city with a diverse range of industries including entertainment, technology and manufacturing.
Population growth
Los Angeles is the second most populous city in the United States and is expected to continue to grow in population, which is expected to increase the demand for housing.
Good weather
With a warm Mediterranean climate all year round, Los Angeles offers a comfortable living environment, which is why many people want to live in the city.
High level of education
The area is home to many world-renowned universities, including UCLA and the University of Southern California, making it a highly educated area. This creates high demand for student rentals.
Redevelopment Project
Redevelopment is underway in many areas, including downtown and Long Beach, which could lead to increased property values.
Diverse Culture
Los Angeles is a multicultural city with a population of many different nationalities, which makes it an attractive market for international investors.
Problems with Los Angeles' real estate situation
Rising house prices
Home prices are very high in Los Angeles, especially for young people and first-time home buyers. As of April 2023, the median home price in Los Angeles County was about $740,000, down 7.5% from the previous year, but still high.
Housing supply shortage
Housing supply is not keeping up with demand, resulting in very limited inventory. As of June 2023, Los Angeles County only has 2.6 months of monthly inventory supply. This continues to put upward pressure on home prices.
High mortgage interest rates
High mortgage interest rates are making it harder to buy a home, which has led to less sales activity across the housing market and more price volatility.
Increasing competition in the rental market
The rental market is also very competitive and rents are soaring. Especially in popular areas, rents are so high that it is difficult to find an affordable rental property.
Zoning measures are key to solving Los Angeles' housing crisis
Los Angeles' housing problem is getting worse.
While the number of people moving into the area is increasing, there is a housing shortage, and rental prices are more than 45% higher than in other developed international markets such as Tokyo.
One of the causes of the housing shortage and rising rents is zoning, known as the "single family zone." This regulation limits the number of homes that can be built on a single plot of land, significantly limiting the number of homes available.
In response to this situation, the City of Los Angeles has taken action, releasing a housing plan through 2029 that outlines housing-related laws, programs, and regulations to address housing issues.
In addition to housing issues, the government has also implemented policies that address environmental issues and homelessness, demonstrating its commitment to tackling long-standing social problems in a comprehensive manner.
The government has made a major move to promote housing supply.
City of LA
LOS ANGELES – Mayor Karen Bass has signed an ordinance to accelerate affordable housing construction in Los Angeles.
This ordinance was approved by the City Council on June 27, 2023.
It takes a big step toward codifying Executive Guidance 1 by exempting affordable housing and qualified mixed-income projects from the site plan review process. Like Executive Guidance 1, this exemption will reduce project processing times by six months.
Eliminating this process for affordable units would open the door to projects that want to build but fear the burden of site plan review.
This amendment makes the key points of the Mayor's Administrative Guidance 1 permanent.
Benefits of Affordable House Construction
Economic and social benefits
High demand and urgent need
Los Angeles faces a severe housing shortage, especially for low- and moderate-income residents. With an estimated 500,000 additional housing units needed to meet current demand, the combination of a housing shortage and skyrocketing housing prices has left many residents struggling to find affordable housing, contributing to homelessness and housing insecurity. Investing in affordable housing addresses this critical need and positions developers as key players in solving an important social problem.
Funding and Funding Opportunities
Investing in affordable housing in Los Angeles is financially favorable due to a significant backbone of state, federal and private funding. This funding structure allows developers to maximize capital efficiency and realize higher returns on their investments.
Government support and incentives
Under Mayor Karen Bass, Los Angeles local government has streamlined the approval process for 100% low-income housing projects, reducing bureaucratic delays and facilitating faster project completion, while providing critical financial support to developers through a variety of financing programs, including flexible housing grant pools and affordable housing-specific loans.
Market Dynamics and Future Growth
Resilient real estate market
Despite fluctuations, the Los Angeles real estate market remains strong, with high median home prices and long-term growth trends. Investing in affordable housing in this market offers the opportunity for stable demand, durability, and resilience, even in economic downturns.
Positive impact on the community
Affordable housing real estate developments contribute to the overall well-being of communities by providing stable housing for low- and moderate-income residents where it is needed most. Stable housing translates to better educational outcomes, improved health, and increased economic mobility for residents. These social benefits can enhance developers' reputations and attract additional support and investment from community stakeholders.
Long-term sustainability
Affordable housing provides long-term sustainability through stable occupancy rates and reliable rental income. These projects are often supported with rent subsidies and other financing mechanisms to ensure stable cash flow and reduce financial risk for developers/investors.
Strategic Positioning and Competitive Advantage
Alignment with policy priorities
Investing in affordable housing aligns developers with state and local policy priorities aimed at addressing the housing crisis. This alignment gives them preferential treatment in zoning, permitting and access to public funds, giving them a competitive advantage in the real estate market.
Strengthening Corporate Social Responsibility (CSR)
Developers who invest in affordable housing can improve their CSR reputation by demonstrating a commitment to social justice and community development, which can improve their brand image, attract philanthropic investors, and build stronger relationships with local governments and communities.
Investing for the future
As long as housing affordability remains a pressing issue, Affordable House investment will remain relevant and necessary. This future-proofing aspect ensures that developer investments remain in demand, offering long-term stability and growth potential.
Investing in Affordable Housing in Los Angeles is not only financially opportunistic, but also socially responsible: it leverages public and private capital, aligns with government priorities and addresses a critical market need, while contributing to the long-term stability and growth of the community.
Voucher Payment Standard (VPS)
The Section 8 Department Voucher Payment Standard is the most the Housing Authority can pay to help a family with rent. The family's voucher will show the number of bedrooms authorized by the Housing Authority, based on the number of persons in the family.
The Housing Authority establishes Voucher Payment Standards (VPS) based on the Fair Market Rents (FMR), which are established at least annually by U.S. Department of Housing and Urban Development (HUD). The VPS is the maximum subsidy the Housing Authority can provide toward the contract rent (rent plus utility allowance for utilities, stove or refrigerator paid or provided by the tenant). If the contract rent (rent plus utility allowance) is more than the VPS, the family must make up the difference out of its own pocket.
The Housing Authority must use the SMALLER of the number of bedrooms in the rental unit or the number of bedrooms on the voucher to determine the VPS. For example, if a family occupies a two-bedroom unit with a three-bedroom voucher, the two-bedroom VPS must be used to calculate your tenant portion of the rent.
Real estate development track record (including ongoing projects)
Frequently Asked Questions (FAQ)
To the landlord.
It depends but in most cases, only those who pass the screening can move in.
Currently, the price is determined by the comp at the time of purchase, so there is no impact.
The history of Affordable Housing dates back to 1937, but LA has been relaxing the number of units that can be built and simplifying the permit application process to allow more investors to enter the market.
Due to the new relaxation that began in 2023, there are still only a few participating companies, and there are not many companies that are familiar with the flow after this relaxation, so you will be able to move at an advantage.Possibly. Generally, there is a tax advantage called the Opportunity Zone. For example, if you build an affordable house like this in an Opportunity Zone and hold it for 10 years, there is a rule that all capital gains related to it are tax-free. While we can provide general information and real estate strategy suggestions, please contact your tax specialist for tax-specific questions.
There are certain conditions, but it is generally possible. Please contact us for details.
Please rest assured that we will handle everything from property selection + contractor selection + construction loan arrangements + progress reports + sales cash + refinancing in a centralized manner.
To date, we have primarily been approached by international investors ranging from real estate developers (including publicly traded companies), real estate joint ventures, small-mid companies, LLPs (Limited Liability Partnerships), and high net worth individuals.
We believe that the more complex the development, the more we can take advantage of our strengths.
Please contact us and let’s first start with a conversation!
