Sacramento's Attempt To Build Affordable Housing Illustrates Why It's Almost Impossible

Although Sacramento, California, is in the Golden State's interior, it struggles for accessible affordable housing just like the big cities on the coast. 

A recent attempt by the city to build an affordable housing development illustrates the challenges that come with achieving this laudable goal. It started with a simple plan to build an affordable, 43-unit, seniors-only housing complex in the middle of the city.

When it was all said and done, the development cost the city $27 million. This translates to a per-unit cost of $670,000. To put that number into context, consider that brand new high-end, three-bedroom homes in a luxury development are listed at $617,000. Sadly, this is hardly an anomaly. It is one of many attempts to build affordable housing that ends with per-unit costs over $600,000.

Don't Miss:

• Most investors are priced out of buying real estate in the highest-growth markets, but they can still get a piece of the action through this innovative strategy. 
• Elon Musk has reportedly bought 6,000 acres of land just outside of Austin. Here’s how to invest in the city’s growth before he floods it with new tech workers.

Similar Developments Have The Same Cost

In early 2023, a nonprofit housing developer wanted to build a 140-unit affordable development on Broadway. The original projected cost was $78 million. That was expensive enough, but then the unexpected occurred, and the developer had to knock down a vacant building on its proposed site. By the time the project opened, the final budget had exploded to $94 million.

Mutual Housing California sought to rehabilitate an old hotel on Stockton Boulevard and turn it into 113 affordable units. It is estimated that after constructing the one- and two-bedroom units, the final cost will be $70 million. That's an average per-unit cost of $600,000. Even companies that are set up as nonprofits with a specific mission to build affordable housing have trouble coming up with this kind of money.

For a private developer, such as a real estate investment trust or real estate crowdfunding outfit, these kinds of per-unit costs are only justifiable if they can charge market-rate rents for the properties. They are for-profit companies, and as such, they have shareholders who are expecting a dividend at the end of the quarter or year. The same shareholders also expect a handsome payoff when the assets whose construction they funded are sold.

The Most Brutal Irony Of All

The only way private developers can have a reasonable expectation that their investors will make a profit is if they're building in the luxury sector.  In what can only be described as the most brutal of ironies, The Sacramento Bee queried developers and found out they are often able to build market-rate units in the Sacramento area for $300,000 per unit.

That's half what it costs to build affordable housing units. The reasons why are complex, but the long list of federal, state and city regulations that come with building affordable housing are certainly a deterrent. By the time developers and builders acquire the land and clear the regulatory hurdles on affordable housing, they often find themselves way over budget.

There Has To Be A Better Way

The problems that affordable housing providers are experiencing in Sacramento are not unique. If anything, they are even more pronounced in cities like Los Angeles, San Francisco and San Diego. They all have average rents and home prices significantly higher than Sacramento.

Start generating passive income through real estate

Check out these featured investments from Benzinga's Real Estate Offerings Screener.

The only real answer to this problem is for both the business and the legislative community to reach a point where they are both rowing in the same direction. That means that the government may have to compromise on some regulations and incentivize developers with bigger or more creative tax breaks, such as those in designated opportunity zones. Additionally, the cost of skilled labor and land acquisition is tremendously high in places like California. 

Many developments can be delayed for months or years by a single lawsuit from a well-funded group of concerned residents who don't want affordable housing in their backyards. A combination of all these challenges is why it costs over $600,000 to build an affordable housing unit in Sacramento. Until there is a comprehensive solution that addresses these problems, affordable housing will continue to be a scarce commodity in California and all over the country.

Read Next:

• Homeownership may be out of reach for most Americans, but that’s not stopping these average investors from raking in passive income with single-family rentals through fractional ownership.
• Passive income investments are one of the most trusted methods for riding out a recession, so it's no surprise that people are turning to high-yield real estate notes that pay a fixed 7.5% to 9%.