A.CRE

HUD Home

A residential property owned by the Department of Housing and Development (HUD). If a foreclosed home was acquired using proceeds from an FHA-insured loan, the FHA will pay out the lender for the balance due and ownership of the property will transfer to HUD.

Putting ‘HUD Home’ in Context

Scenario: Greenwood Legacy Investments Acquires a HUD Home

Greenwood Legacy Investments, a mission-driven family office, is exploring opportunities to expand its portfolio in affordable housing while leveraging tax-advantaged strategies. The firm identifies a HUD Home located in a suburban neighborhood of Cleveland, Ohio, known as the Willow Glen HUD Home. This property is a three-bedroom, two-bathroom single-family home, spanning 1,800 square feet, situated on a quarter-acre lot.

Background on the HUD Home

The Willow Glen HUD Home became part of the Department of Housing and Urban Development’s portfolio after its previous owner defaulted on an FHA-insured mortgage. Following the foreclosure process, the FHA paid the lender the balance due and transferred ownership of the property to HUD. As is standard practice, HUD listed the property for sale to recover some of its costs, pricing it competitively at $160,000.

Greenwood’s Investment Strategy

Greenwood sees this property as an opportunity to align with its mission of supporting affordable housing while benefiting from potential federal tax incentives. By purchasing and rehabilitating the HUD Home, the firm plans to rent it to low-income families under a housing assistance program, further enhancing its social impact goals.

Financial Context

The firm evaluates the investment with the following assumptions:

  • Acquisition Price: $160,000
  • Rehabilitation Costs: $20,000
  • Total Investment: $180,000
  • Expected Monthly Rent: $1,500 (based on local market data for subsidized rents)
  • Annual Gross Income: $18,000
  • Operating Expenses (Including property taxes, insurance, and management fees): $6,000 annually
  • Net Operating Income (NOI): $12,000

Calculations and Returns

Using these figures, Greenwood estimates its potential returns:

Cap Rate = NOI ÷ Total Investment = 12,000 ÷ 180,000 = 6.67%

    • Cash-on-Cash Return (assuming Greenwood finances 70% of the acquisition and rehabilitation):
      • Equity Investment: 30% of $180,000 = $54,000
      • Annual Cash Flow: $12,000 – $5,400 (debt service) = $6,600

Cash-on-Cash Return = Annual Cash Flow ÷ Equity Investment = 6,600 ÷ 54,000 = 12.22%

HUD-Specific Considerations

As part of the HUD Home program, Greenwood had to comply with certain buyer restrictions and agree to maintain the property as affordable housing for a minimum period. Additionally, they accessed HUD resources for guidance on rehabilitation standards, ensuring the property met all safety and livability requirements.

Outcome

The acquisition of the Willow Glen HUD Home allowed Greenwood to fulfill its mission of supporting affordable housing while achieving attractive returns on its investment. By leveraging the HUD program, the firm acquired a property at below-market value, revitalized it, and provided quality housing for a low-income family in Cleveland.

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