Affordable housing is a highly debated topic that various governments have trouble defining and specifying.
For property managers, affordable housing and subsidized housing can serve as an exciting investment opportunity. Not only are they providing low income housing to low income families, but they are also benefiting from the various tax benefits that come with it.
However, this can all be pretty confusing.
For this reason, we have put together a complete guide for property managers to fully understand the world of affordable housing.
To begin, let's go over what affordable housing refers to and how it is defined by investors and the government.
What Is Affordable Housing?
Affordable housing is defined as public housing that is deemed affordable for families with a household income that is at or below the median income. This median income is stated by state and local governments by a recognized housing affordability index.
There are various housing programs that lower to middle income households can take advantage of to gain access to rental assistance as well as affordable rentals. These housing programs, mostly government programs, provide rental housing to these families and negotiate with property managers and property owners to rent out the existing housing.
Who Is Eligible?
The eligibility requirements for affordable housing can get a little tricky. First, there are a few general requirements for those wishing to receive housing assistance. These can vary depending on state and local laws, but they typically include:
- Low-income distinction
- Clean criminal record
- History of being a good tenant
...and some more specific requirements.
In the United States, a low-income household is typically defined as a household that earns below %80 of the median income.
For example, in Florida, the median household income is $57,000. This means that a household would have to earn less than 80% of that income, which is around $45,600, to be classified as low-income.
However, not every family who earns this much or less will receive affordable housing benefits. It is estimated that only around 1 in 4 families who meet the requirements and apply actually receive benefits.
Investing In Affordable Housing
For a property manager or real estate investment, it may seem like affordable housing is not something that you should invest in.
However, there are actually a large number of benefits to investing in these kinds of rental units. But, it is important to compare the pros and cons of these investments before making any decision.
In this section, we will be discussing the pros and cons of investing in subsidized housing.
Pro: Tax Credits
The first, and possible the most beneficial, pro of investing in subsidized housing includes access to tax credits.
The Low-Income Housing Tax Credit (LIHTC) is now responsible for funding approximately 90% of all subsidized housing developments in the United States. Through this same program, investors can get between 30% and 70% in subsidies through the LIHTC.
This specific benefit can be very useful for real estate investors to create a lot more value for the money that they spent on the investment. Thus, it incentivizes investors to invest money into cheaper properties to be able to convert them into affordable housing.
Another great benefit of investing in affordable housing is that they are resilient to recessions.
During recessions, consumer incomes typically take a significant hit and it becomes harder to fill vacancies in regular housing units. This is when the demand for some kind of permanent supportive housing rises.
This is why affordable housing can actually be one of the most stable real estate investments. Even when the market is at an all-time-high or all-time-low, affordable housing will always be in demand.
Pro: Building A Local Economy
Although this is a benefit that may not be immediately quantifiable like the other benefits, it can still have a noticeable impact on your portfolio.
When families within a community are able to afford to pay for a rental property, they are also going to be able to pay for things like groceries, healthcare, entertainment, etc. Thus, they are injecting money back into the economy, helping it grow and prosper.
Once the economy begins to grow, any other investments in the area will most likely increase in value.
Con: Strict Inspections
One of the drawbacks of investing in affordable housing is that the government conducts very strict inspections of the property before allowing the tenant to move in.
These inspections often require higher property specifications than any other regular inspection. The government will also go back to the property to conduct yearly inspections to ensure that the property is still within accordance.
Con: Government Leases
Just like with traditional housing. affordable housing units have lease agreements that dictate the tenant's stay there. However, there is one significant difference - the government programs, like the US Department Of Housing & Urban Development (HUD) decide on the lease agreement.
This means that it is possible for affordable housing units to have two lease agreements. This can become a problem for the property manager because the government lease agreement will always supercede the property manager's.
This also applies to transitional housing, which is housing that is designed to support families only until they are able to sustain another form of permanent housing.
Con: Tenants Not Financially Qualified
Now, although many tenants who apply for affordable housing can be very good tenants, that does not mean that they are necessarily financially qualified for one of your rental units.
Since these tenants typically have a lower income, it is possible that they do not mean the minimum income or credit score to be a typical tenant.
Although investing in affordable housing developments may sound like a risky endeavour, it can actually be a very stable and lucrative one if done correctly. Not only is the investor benefiting from some of the tax credits, but they are helping struggling families find reliable housing to help them get back on their feet.