Affordable housing has been a long-running crisis in our country. There is an estimated shortage of 7.2 million homes for low-income families. The National Low Income Housing Coalition found that there are only 36 affordable and available rental homes for every 100 extremely low-income renter households. The numbers get worse when you look at the 50 major-metro markets, with only 14 affordable and available homes for every 100 households.
In the past, policymakers and citizens have looked to the federal government for support, using taxpayer dollars to fund government programs aimed at providing affordable housing. But these solutions alone won't bridge the gap that continues to widen. The long-term solution lies in individual investors and corporations working with government agencies while utilizing their own business models to develop and provide long-term affordable housing.
At first glance, it may seem impossible to earn a profit while offering housing for less than the market rate, but there are ways investors can participate and profit.
Utilize existing programs
The Tax Cut and Jobs Act of 2017 introduced opportunity zones, a program that has become a shining example of how powerful tax incentives can be for directing private capital into desired markets or industries. The program, which offers various tax benefits to participating investors, has spurred over 88 opportunity zone funds focused on providing or developing affordable housing across the nation.
But this isn't the only tax-incentivized program focused on affordable housing. Certain states and counties are creating their own tax-based incentives to help private investors create more affordable housing. For example, St. Paul, Minnesota, is offering a 40% tax break for investors who utilize at minimum a fifth of a building’s units for lower-income tenants for 10 years and adhere to specific rental-rate requirements based on income. Another county in California gave a developer land for free, which was valued at $10 million, toward a development of a $52- million-dollar affordable housing project.
Bonds are also a popular way for local states or cities to incentivize affordable housing. Government-issued bonds can lower the cost for development of affordable housing or help subsidize the cost of operating the project, placing the burden for repayment on taxpayers rather than the developers. However, bond transactions can be costly, with developers paying anywhere from 5% to 6% in bond fees. These opportunities normally make sense fiscally when the development project is over $5 million.
While many of the projects above are for larger real estate investors and developers, small- scale real estate investors can participate and profit too. The Housing Choice Voucher Program, often referred to as Section 8, allows landlords to rent their private rental property to an approved tenant and receive the full rental rate for the market in the form of a subsidy.
The Low Income Housing Tax Credit, which was made permanent in 1993, provides investors with a dollar-for-dollar reduction in their tax liability in exchange for providing funds to develop affordable rental housing. The tax credits for providing subsidized housing is then repaid in annual allotments generally over 10 years.
By cutting costs up front for the development, or receiving subsidies, tax incentives, or tax credits, lower rental rates can be justified.
Seek long-term, big-impact solutions
It's critical, however, for investors and developers to understand the needs of low-income families. Tearing down old public-housing projects with the hopes of replacing them with new mixed-income housing projects might sound great in theory, but this approach actually results in far less affordable housing units in the long term.
A government-backed program initiated by Bill Clinton called Hope VI was aimed at restoring and providing better-quality affordable housing solutions. Between 1990 and 2008, 220,000 public-housing units were demolished, yet only 60,000 mixed-income units were built as a replacement. Mixed-income units can help reduce crime and provide better-quality housing in more geographically diverse areas of the city, but the number of housing specifically for low-income households in mixed-income projects needs to be the same as the number of affordable projects destroyed.
Developers in particular should consider what additional services or social-impact solutions can be provided in an affordable-housing development project that could benefit the residents, particularly with social services. Many affordable-housing projects are located in high-concentrated areas of low-income earners where schools, facilities, and services are of lower quality or accessibility. Providing things like an on-site daycare center, healthcare facility, or grocery store with access to fresh food can improve the quality of the community and reduce issues such as crime that can arise in public housing projects.
Positive social change while still profiting
The need for affordable housing isn't dissipating anytime soon. Statistics have shown there are no statistical differences in neighborhoods values in areas that have newly established affordable housing projects. Providing higher-quality housing and services at affordable prices help raise the opportunity for the community and improve the productivity and success of the area as a whole. And clearly, there are ways for investors to participate without jeopardizing their bottom line.
An ongoing concern about participating in affordable housing is the quality of the tenants and challenges or issues that can arise if the tenant breaks the lease, conducts illegal activity, or destroys the unit. But this issue can arise with any tenant no matter the price point. Conducting thorough background checks on each tenant can reduce this risk, but it's also helpful to be an experienced landlord or have a good property manager on your team.
If you're considering participating in affordable housing, conduct further due diligence about the various programs today. It's a good idea to start locally looking at your state or municipality's existing programs aimed at affordable housing. It's likely they utilize some sort of tax credit or specialized financing programs for landlords or developers who will provide long-term affordable housing solutions.