Affordable Housing Investment Pros And Cons

Investing in real estate has a lot of appeal. It’s a good way to establish a regular rental income and can have a big payoff when you decide to sell.

An affordable housing investment is a way to get into real estate and provide housing opportunities for your community. If you’re interested in investing with a social justice angle or you’re investigating social entrepreneurship career opportunities through affordable housing, you’ve come to the right place.

Keep reading to learn what an affordable housing investment is, different ways to pursue this type of investing and downsides to look out for.

What Is An Affordable Housing Investment?

You don’t need to buy a multiunit building if you want to start investing in low-income housing. Affordable housing investment can be a part of your investment portfolio. Here are a few types of investors that can be involved in this opportunity:

• Builders/Developers: Many government incentives are geared toward building/developing affordable housing. Builders and developers can take advantage of these incentives and sell the property to other investors.
• Passive Investors: If you have some money to invest, you can choose to invest in real estate investment trusts (REITs) that manage low-income housing.
• Landlords: If you already own a rental property, consider accepting Section 8 vouchers to help future tenants afford to live in your property.

But what exactly is "affordable housing" and why is it a good idea to start investing in it? More importantly, how can you do it? That's what we'll tackle in the rest of this guide.

What Constitutes "Affordable Housing"?

The U.S. Department of Housing and Urban Development (HUD) defines affordable housing as “housing on which the occupant is paying no more than 30 percent of gross income for housing costs, including utilities.” There’s a difference between HUD’s definition of affordable housing and general housing affordability, which does not have a strict definition and is instead based on how much house you can personally afford to buy based on your income, cash flow and other factors.

Affordable housing is also called low-income, subsidized or public housing. Affordable housing properties are in high demand, especially in areas where housing costs have risen but incomes haven’t kept up.

Why Is Affordable Housing Important?

There are families who need affordable housing all over the country. From cities to towns to rural areas, there’s a shortage of places for people with lower income, seniors and people with disabilities.

When determining eligibility based on income, HUD uses a measurement called AMI – area median household income. AMI is determined by taking all household incomes in the area and calculating the midpoint.

According to a 2022 report from the National Low Income Housing Coalition (NLIHC), 11 million renters with AMI below 30% account for a quarter of all renters. These renters are more likely than other renters to be seniors or people with disabilities, at a rate of 49%.

There is a shortage of 7.3 million affordable rental homes for these 11 million extremely low-income renters. So, two in every three renters in this income bracket are out of luck. That’s without accounting for America's homeless population of over half a million.

This is where affordable housing investment comes in.

What Is Affordable Housing For Low-Income Households?

Access to HUD’s affordable housing programs is based primarily on income levels in relation to the area the property is in. Along with income, an individual’s age or physical disability can also qualify them for housing assistance. HUD uses AMI to help determine the eligibility for affordable housing.

HUD takes the AMI and breaks out income levels into categories. Let’s say an area’s AMI for a one-person household is $60,000. Here’s how HUD would categorize with this AMI:

• Extremely low income = below 30% of AMI (less than $18,000)
• Very Low Income = below 50% of AMI (less than $30,000)
• Low Income = below 80% of AMI (less than $48,000)
• Moderate Income = between 80% and 120% of AMI ($48,000 – $72,000)

To find your area’s median income, you can use HUD’s income finder or Fannie Mae’s more user-friendly map.

How Do I Become A Low-Income Housing Developer?

If you’re interested in learning how to become an affordable housing developer and you’re not super experienced, it’s best to start small. Take what you’ve learned from one property or situation and apply it to your next affordable housing projects.

If you’re already in the developing business, there are still a few things you can learn that apply to affordable homes. Here are a couple of tips to get started, whether you’re a new developer or a seasoned pro in commercial real estate.

Buy Cheap Properties

The best way to begin is to find bargain properties in areas that have a lot of need. Searching HUD homes, HomePath homes and foreclosures are great places to start the search.

Work with a real estate agent or REALTOR^® who is familiar with the area and the local housing market. They can be great sources of information to find bargain properties that are good candidates for renovation.

Expect that these cheap properties will need repairs. If you’re an experienced developer, you probably already know this, but it’s essential to have contacts you can call to inspect the property as well as make the necessary repairs.

Make sure to calculate if the purchase price plus repair costs is worth the investment. By starting with a cheap property, you can dip your toe into developing low-income housing while taking on less risk.

Learn About LIHTC, Section 8 And HAP

You need to familiarize yourself with different government incentives for affordable housing and its development. Section 8 is the HUD voucher program that subsidizes the monthly rent for low-income renters.

If you’re a nonprofit developer, you should also be aware of Section 202 and