Real estate investment has a lot of attraction. It’s a terrific method to establish a steady rental income and can pay off handsomely should you decide to sell down the road.
Investing in low income housing is a great way to get into real estate while also helping your neighborhood. You’ve come to the correct site if you’re looking for socially responsible investments or employment prospects in social entrepreneurship through affordable housing.
What Exactly is Investing in Low Income Housing?
Housing costs (including utilities) should not exceed 30% of a household’s monthly gross income, according to the US Department of Housing and Urban Development (HUD). There’s a distinction between HUD’s concept of affordable housing and generic housing affordability, which isn’t defined in any way.
Low-income, subsidized, and public housing is all terms used to describe investing in low income housing. Investing in low income housing is in high demand, particularly in locations where housing costs have risen faster than salaries.
What Does “Low Income Housing Investments” Mean for Low-Income Families?
HUD’s investing in low income housing initiatives are generally focused on income levels in relation to the property’s location. A person’s age or physical impairment, in addition to their income, may qualify them for housing aid.
HUD employs a criterion called AMI – area median household income – to determine eligibility based on income. The midpoint of all household incomes in the area is used to calculate the AMI.
HUD then divides income levels into categories based on the AMI. Let’s say the AMI for a one-person family in a certain area is $60,000. This is how HUD would classify this AMI:
Extremely low income is defined as a household income of less than 30% of the AMI (less than $18,000).
Low Income = less than 50% of AMI (less than $30,000).
Low income is defined as a household income of less than 80% of the AMI (less than $48,000).
Between 80% and 120 percent of AMI ($48,000 – $72,000) is considered moderate income.
You can use HUD’s income finder or Fannie Mae’s more user-friendly map to locate your area’s median income.
What Is the Importance of Investing in Low Income Housing?
Families in need of cheap housing can be found all throughout the country. There aren’t enough spaces for low-income individuals, seniors, and disabled people everywhere, from cities to towns to rural locations.
According to a 2020 analysis by the National Low Income Housing Coalition (NLIHC), 10.9 million renters with an AMI of less than 30% account for a quarter of all renters and 8% of all households in the United States. These renters are more likely to be seniors or people with disabilities than other renters.
What Is the Importance of Making an Investment in Affordable Housing?
Families in need of cheap housing can be found all throughout the country. There aren’t enough spaces for low-income individuals, seniors, and disabled people everywhere, from cities to towns to rural locations.
According to a 2020 analysis by the National Low Income Housing Coalition (NLIHC), 10.9 million renters with an AMI of less than 30% account for a quarter of all renters and 8% of all households in the United States. These renters are more likely to be seniors or people with disabilities than other renters.
Only 7.3 million rental houses are affordable to these 10.9 million extremely low-income tenants. So, in this salary level, one out of every three tenants is out of luck. That’s not including the roughly half-million homeless people in the United States. This is where investment in low-cost housing comes into play.
Who Should Consider These Real Estate Investments?
To invest in affordable housing, you don’t need to purchase a multi-unit structure. Investing in affordable housing can help you diversify your portfolio. This opportunity can be pursued by a variety of investors:
- Builders/Developers: There are numerous government incentives available to assist in the construction/development of affordable homes. These incentives can be used by builders and developers to sell their properties to other investors (more on that below).
- Investors who want to be more passive can put their money into Real Estate Investment Trusts (REITs) that manage low-income housing (more on that below).
- Landlords: If you already own a rental property, consider accepting Section 8 vouchers to make it more affordable for prospective tenants.
Make Use of Existing Programs
The Tax Cuts and Jobs Act of 2017 established opportunity zones, a program that has shown to be an effective tool for directing private investments into specific areas or industries. Over 88 opportunity zone funds focused on delivering or creating affordable housing across the country have sprung up as a result of the scheme, which provides various tax benefits to participating real estate investors.
This isn’t, however, the only tax-incentive scheme aimed at promoting affordable housing. Several states and counties are developing their own tax incentives to encourage private investors to build more affordable homes.
Bonds are also a common approach for local governments to encourage the construction of affordable housing. Government-issued bonds can assist subsidize the cost of developing affordable housing or lessen the cost of operating a project by putting the repayment burden on taxpayers rather than developers. Bond transactions, on the other hand, can be pricey, with bond fees ranging from 5% to 6% for developers. When the development project exceeds $5 million, these opportunities usually make financial sense.
While many of the projects listed above are geared toward larger real estate investors and developers, small-scale investors can also participate and profit. The Housing Choice Voucher Program, also known as Section 8, permits landlords to rent their private rental property to an eligible tenant in exchange for a subsidy equal to the full market rental rate.
The Low Income Housing Tax Credit, which was declared permanent in 1993, gives investors a dollar-for-dollar tax break in exchange for funding the development of affordable rental housing. The tax credits used to provide subsidized housing are subsequently reimbursed in annual installments over a ten-year period.
Lower rental rates might be justified by decreasing development expenses upfront or gaining subsidies, tax incentives, or tax credits.
Look For Solutions That Will Have a Long-Term Impact
Investors, on the other hand, must be aware of the demands of low-income families. In theory, demolishing old public housing buildings in order to replace them with new mixed-income housing projects sounds great, but in practice, this method results in considerably fewer cheap housing units in the long run.
Mixed-income housing can help reduce crime and provide better-quality housing in more geographically diverse regions of the city, but the number of low-income housing units in mixed-income buildings must equal the number of affordable housing units eliminated.
Many affordable-housing projects are located in densely populated regions with a large concentration of low-income earners, where schools, amenities, and services are of poor quality or inaccessible. Having an on-site daycare center, healthcare facility, or grocery store with fresh food can improve the community’s quality of life and prevent issues like crimes that can occur in public housing developments.
Social Impact
The demand for low-cost homes isn’t going away anytime soon. According to statistics, there are no statistical disparities in neighborhood values in locations where new affordable housing complexes have been developed. Providing higher-quality housing and services at reasonable costs helps to expand the community’s opportunities and boost the area’s overall productivity and prosperity. And it’s evident that there are ways for investors to become involved without compromising their profits.
The quality of the tenants is always a worry when it comes to inexpensive housing, as are the obstacles or concerns that can occur if the tenant breaches the contract, engages in criminal behavior, or destroys the property. However, this problem might develop with any tenant, regardless of their financial situation. Conducting extensive background checks on each renter can assist to mitigate this risk, but being a seasoned landlord or having a strong property manager on your team can also help.
If you’re thinking about joining a low-cost housing program, start researching the many options immediately. It’s a good idea to start looking at existing affordable housing programs in your state or municipality. They’re likely to use tax credits or specialized financing programs for landlords or developers who supply long-term affordable housing options.
If you’re thinking about joining a low-cost housing program, start researching the many options immediately. It’s a good idea to start looking at existing affordable housing programs in your state or municipality. They’re likely to use tax credits or specialized financing programs for landlords or developers who supply long-term affordable housing options.
Is It Worth It to Invest in Low-Cost Housing?
When it comes to investing in affordable housing, there are a lot of misconceptions. Some people may link low-cost housing with poor tenant quality and reduced profitability. The issue is, any real estate investment can be affected by these factors.
There are numerous advantages to investing in affordable housing if you do your homework and invest wisely.
Profitability
There is a great need for low-cost homes. Purchasing, refurbishing, and then renting cheap property has the potential to be profitable. You need to know how much you’re investing and what your margin is, just like any other real estate investment. Because of this margin, upgrading an existing house may be more cost-effective than starting from scratch.
Recession-resistant
Affordable housing is in demand in both hot and cold real estate markets, and it can be found in a variety of places. While luxury housing may appear to some to be a more tempting investment, it is more vulnerable to market fluctuations. In the event of a recession, demand for inexpensive housing may rise, while demand for luxury property may fall.
Government-backed
The government backs investing in low income housing, which eliminates a lot of risks. Section 8 vouchers imply that the government pays the landlord directly. These payments will be given to the landlord even if the renter loses their job.
What Are the Drawbacks of Investing in Affordable Housing?
When it comes to affordable housing, investors must take specific precautions. A little preparation and study can go a long way.
Construction is Expensive
It can be almost as expensive for developers to build new affordable housing as it is to build housing for middle-income wage earners. Renovation of an existing home may be a better financial decision than dealing with hefty building expenditures.
Restrictions on Zoning
Zoning laws and regulations can make it difficult to create affordable housing in many communities. Many of the cheapest housing units are found in multi-unit structures. Builders may find it challenging to comply with regulations regarding lot size and square footage.
Management Concerns
Government bureaucracy adds another degree of supervision to affordable homes. It may take longer to apply for funding or find new tenants as a result of this.
Because the income per unit is lower in affordable housing, repairs consume a bigger portion of profits. To save money on property maintenance and repairs, the majority of successful low-income housing landlords operate their own properties.
The Bottom Line
Affordably priced housing has a positive impact on communities and can be a sound investment. It also provides an opportunity to engage in real estate with consistent demand, whether you’re a builder, a landlord, or a passive investor. Builders and landlords may need to take special precautions, yet there are numerous advantages to having inexpensive housing.
If you’re looking to diversify your real estate portfolio, REITs that specialize in affordable housing could be a suitable fit. You may feel good about investing in something that benefits the community while also knowing that you’re making a sound financial decision.
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