Image by T.H. Chia from Unsplash.

It’s no secret that there’s a severe shortage of affordable housing in the U.S. The National Low Income Housing Coalition put out a report in March of 2021 which estimates a gap of 6.8 million affordable and available units for what are known as extremely low income renters, a HUD definition meaning a household income of less than 30% of area median income, or AMI.

Current efforts don’t appear to be able to bridge this massive gap, either. A Wall Street Journal article from two years ago highlights how, at that moment, developers have overwhelmingly been building luxury units, with very little focus on affordable housing except where required by law.

Investment, too, appears to be highly concentrated on top-tier apartment buildings across major markets. So, what is the upside to making an investment play in affordable housing? Check out five key reasons below.

1. Affordable Housing Has Profit Potential

While luxury assets have the potential for higher margins, the fact remains that Class A, upscale communities tend to have higher vacancies almost universally compared with affordable housing properties. While buying an affordable housing asset could be seen as a riskier option, due to the potential for historical deferred maintenance issues and perceptions of higher rental arrears, investors in this space generally can take advantage of significantly lower-cost loan options — like the HUD 223(f) — to finance an acquisition.

2. Affordable Housing Properties Offer Consistent Returns

Another big plus of the affordable housing sector is its ability to deliver consistent income to landlords. For owners of Section 8 housing, the Department of Housing and Urban Development agrees to cover any difference between a contracted, subsidized rental rate and what a resident can pay through the use of HAP contracts. This essentially means that, even should a resident become unemployed, the government will pick up the tab in ensuring rent is paid.

3. Even in a Downturn, Affordable Housing Stays Strong

The ability of affordable housing to weather a recession is one of its greatest strengths and certainly sets it apart from luxury properties — especially when it comes to large cities across the country. Although high-end rental rates skyrocketed last year, up nearly 16% according to Yardi Matrix data, these increases were only possible due to the massive hit Class A properties took during the initial downturn of the pandemic. In times of severe economic turbulence, rental demand remains high, as many people prefer to retain liquidity and avoid purchasing homes, but this demand isn’t felt equally across property sectors. Rental units with asking prices above a market’s median are far more likely to sit vacant for months compared to affordable housing, which generally have large waiting lists with ample potential tenants.

4. Affordable Housing Tax Credits Reduce Costs

If the affordable housing asset you invest in needs some serious work, you may be able to take advantage of HUD’s Low-Income Housing Tax Credit, or LIHTC, program. This program offers tax incentives in two separate ways, covering either 30% or 70% of a rehabilitation or development project’s costs. While competition for funds can be fierce, these tax credits can make all the difference when it comes to creating additional affordable housing units in a market. Similarly, investors or developers may also be in a strong position to utilize additional credits if a property or development is located within an Opportunity Zone.

San Francisco. Image by Kimson Doan from Unsplash.

5. Affordable Housing Positively Impacts Communities

Last and certainly not least, the social impact of improving or creating affordable housing in a market brings a clear net social good to a city. Especially in many metropolitan areas where homelessness is rife, or where employees need to take on multi-hour commutes simply because housing prices have risen so far out of the reach of many, affordable housing is absolutely essential for the greater public good. Affordable housing also has many additional benefits, beyond the immediate needs of renters — there’s also a positive economic impact, from increased job opportunities to a significant increase in local consumer spending.