By definition (according to the U.S. Department of Housing and Urban Development), housing is affordable if it requires no more than 30% of a household's income. The determination of affordability is based on an area's median income when reports are made about how much affordable housing is available.
The need for additional affordable housing (both for purchase and rent) persists across the United States. The National Low Income Housing Coalition recently reported that less than forty percent of the families who need affordable housing have access. In large cities and metropolitan areas, availability is even worse, stressing renters' budgets in those areas and pushing families to the streets.
Traditionally, the federal government has encouraged investment in affordable housing through programs like Low Income Housing Tax Credits (LIHTC) and the more recent Qualified Opportunity Funds. The LIHTC (initiated in 1986) is a federal subsidy that supports investment in the construction and rehabilitation of low-income multi-family housing via the use of tax credits. The Qualified Opportunity funds are part of the 2017 Tax Cuts and Jobs Act, which offers deferment and some forgiveness of capital gains for funds that are invested into economically challenged areas. Thousands of funds have started since the inception of the program, with nearly 100 focused on affordable housing.
There are also local efforts to support low-income housing. Investors can seek out these opportunities. Some states issue bonds to support affordable housing, while local governments may offer incentives to developers who include below-market units in their offerings. One example is found in St. Paul, Minnesota. The Affordable Housing Incentive Program provides rental property owners a 40% tax reduction, plus some grant assistance, for the development of affordable units. (The developer is required to maintain the units as affordable for ten years.) Similarly, the City of Charlotte, North Carolina, gave a developer a long-term land lease for a nominal charge in exchange for providing half of the developed units at an affordable price for twenty years.
Consider fractional investment opportunities
For the investor looking at affordable housing, REITs are worth examination. A Real Estate Investment Trust is a trust that owns, finances, or invests in real estate (or related assets.) REITs are pass-through entities and must follow specific rules to maintain that status. The stipulations include having at least 75% of assets invested in real estate and deriving 75% of income from real estate activities. Some REITs are traded, some are not, while some take a broad approach to investments and others are specific.
One very narrowly focused type of REIT is referred to as a social-purpose REIT, with the stated goal of addressing affordable housing availability while simultaneously seeking to provide positive results for investors. The investor may be willing to accept a lower prospective return on investment in exchange for the reward of “giving back” to the community.
Aside from the deliberate actions of social-purpose REITs, others invest in mobile home communities or modest detached housing tracts, which still offer homeownership opportunities or affordable rentals to families who earn below the local median income.