According to the National Low Income Housing Coalition, there is a shortage of seven million affordable homes in this country, and 75% of extremely low-income families must spend more than half of their income on rent. There is no community in the U.S. where one person working full-time in a minimum wage job can afford the rent on a two-bedroom apartment. Further, the coalition points out that increasing access to affordable housing is the most effective way to reduce childhood poverty and improve economic mobility in the United States.
As an investor, you may be motivated in part by altruism and a genuine desire to help. Most likely, you also need to invest in projects that you expect to have the potential to return a profit or contribute in some other way to your financial goals. As a result, federal tax policies sometimes seek to create incentives for investors to consider affordable housing projects which might not otherwise gain the support they need.
What policies support affordable housing investments?
Low Income Housing Tax Credits, which Congress created in 1986, are an indirect federal subsidy that encourages investment in the development and rehabilitation of low-income rental housing. The program provides a reduction for investors in their tax liability on a dollar-for-dollar basis when some units in a development are rented for below market value.
The Tax Cuts and Jobs Act Law created Qualified Opportunity Zones in 2017. This initiative is designed to direct proceeds from investors’ capital gains from asset sales into new investments in economically disadvantaged areas, called Qualified Opportunity Zones. Real estate projects are one of the allowable investments in the QOZs, along with other business opportunities. Investors in the QOZ areas can obtain deferral on their capital gains recognition and partial or complete forgiveness by maintaining the investments for specific lengths of time.
HUD Multifamily Loans
One potential investment approach leverages both programs, using loans through the Department of the Department of Housing and Urban Development (HUD) to invest in low-income housing in Qualified Opportunity Zones. HUD, which enforces the Fair Housing Act, prohibiting discrimination in housing, also provides loans to support the purchase or refinance of apartments or other multifamily rental properties through the 223(f) loan program and includes construction and rehabilitation loans via the 221(d)(4).
Can I make money with affordable housing?
All real estate investments have risks and can fail to return a profit. Investing in affordable housing has unique risks and potential upside. The investor is responsible for determining how much risk they are willing to take in a given situation and calculating the possible outcomes. The property price, need for improvements and upkeep, potential occupancy, and rental income, as well as tax benefits, may all play a role in the calculation you make as an individual.
With any rental, the property owner must consider operating expenses compared to income. In the specific situation of affordable housing, the tax credits or deferral/forgiveness of capital gains may alter the equation to make an investment more attractive in either the short or long term. Other strategies may also change the overall value of the investment as a part of your portfolio. Consulting with a financial adviser may help.