Affordable Housing

Section 8 (Housing Vouchers)

Despite the stigma, section 8 is often a great source of income, especially if the buildings are in the path of progress.

Most strategies involve increasing the number of bedrooms, and tenant selection criteria is vital to making the strategy work

Pros

Consistent and on-time income, sometimes higher than market
Will always have interested tenants, often staying longer than market ones
Useful if investing in the path of growth
Fannie/Freddie will get you discounts on financing
Can often avoid taxes if using the HUD program.

Cons

Stereotypically, lower income tenants are rougher on properties - section 8 or not this is indicative of C/D class neighborhoods. Screening is very important
They will make you fix things and add things to be compliant which can be obnoxious

<aside> 💡 Requirements can be extensive. For example, in Chicago, they dock points for:

Inoperable light fixtures and improperly wired electrical outlets (reverse polarity, open ground, hot neutral reverse, etc.)
Deteriorated and unstable paint on surfaces (peeling, cracking, chipping, etc.) in units built prior to 1978 where children under the age of six reside or will reside
Missing, inoperable or incorrectly mounted smoke and carbon monoxide detectors
Broken or inoperable windows (cracked glass panes, broken locks, drafty frames, etc.)
Exposed electrical wires/connections (light fixtures missing globes, electrical junction boxes missing cover plates or knockout plugs, breaker boxes with open sockets, etc.)
Broken/faulty door locks and drafty doors
Cutting hazards, including protruding sharp nails pipes/metals objects with jagged edges,deteriorated sheet metal, cracked glass blocks on windows,etc.
Gaps/holes around heating system flue pipes and gas utility not in service
Evidence of rodent and/or bug infestation
Holes and large gaps (more than a quarter inch) on walls/ceilings/floors of living space area </aside>

LIHTC

Low-Income Housing Tax Credit is a type of affordable housing program that is different housing vouchers. It is essentially the government subsidizing new development buildings with tax breaks and credits

Pros

Tax Credits can be sold
Incredibly low risk investment. By paying no property taxes, you remove a significant portion of your expenses and there will always be a demand for cheap rent in good times and bad
Based on % of area median income. In high income areas such as CA or Austin, where the median income is over 100k, that means people who make as much as 70k can qualify for the program.
Only half of the units need to be affordable housing.

Cons

Incredibly difficult to qualify for, often needing a cosigner who has qualified for the program before and lobbyists to push you through the application progress
Median income has grown slower than rent in the last few years
Bureacracy = paperwork
Essentially award to new construction only

<aside> 💡 There are 3 ways to qualify

At least 20 percent of the project’s units are occupied by tenants with an income of 50 percent or less of area median income adjusted for family size (AMI).
At least 40 percent of the units are occupied by tenants with an income of 60 percent or less of AMI.
At least 40 percent of the units are occupied by tenants with income averaging no more than 60 percent of AMI, and no units are occupied by tenants with income greater than 80 percent of AMI. </aside>