Well-designed, well-managed rental housing contributes to the quality of life of people for whom homeownership may be out of reach, but who desire the stability and security of a good home. Yet basic housing security escapes so many.
According to Habitat for Humanity, 1 in 3 families pays more than 30% of their income on housing costs, while 1 in 7 families pays half or more—a level deemed “severely cost-burdened.”
Are we developing at the pace necessary to provide more affordable housing? Not according to the National Multifamily Housing Coalition (NMHC). The U.S. needs to build an average of 328,000 new apartments every year by 2030, says NMHC, and we’ve only hit that mark three times since 1989. The problem is especially severe for extremely low-income renters, whose household incomes are at or below 30% of the area median income (AMI). The U.S. has a shortage of 6.8 million rental homes for that group of renters.
This is an unsustainable trajectory. The lack of affordable housing in the U.S. has reached a level of crisis.
The good news is that we already have an important tool in place to address the crisis, one that creates tremendous business opportunities for real estate developers and managers and allows us to contribute to the communities in which we work and live. This tool is mixed-income housing.
A key solution
Mixed-income housing is where units in a property are rented to residents of various income levels. The property may be workforce housing, targeted to middle-income workers. Often, some sort of subsidy or public financing is involved, and low- or extremely low-income renters are in the resident mix.
For example, a multifamily community may have been developed with a bank loan and equity through the Low-Income Housing Tax Credit (LIHTC) program. A portion of units is set aside for low-income residents while another portion consists of market-rate units. The property also has residents with Section 8 vouchers. Because of the different rental rates and income qualifications for the LIHTC, Section 8, and market-rate units, residents are at three income tiers, creating a diverse mix in the resident profile of the community.
Mixed-income properties increase the density of available homes for a broader swath of the population in a given location. Creating this density is critical to solving the affordable housing crisis. Once the properties are occupied and thriving, they increase the population density of their neighborhoods, creating a demand for retail, food, and entertainment businesses. This demand drives economic growth and strengthens the overall neighborhood and community.
Mixed-income housing deals
Investors put their money into mixed-income housing deals to access favorable financing, diversify their portfolios, spread investment risk, and reduce tax burden. Mixed-income housing investments typically generate predictable returns, and demand for the affordable units will remain high even through economic downturns. This stability is appealing to many investors.
Nonprofit investors typically have nonfinancial motivations. They may seek to facilitate access to affordable housing; support a certain segment of the population, such as the elderly or persons with disabilities; or expand access to human services.
Mixed-income housing deals often have a variety of financing sources. Developments may have up to six or seven sources of funding in their capital stacks, from bank loans to federal and state tax credits to financing from the city and nonprofits.
Funding sources and other variables will determine how a property performs, but we can look at the LIHTC program for some clues. In recent years, the tax credit market, along with the rest of the affordable housing sector, has been strong.
The tax credit properties in an annual study by CohnReznick had an average internal rate of return of 6.1% from 2010 to 2020. Actual yields were 7% higher than projected. In 2020, the 15,760 properties in the study had a median occupancy rate of 97.7%, debt coverage ratio of 1.52, and median net operating income of $2,619 per unit. The properties had a 0.57% cumulative foreclosure rate, and the rate has remained well below 1% for at least 15 years.
Management of mixed-income housing
The biggest concern in the management of mixed-income housing is complying with the regulations and requirements that apply to the property. “Managers will spend at least 20% of their time working on ensuring that compliance items are getting completed correctly and on time,” says Travis Cason, ARM, regional portfolio manager, FPI Management. “That time requirement increases drastically—to up to 50%—for managers of smaller locations.”
Affordable housing programs vary in the scope of compliance. For example, compliance for Section 8 housing involves the quality and safety of the property, while compliance at LIHTC properties involves the physical property as well as the income of renters in tax credit units.
Among other requirements, Section 8 properties must go through Public Housing Agency (PHA) inspections when a resident moves in, annually, and when there’s a complaint or quality concern. Compliance for LIHTC properties generally includes regular certification of household income and inspections. States may have additional compliance requirements, such as staff training and management company certification.
Cason stresses that successful compliance relies on leadership understanding the workload that these programs require and making additional resources available as necessary. “The goal should be making the inspection process appear as smooth and organized as possible for the inspector.”
General administration of mixed-income properties is labor-intensive as well. In the example of a property with market-rate, tax credit, and Section 8 units, the residents in the market-rate and tax credit units pay their full rents directly to the management company. Residents with Section 8 vouchers pay a portion of their rents directly to the management company, and the PHA pays a portion. And while that rent paid by the PHA is reliable revenue, managers are restricted in the actions they can take in rent collection efforts for those units occupied by residents with Section 8 vouchers.
Staying on top of compliance and administration requires excellent processes and systems, a good maintenance program, and the cooperation of residents in the affordable units. And residents in market-rate units still expect prompt responses to their maintenance calls, well-maintained amenities, and excellent service.
Resident relations are another key concern. Managers must be advocates. Cason, who recently leased up a 581-unit mixed-income property with luxury market-rate, tax credit, and Section 8 units, says that you often have to overcome preconceived biases about affordable housing among market-rate residents. A big opportunity is missed without proactive resident engagement to foster a sense of community and give residents an opportunity to interact. This helps residents connect at the human level, which overcomes those biases we all bring to different situations.
With high demand for the properties and the stability of the investments, mixed-income housing is a primary tool in solving the affordable housing crisis. Management companies that include mixed-income properties in their portfolios should understand the compliance and administration challenges that come along with them. However, the rewards of supporting financially stable properties, fostering stronger communities, and strengthening local economies make those challenges worth the effort.