Interest in affordable housing has continued to increase over the past several years, especially amongst institutional investors. Capital is increasingly flowing to the sector, and at a rapid rate, making the term “affordable” somewhat of a buzzword. But what does “affordable housing” actually mean, and how does it differ from other multifamily assets, including workforce, attainable and essential housing? The fact is, important and significant distinctions exist among these different subsectors, yet they are often referred to under the same umbrella of “affordable.”

REGULATED RENTS

One of the biggest differences between “big A” affordable housing and other multifamily subsectors is rent regulation. This means rents are tied to the area median income (AMI) of a local region, and affordable properties are generally reserved for households with incomes less than 60 percent of AMI. Although workforce housing is generally geared toward households making 60 percent to 120 percent of AMI, these communities are free to rent homes to households at all income levels.

Because they are rent-regulated based on AMI, “big A” affordable-housing properties are truly affordable for residents in the communities in which they are located, resulting in extremely high demand. Many of our affordable communities have extremely long waiting lists, and experience very little to no turnover. There is also a lack of development within the affordable-housing space, as developers often are navigating complex financing structures, such as low-income housing tax credits, which creates a barrier to entry and, thus, limits supply.

Residents living in affordable-housing communities also pay no more than 30 percent of their household incomes toward rent. This is extremely important because it translates to high collection rates; residents are paying a much smaller percentage of their overall incomes for housing, compared with market-rate and other types of multifamily communities, where they would pay upward of 50 percent of their incomes.

Many residents in affordable-housing communities also use Section 8 housing vouchers. Section 8 authorizes payment of government-funded rental housing assistance to private landlords of low-income households; therefore, Section 8 residents are less likely to default on their rental payments, further resulting in high collection rates. A variety of other voucher and project-based subsidies and housing assistance payment (HAP) contracts also benefit affordable-housing renters and owners. In fact, the collection rate across our national portfolio averages 95 percent and above.

This unique combination of extremely high demand, high collection rates and low turnover costs often makes affordable-housing investments attractive to investors, based on the stability of the subsector. Market-rate and other multifamily subsectors typically experience higher turnover rates and lower collection rates, as residents are overextended on income-to-rent ratios, and these properties generally do not have long waitlists to quickly fill vacant space. This all impacts the long-term stability and profitability of a community.

Beyond this, the fact “big A” affordable housing is rent-regulated and truly affordable to residents has a significant social impact, fulfilling ESG goals for many investors.

HIGH-QUALITY ASSETS

One common misconception is affordable-housing communities are not high-quality assets. Often, however, these communities are class A and class B properties with top-tier amenities.

Some developers and investors are constantly keeping a pulse on the latest amenities residents are demanding, and incorporate these within their communities. Many communities include high-quality community spaces, fitness and wellness centers, and onsite social programming.

Impact investors also provide residents with a variety of social services, including financial literacy classes, after-school and mentorship programs for kids, and home down-payment assistance programs, to name a few. They also place an emphasis on sustainability within their portfolios, and look for ways to optimize water and utility usage, among other sustainable measures. Some acquire LEED-certified properties located in strong in-fill class A markets.

Taking a holistic approach to investment — investing both in the brick-and-mortar of the asset by adding top amenities, and investing in residents through social programming and services — translates directly to property performance.

In fact, affordable-housing communities tend to perform on par, and often better than, market-rate and other multifamily asset classes that experience more volatility in performance.

EXPERIENCED OPERATORS

As demand for affordable housing increases, more capital is naturally flowing to the sector, and more multifamily operators are venturing into affordable housing. That said, it is important for investors when evaluating affordable-housing operators to look for those that have experience operating in this asset class.

“Big A” affordable properties that are rent-regulated are subject to a variety of regulations and regulatory agreements. It is important to work with operators who understand the complexities and nuances of these regulatory agreements.

For example, do they have a compliance team that works with housing authorities? Because affordable communities also adhere to income restrictions for residents, operators also need to know how to navigate these and ensure that all properties are adhering to the right guidelines.

This varies significantly from market-rate and other multifamily asset classes, such as workforce, attainable or essential housing. These multifamily communities are not rent-regulated, and do not have to adhere to the same regulatory agreements and income restrictions. Therefore, multifamily operators of these asset classes do not often have the same internal infrastructure in place to successfully operate affordable communities.

Ultimately, the term “affordable” has increasingly been used interchangeably to describe multifamily assets that may be priced slightly lower than the market but are not truly affordable, so it is important for investors to clarify to which type of affordable housing to which a sponsor is referring.

Truly affordable housing is always rent-regulated, based on area median income, with rents not exceeding more than 30 percent of a resident’s household income, and follows regulatory agreements to keep rents affordable. As affordable housing becomes increasingly more popular, it is important to understand these nuances, what an investment in truly affordable housing means, and its long-term benefits compared with other multifamily asset classes in the market.

That’s “Big A” affordable housing.

John Williams (jwilliams@avanath.com) is president and CIO of Avanath Capital Management.