Profiting from the U.S. housing shortage
- September 1, 2022: Vol. 9, Number 8

Profiting from the U.S. housing shortage

by Matt Frankel

A crisis-level affordable housing problem exists on both the homeowner and rental sides of the market. The average contract interest rate on a 30-year fixed-rate mortgage has roughly doubled over the past year, and the median home value in the United States is 19.8 percent higher than it was a year ago, according to data from Zillow. Assuming a 20 percent down payment (which itself is another part of the affordability crisis), the monthly principal and interest payment on the median U.S. home has gone from $997 to $1,699 in just one year — and that’s before factoring in taxes and insurance, which tend to increase along with home values.

On the rental side, we recently learned the median rent for an available apartment reached $2,000 in the United States for the first time ever. According to the typical rule that rent should be less than 30 percent of income, which is used by many landlords across the country, this implies that it would take a salary of $80,000 per year just to qualify for the median apartment. It’s not difficult to understand why this has put housing out of reach for millions of Americans who need it. In fact, there is not one state or county in the entire United States where a full-time minimum-wage worker could reasonably afford a two-bedroom apartment.

Just to cite one example of how bad the problem is, a study by the National Low Income Housing Coalition found that no U.S. states have an adequate supply of rental homes per 100 extremely low-income renter households. Seven states, including California, Florida and Texas, have less than 30 percent of the needed inventory. In all, the country has a shortage of 7 million affordable rental homes for extremely low-income renters.


There are a few reasons why the affordable housing problem in the U.S. has reached this point.

For one thing, affordable housing can be just as costly to build as market-rate multifamily housing, which can make the latter far more appealing to developers. There are certain incentives available to help offset the costs, which we’ll get into later, but it can be difficult for developers to justify the capital outlay for a property with some disadvantages when it comes to the ability to raise rent and the need to navigate government assistance programs. There can also be zoning laws and other regulatory issues that make building affordable housing less practical.

Another driving force behind this crisis is that demographic groups needing affordable housing have significantly grown. For example, people older than 65 are more likely to need affordable housing than the overall population, and the gradual retirement of the massive baby boomer generation has caused this age group to rapidly expand. In fact, the 65-and-older population grew by a staggering 34 percent from 2010 to 2020. When combined with the rapidly declining affordability of market-rate housing, it’s not a surprise that demand has outpaced supply.


There are several different definitions of “affordable housing” that are important to know. From a regulatory perspective, affordable housing typically means the rent is tied to the area median income (AMI) as opposed to market rates. This helps prevent renters from being priced out of the market when rent increases at a double-digit percentage as it has over the past year. Housing units designated as affordable are typically only rented to households with less than 80 percent of AMI, which is HUD’s definition of a “low income” renter.

Because of their affordability and the scarce supply throughout the country, regulated affordable housing units often have very long waitlists and rarely see much tenant turnover.

There is also “workforce housing,” which is designed to be affordable for employees of local businesses, but it isn’t necessarily income restricted. This is a common designation in expensive real estate markets across the country. There are a few other terms as well, such as the previously noted “extremely low-income” housing, which is similar to regulated affordable housing but with lower income thresholds.

In addition to the income restrictions and rent increase regulation, affordable housing tenants typically don’t pay more than 30 percent of their overall income toward rent. In such cases, assistance programs such as Section 8 housing vouchers are often used.


There has been a significant uptick in interest in affordable housing among investors over the past few years. For example, Blackstone recently announced a $1 billion program to buy rental homes to rent at a discount to people below a certain income level. From an investor’s perspective, in addition to being a socially responsible way to put money to work, investing in affordable housing can make sense in several other important ways.

For one thing, because tenants pay rent that is far below market rates, rent collection tends to be close to 100 percent no matter what the economy is doing, making affordable housing one of the most recession-proof types of real estate. Think of it this way: If you were paying $1,000 per month for an apartment, you would pay $2,000 on the open market, wouldn’t you make sure your rent was paid on time and in full every month? From a landlord’s perspective, when combined with government assistance programs, the rental income from affordable housing units can produce cash flow that’s on par with market-rate multifamily housing.

There is also very low turnover in affordable housing and for the same reason. It’s not uncommon for market-rate multifamily landlords to see their properties vacant 10 percent to 15 percent of the time, but this would be unusually high in affordable housing. As mentioned previously, affordable housing communities tend to have long waitlists and have no trouble filling units as soon as a tenant moves out.

Last but certainly not least, investments in affordable housing can be a recession-resistant way to diversify your portfolio away from the stock market without sacrificing long-term growth potential. With a recession expected in the near future by many experts, this is on the minds of many investors.


When it comes to investing in affordable housing, there are several options available, especially for high-net-worth investors. Here are just a couple.

Tax credit syndication: This is a way that several major investment banks are aiming to tackle the affordable housing crisis. Blackstone’s $1 billion affordable housing initiative was noted earlier, and the reason the economics work is something called Low Income Housing Tax Credits. These tax credits are awarded to developers who establish affordable housing units to help them offset the cost. The credits are rarely used by the developer but are more commonly sold to tax-credit syndication funds made up of high-net-worth investors. In exchange for buying these credits, they get a return in the form of a break on their federal income taxes.

There are several major firms that offer tax credit fund investing to accredited investors, such as Alliant Capital, which is a subsidiary of Walker & Dunlop. Alliant recently closed on a $160 million low-income housing tax credit fund that will facilitate the creation of almost 1,300 affordable housing units in the United States.

Real estate crowdfunding: The real estate crowdfunding industry has exploded in recent years after regulatory changes made it easier for real estate developers to solicit investments for their projects. Crowdfunding platforms allow developers (also known as sponsors) to list their investment opportunities for investors to browse, and accredited investors can decide to invest or not. Affordable housing opportunities are often listed on these platforms.

For example, a 2017 investment offering posted on the reputable platform CrowdStreet involved a workforce housing fund that intended to acquire and improve residential housing units, specifically mobile home communities. The fund invested in several mobile home parks in just over two years and ended up producing a stellar 63 percent return for investors over that time period.

Innovative housing startups: This isn’t exactly a low-risk way to invest, but many innovative startups have come along to help ease the affordable housing burden in their own ways. This is especially true when it comes to the problem of construction costs, which is one of the biggest reasons the affordable housing crisis has become such a problem.

One interesting example is Boxabl, which is currently raising capital through the StartEngine crowdfunding platform. The company has developed a mass-production system for building customizable houses that fold up into shippable sizes. So far, Boxabl has 80,000 reservations and 4,000 paid deposits from customers (including some from the U.S. government).

There are too many affordable housing startups to mention here, but this can be an alternative way to invest in affordable housing. Just understand that startup investing is inherently risky, and it’s important not to invest any money you can’t afford to lose.

Create your own affordable housing: You don’t necessarily need to be a high-net-worth investor to invest in affordable housing — anyone with the financial means can purchase a property (either single- or multifamily) with the intention of designating it as affordable housing and accepting Section 8 vouchers. There are 4.5 million people living in Section 8 housing in the United States, and the majority stay in their homes for five years or more, making this an attractive investment option for interested investors. You’ll also get the benefit of tenants pre-screened by your local housing authority and can save on common rental property expenses that are unnecessary when it comes to Section 8 properties (such as marketing costs).

To be sure, there are some hoops to jump through: You can’t simply buy a property and rent it to Section 8 tenants. Landlords need to complete an application, ensure their rental rates are in line with the local market, and get approved as a Section 8 landlord. Then the local housing authority needs to approve the specific property and complete an inspection. Once this is done, you can start accepting Section 8 vouchers and directly become a part of the affordable housing solution.


To sum it up, the U.S. affordable housing crisis is a major problem, but there are several ways for investors to help resolve it, including options for all risk tolerance levels and investment goals.


Matt Frankel is a CFP and has been writing for The Motley Fool since 2012.

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