According to a study by the National Low Income Housing Coalition, there is a roughly 7.2-million shortage of affordable low-income housing in the U.S. And there are only 4.6 million homes that are available to rent. This means there is a shortage of more than 2 million homes in the marketplace that are available and even fewer of them are affordable.
The Low Income Housing Tax Credit Program (LIHTC) has been successful in creating and preserving affordable housing since 1986, but there is still a huge need for more investment dollars in this space, in my opinion. Private investors can help close the housing gap by investing in affordable housing developments, helping ensure that everyone has a place they can call home.
But one should not confuse the LIHTC program with the Housing Choice Voucher Program, also known as Section 8. The latter program offers assistance to very low-income families to buy decent, safe and sanitary housing, which can include single-family homes, townhomes and apartments, and is not limited to units located in subsidized housing projects. These vouchers are provided directly to the recipient and are used to supplement their rent.
The Housing Act of 1937 created the public housing program, which was the precursor to Section 8. The program was designed to provide federally-funded assistance directly to low-income households in order to improve living conditions and increase access to quality housing. There is no maximum income for Section 8 qualification. However, households must have an income that is below 50% of the area median income (AMI) to be eligible for the program.
On the other hand, the LIHTC program gives state and local LIHTC-allocating agencies about $8 billion annually “to issue tax credits for the acquisition, rehabilitation or new construction of rental housing” targeting households that are at 50% to 60% of the AMI. These federal tax credits that are allocated through the LIHTC program incentivize developers and corporate America to invest in building affordable housing.
The stigma of slum-lords or low-quality housing that has been attached to Section 8 often carries over to the affordable housing program, which is very different. Investors in the multi-family housing space may be wary about investing in LIHTC properties out of fear of being associated with low-quality or unsafe housing. From my perspective, this unfortunate misnomer couldn’t be further from the truth. There are many affordable housing properties that are very competitive with market-rate developments and offer the same types of amenities as a market-rate property.
The core differences between the Section 8 program and the LIHTC programs are the intended uses of the allocations. While the Section 8 program is a government-funded program that provides voucher assistance directly to the recipient of a low-income household, the LIHTC allocations are made available to the states and issued directly to the development to offset construction cost, making it possible to reduce the rent amount for its targeted audience. The LIHTC program also engages corporations to participate in investing in the LIHTC program by incentivizing them with tax credit benefits.
Also, the Section 8 voucher payment standards vary by location and are based on the fair market rent for the specific area. The payment standard is the maximum amount of rent that the voucher will cover. It is worth noting that the minimum rent for a Section 8 voucher is $25 per month. However, there is no maximum rent for a Section 8 voucher, but the voucher will only cover up to the Payment Standard for the area. Within a LIHTC-funded development, the tenants are 100% responsible for the rental payments as it is not supplemented by the government.
Increased awareness of the LIHTC program and how it works is important to communicate to the broader investment community as it increases the conversations surrounding housing needs. These conversations make it more attractive for investors to put their money into the affordable housing space and help create more units of affordable housing.
The information provided here is not investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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