Introduction to Affordable Housing for Investors


Affordable housing may be appealing to multifamily investors for several reasons. There is consistent demand for these properties, and they are often viewed as recession-proof. At the same time, they give investors an opportunity to invest in social impact and/or the well-being of their own community. However, the regulations and financing mechanisms for these types of investments can be complicated, and often differ from state to state or city to city. Understanding the basics of affordable housing is necessary before navigating the complexities of specific projects. To that point, we will consider a few important affordable housing terms before reviewing the basics of Low-Income Housing Tax Credits, Section 8, HAP Contracts and loan programs.

Important Terms

AMI (Area Median Income)

AMI is used as a measure of how a family’s income compares with the median income of all families in a geographic area. AMI is commonly used by HUD to determine eligibility for housing programs. HUD publishes these medians on their website annually.

HFA Housing Financing Agency

HFA’s are often responsible for administering housing tax credits at the state level.

HUD The United States Department of Housing and Urban Development

HUD has developed programs to encourage the creation of housing that is safe and affordable for those who are elderly, disabled or have low income.

PHA Public Housing Agency

A PHA is any State or local governmental instrumentality that is authorized to engage in or assist in the development or operation of housing for low-income families.

Very Low-Income Family

A “very low-income family” is defined as a family whose annual income is at or below 50% of the median income of the area in which the project is located (adjusted for family size).

Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit (LIHTC) is a federal income tax credit established as an incentive for private investors to invest in affordable rental housing. LIHTC, also known as Section 42, is used to fund most of the affordable housing construction in the United States. These tax credits can be used to support rehabilitation and/or acquisition of existing structure as well as new construction projects. LIHTCs are often traded by developers to investors for equity. The investors are often corporations using the credits as tax shelter, while the developers benefit from additional equity to finance their project.


Allocation of the tax credits is guided by HUD regulations, but controlled by states. State HFAs often allocate the tax credits based on high-poverty census tracts, high-cost development areas and state priorities. States provide annual Qualified Allocation Plans that outline the specificities of their allocation plan and priorities.


Originally, eligibility for LIHTC required 20 percent of the units in the property to be affordable to a household earning 50 percent or below the AMI or a minimum of 40 percent of the units to be affordable to a household earning 60 percent or below the AMI. A 2018 amendment to Section 42 stated that households earning up to 80 percent of AMI are allowed in LIHTC-assisted units as long as the average income of all households remained at 60 percent of the AMI or below. In exchange for the tax credits, investors are required to comply with investment regulations for 15 years and meet affordable rent requirements for at least 30 years (longer in some states).

There are two types of LIHTCs, a 9 percent tax credit and a 4 percent tax credit. Funds for a 9 percent tax credit are allocated to states annually by the IRS for distribution. States then determine which projects win these highly competitive tax credits through their Qualified Allocations Plans. The criteria differ year to year, but may include extended affordability periods, projects that pertain certain characteristics (preservation), location (areas with low poverty rates, access to good jobs, public schools, etc.), and incentives for sustainable green building standards. The 4 percent tax credit is available for all projects that qualify. These credits are available for projects that receive at least 50 percent of their funding through tax-exempt bond financing. The tax credits must be claimed over a 10-year period.

Section 8 / Housing Choice Voucher Program

Section 8, also known as the Housing Choice Voucher Program (HCVP), is a federal housing assistance program for eligible households funded and administered by HUD. The vouchers commonly pay for about 70 percent of housing and utilities for eligible households, and the renters are responsible for the remaining 30 percent.


Local Public Housing Agencies (PHAs) – Vouchers are not administered to all households that apply since the volume of those seeking vouchers far outnumbers the funds available for vouchers. Section 8 regulations fall into two categories: rules and policies. Rules are specific requirements that every PHA must abide by when distributing vouchers. Policies provide directions to PHAs but allow them flexibility in crafting specific rules to implement. PHAs provide a PHA-plan and Administrative Plan that outline the application process and their mission.


While each PHA has their own specific criteria, there are some general requirements for eligibility. The household’s income must be 50 percent or less of the AMI. Most vouchers go to households with income of 30 percent or less of the AMI. Eligible renters must be U.S. citizens or non-citizens who have eligible immigration status. Applicants must also be in good standing with federal housing programs. Landlords accepting Housing Choice vouchers must have properties that pass three different types of inspections to ensure the housing meets HUD’s Housing Quality Standards (HSQ) requirements. Once the property passes the initial inspection, the landlord receives a Housing Assistance Payment (HAP) contract from the PHA, which outlines the amount and terms of the voucher payments. Most Section 8 leases are required to last at least 1 year, but there may be exceptions.

HAP Contract

HUD provides Section 8 rental subsidies to owners of certain mortgaged properties pursuant to a HAP contract. A HAP (Housing Assistance Payment) contract, is an agreement between a PHA and the owner of a property with units occupied by HCVP participants. The contract specifies that the PHA agrees to make housing assistance payments to the owner on behalf of the renters.


A PHA or HUD can serve as the “Contract Administrator” for Section 8 assistance pursuant to a HAP Contract. HAP Contracts specify the number of units in a particular property for which Section 8 assistance will be provided. Typically, 75 percent of the units must be occupied by very low-income families. Regulations prohibit, without prior HUD approval, the admission of any low-income family other than a very low-income family to any project subject to a HAP Contract startingAf October 1, 1981.


Owners of assisted properties are subject to certain obligations imposed by HAP Contracts including:

  • The leasing of assisted units to Section 8 income eligible families
  • The maintenance of the project as decent, safe and sanitary housing for the residents
  • Compliance with applicable nondiscrimination and equal employment opportunity requirements
  • Compliance with Section 8 reporting, management and accounting requirements
  • The procurement of prior written approval of HUD and the Contract Administrator to any transfers of the project or any portion thereof and any assignment of the HAP Contract

There are additional requirements for New Construction, Substantial Rehabilitation and New Regulation Projects that can be found on your local housing agency’s website.

Loan Programs

Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) often give additional benefits for projects done in conjunction with LIHTCs. To qualify for these benefits, Freddie Mac requires that there must be at least seven years remaining in the 10-year tax credit period. Fannie Mae requires that there must be at least eight years left of the initial 15-year compliance period. Financial institutions provide incentives for these projects due to the lower perceived risk and their desires to promote and preserve affordable housing.


Northeast PCG recent listings and sales with affordable housing components:

Further Resources

For more information regarding these programs please visit your local housing finance agency website.