Understanding Categories of U.S. Housing Investment

While interest in affordable housing in the United States has been increasing among institutional investors over the last several years, the term is often misunderstood. As demand grows, affordable housing itself has become somewhat nebulous, often used to describe a variety of asset classes with different characteristics.

Understanding the distinctions between the different housing categories often grouped under the umbrella of “affordable” is crucial for institutional investors worldwide who are looking to navigate this sector successfully.

Capital “A” Affordable
In the U.S., affordable housing, or “Affordable Housing with a Capital ‘A’,” refers specifically to rent-regulated properties where rents are set based on a region’s Area Median Income (AMI). Rents typically range from 30% to 80% AMI and are subject to regulatory agreements that ensure affordability for low-income residents. These rent limits are adjusted annually and can vary by location and unit size.

Affordable housing residents pay no more than 30% of their income toward rent. This creates a highly stable revenue stream, as residents typically face less financial strain compared to those in market-rate properties, where rent can consume over 50% of a household’s income.

Additionally, many affordable housing residents use Section 8 housing vouchers, which provide government-funded rental assistance directly to landlords. As a result, these residents tend to be less likely to default on rent payments, leading to higher collection rates.

These properties tend to have long waitlists, low turnover, and offer stable returns, even during times of economic uncertainty. This makes them an attractive investment during both periods of economic growth and downturns, given the consistent demand and limited, often diminishing, supply. Developers are often navigating complex financing structures such as low-income housing tax credits (LIHTC), which creates a barrier to entry.

Due to the complex regulatory nature of this asset class, it’s vital for investors to partner with sponsors and asset managers who have deep expertise in managing these types of properties. Successfully navigating the unique rules and regulations of affordable housing requires specialized knowledge and operational skill.

Workforce Housing
Workforce housing is typically aimed at middle-income earners, often teachers, healthcare workers, police officers, and firefighters. While not subject to rent regulations, it is generally priced below market rates, typically between 80% and 120% of AMI. This housing type is often referred to as “naturally occurring affordable housing” and is classified differently from Capital “A” Affordable.

Unlike affordable housing, workforce housing does not ensure that rent will be no more than 30% of a resident’s income, and rents fluctuate with market conditions. While workforce housing is generally more affordable than market- rate housing, its demand tends to be more volatile compared to truly affordable, rent-regulated properties.

Essential Housing
Essential housing shares similarities with workforce housing, focusing on properties priced below market to meet the needs of the everyday workforce. However, unlike affordable housing, essential housing is not subject to rent regulation. It is simply priced slightly below the market rate, with the goal of meeting the housing needs of essential workers and low- to middle- income individuals.

While essential housing is often labeled as "affordable" in general discussions, it does not fit the formal definition of affordable housing, as it lacks regulatory rent limits and typically doesn’t guarantee that rents are affordable in relation to household income.

Attainable Housing
Attainable housing is a broader concept, referring to a range of housing options that cater to various household incomes, preferences, and needs. While attainable housing may include some lower-priced options, it is not rent-regulated and does not guarantee affordability in the traditional sense.

This category focuses on creating a more inclusive housing market, offering diverse housing options to meet the needs of a broader range of income levels. However, like essential housing, attainable housing is often mistakenly referred to as affordable, even though it doesn't meet the criteria of rent- regulated, truly affordable housing.

True affordable housing, characterized by rent regulation tied to AMI and rent caps that ensure tenants spend no more than 30% of their income on housing, presents a more predictable and stable investment compared to other asset classes like workforce, essential, or attainable housing.

For institutional investors seeking long-term, resilient returns, understanding the distinctions between these various asset classes—and ensuring clarity on what “affordable” truly means—is critical. By doing so, investors can better assess the potential risks and rewards of each category and make more informed, strategic decisions in this growing sector