The Providers Of Affordable Housing

Nearly 35 million households rent their housing units. Because of the importance of housing, the Federal Government provides assistance to slightly more than 4 million low-income households. Even with this level of support, another 12 million families who are eligible for assistance receive none and must rely on private-sector property owners for affordable housing. Thus it is important to know how this segment of the market operates. Whether and how providers of unassisted, affordable rental units serving these low-income families differ from owners providing more expensive rental units to families with higher incomes and more extensive choices is an important policy issue. This paper looks at information collected in the Property Owners and Managers Survey (POMS) conducted for the U.S. Department of Housing and Urban Development (HUD) by the U.S. Bureau of the Census.¹

Identifying Affordable Rental Units

This work examines whether property owners and managers who provide affordable rental housing behave differently from property owners and managers of more expensive rental units. Affordable rental housing refers to units that do not cost so much as to be burdensome to lower income families. To identify affordable units, an approach is used based on HUD's income eligibility rules and affordability-burden guidelines. Affordable rental units are identified as those that a family with 50 percent of the HUD-adjusted area median income² (an income-eligible family) could afford without spending more than 30 percent of their income on rent, which is the standard of reasonable rent burden implicit in most of HUD's assisted-housing programs.³ HUD-adjusted median family incomes are available for every county or county equivalent (nearly 3,200 areas). Ideally, these cutoffs would be adjusted for differences in the number of bedrooms; however, this added precision must await the merging of POMS, which does not contain number of bedrooms, with the 1995 American Housing Survey.⁴ Using this definition about one-half of private-sector rental units would be considered affordable. This is somewhat higher than other studies have found.⁵ For now this approach is sufficient to provide useful results on the providers of affordable housing, although the intention is to use the more refined definition in future work.

Who Are The Owners?

Single-family privately owned rental units are predominately owned by individual investors whether the unit is affordable to lower income families or only to higher income families. The other forms of ownership infrequently occur for single-family properties and are distributed nearly the same for affordable units as for the more expensive units. Units in multifamily properties are also frequently owned by individual investors; however, individual investors more often own affordable units (59 percent) than more expensive units (44 percent).⁶ This shortfall for more expensive units is made up by the higher presence of limited partnerships (14 percent for affordable units compared with 17 percent for more expensive units) and general partnerships (7 percent for affordable units compared with 11 percent for more expensive units). These last two differences are not statistically significant.

Affordable rental units owned by noninstitutional owners, such as individual investors (including joint ownership by two or more individuals), estate trustees, and limited and general partnerships, are more likely to have a lower number of owners than the more expensive properties. For example 52 percent of affordable single-family rental units have one owner, while only 45 percent of the more expensive single-family rental units have one owner. Affordable multifamily rental properties owned by noninstitutional owners⁷ exhibit the same pattern, with 31 percent of affordable units owned by a single owner compared with 23 percent for more expensive units. The difference for single-family rental units just misses being statistically significant. Other characteristics of noninstitutional owners reveal that affordable single-family rental units are more likely to be owned by older individuals, with 63 percent of the units having owners over 55 years old compared with only 44 percent for more expensive single-family units. No such clear pattern holds for noninstitutional owners of multifamily rental properties.

Owners of affordable rental properties are more often reported to be female, with 32 percent for single-family affordable units compared with 27 percent for more expensive units. The difference for multifamily units is not as great, with 20 percent for affordable units compared with 17 percent for more expensive units. (Neither difference is statistically significant.) Overall, most rental units are owned by owners who are white. However, there are some interesting differences between affordable and more expensive rental units. Respondents for noninstitutionally owned affordable rental properties are more likely to have reported that the owners are African American (11 percent for single-family and 6 percent for multifamily) than is the case for more expensive rental units (2 percent for single-family and 3 percent for multifamily). Only the difference for single-family rental units is statistically significant. Owners of single-family rental units who are Asian or Pacific Islanders are more often owners of more expensive rental units, but again the difference is not large enough to be statistically meaningful. The differences in ownership by persons of Hispanic origin are small and insignificant.

In terms of the number of total rental units owned, there is a statistically slight tendency for single-family rental units to be owned by persons who have no other properties. Owners of affordable multifamily rental units are more likely to own fewer total units than owners of more expensive rental units; 56 percent of the more expensive units have owners who own 50 or more units, while only 32 percent of affordable multifamily units have owners who own 50 units or more. This shift toward smaller scale for owners of affordable units in multifamily properties is also evident in the number of owners with two to four units (29 percent compared with 4 percent for owners of more expensive units).

Compared with more expensive rental units, affordable rental units seem to be owned by individuals who are older, more frequently women, more frequently African Americans, and who own fewer other units.

How Was The Property Acquired?

The predominant method of acquiring rental properties is reported to be purchasing for all types of property -- affordable and more expensive, single-family and multifamily. However, affordable single-family rental properties were acquired more often by inheritance or gift (13 percent) than was the case for more expensive single-family rental units (5 percent). This tendency, though smaller, is also present for rental units in multifamily properties, but it is not statistically significant (4 percent for affordable units versus 1 percent for more expensive units).

Reasons for acquiring rental properties were somewhat different for single-family properties and less so for units in multifamily properties, though they are not statistically significant for either type of property. "Providing affordable housing" (4 percent for affordable units, 1 percent for more expensive units) and "income" (31 percent for affordable units, 25 percent for more expensive units) were more prevalent reasons for acquiring affordable single-family rental properties, while "as a residence for self or family" was the more prevalent reason for acquiring more expensive single-family rental units (32 percent versus 28 percent). For owners of units in multifamily rental properties, "retirement security" (9 percent for affordable units, 5 percent for more expensive units) and "family security" (4 percent versus 2 percent) played more important roles for affordable units than for more expensive units. "Long-term capital gains" was given as a reason more often by owners of more expensive multifamily rental units (19 percent) than by owners of affordable multifamily rental units (15 percent).

Owners of affordable rental units, both single-family and multifamily, acquired their properties earlier than owners of more expensive rental units. Affordable rental units were more likely to be acquired before 1980 (39 percent for single-family and 38 percent for multifamily) than were more expensive rental units (24 percent for single-family and 31 percent for multifamily).

Methods of financing acquisitions of properties showed a very sharp distinction for affordable single-family rental units, with 29 percent of owners reporting that they paid all cash while about 12 percent of the owners of more expensive single-family rental units reported paying all cash. Owners of multifamily rental units paid all cash less frequently, and the distinction between affordable and more expensive rental units is not statistically significant (9 percent for affordable units and 7 percent for more expensive units).

In summary affordable single-family rental units were more often acquired as inheritances or gifts, purchased for all cash, and acquired earlier than more expensive units. Multifamily rental unit acquisition methods, reasons, and financing differ less between owners of affordable and more expensive units, with the exception of when they acquired the units.

Attitudes Toward The Property

Regardless of unit type or affordability, the majority of owners plan to hold their properties for more than 5 years. Owners of affordable single-family rental units are more attached to their units than owners of more expensive single-family rental units, in contrast to multifamily rental properties where the opposite is true. Owners of affordable single-family rental properties more often responded that they would hold their properties for more than 5 years (71 percent compared with 62 percent for owners of more expensive units). For multifamily rental properties the pattern is reversed, although it is less pronounced and not quite statistically significant (81 percent for more expensive units versus 76 percent for affordable units).

When asked whether they would buy their properties again, owners of affordable single-family rental units were more likely to answer in the affirmative (58 percent) than owners of more expensive single-family rental units (49 percent). Owners of multifamily rental properties were even more positive about doing it over again, but in this case the owners of more expensive units were more positive than owners of affordable units (75 percent versus 65 percent).

More than 60 percent of all owners reported earning a profit or breaking even. For single-family rental units, owners of more expensive units more often reported earning a profit (52 percent compared with 49 percent for owners of affordable units) or having a loss (32 percent versus 31 percent for owners of affordable units). Owners of affordable rental units were more likely to report breaking even (20 percent compared with 15 percent for owners of more expensive rental units). These distinctions, however, do not have statistical significance. Owners of the more expensive units in multifamily rental properties were more positive, with more reporting profits (67 percent versus 58 percent for owners of affordable units) and fewer reporting losses (22 percent versus 27 percent for owners of affordable units). This is a statistically insignificant difference.

When asked about the profitability of their properties compared with similar properties, most owners (60 to 68 percent) reported that their units were about the same as other similar units. Owners of affordable units were more likely to respond that their properties were less profitable than owners of more expensive units (36 percent versus 25 percent for single-family units and 20 percent versus 12 percent for multifamily units).

In addition to profitability, owners were queried about changes in the value of their properties compared with other similar properties. The most common response (44 to 55 percent) was that the value remained the same. Owners of the more expensive single-family rental units were ambivalent: more indicated an increase in value (34 percent compared with 31 percent, although the difference is not statistically significant) and more indicated a decrease in value (23 percent compared with 13 percent of owners of affordable units). Owners of the more expensive units in multifamily rental properties were more positive about value, with 37 percent indicating an increase in value compared with 29 percent for owners of affordable units in multifamily rental properties.

Owners of affordable rental units feel that they are competing with rental properties that are either assisted or that accept tenant-based assistance. Owners of affordable rental units, when asked if they compete with private properties that accept Section 8 tenants, more often respond affirmatively (45 percent versus 35 percent for single-family units and 51 percent versus 37 percent for multifamily properties). These owners of affordable rental units also see themselves competing more often with rental properties receiving non-Section 8 assistance and with public housing.

Owners are generally positive about their properties -- they plan to hold on to them for long periods of time; they would most often purchase the properties again; they most likely made a profit or broke even; and they rated their units "better" or "about the same" compared with similar properties in terms of profits and value appreciation. Nevertheless important differences among these characteristics exist between affordable and more expensive single- family rental units. Owners of affordable single-family rental units gave more positive answers for length of future ownership, buying property again, and property value appreciation, and gave less positive answers for current profits and profitability compared with similar properties, than the owners of more expensive single-family rental units. Owners of units in more expensive multifamily rental properties were more unequivocal: They gave more positive responses to all these questions. Finally, owners of affordable rental units more often saw themselves competing with assisted housing for new tenants than owners of more expensive rental units.

Dealing With Section 8

Knowledge of HUD's Section 8 program is not as widespread as one might expect. Only about one in six owners of single-family rental units is very familiar with the program; this is true for owners of both affordable and more expensive rental units. Furthermore, the percent of single-family homeowners not familiar with the program is higher among the owners of affordable units than among owners of more expensive units (59 versus 54 percent, a difference that is not statistically significant). Owners of multifamily rental properties are much more aware of the program, with one out of three owners very familiar and more than one out of three owners somewhat familiar. Multifamily owners' awareness of the program is about the same for those with affordable units as for those with more expensive units.

About six out of seven owners of single-family rental units reported that they had not received any inquiries from prospective Section 8 tenants. There were no statistically significant differences in the number of inquiries received by owners of affordable units and owners of more expensive units.⁸ Owners of multifamily rental units more often received some inquiries, with only 4 out of 10 reporting that they received no inquiries in the past 6 months. There is very little difference in the number of inquiries received by owners of affordable units and by owners of more expensive units in multifamily rental properties.⁹

Similarly, owners of affordable rental units were more likely to have reported that they would accept Section 8 tenants (57 percent versus 47 percent for single-family units and 57 percent versus 44 percent for multifamily properties). Owners of both affordable and more expensive rental units who reported that they would not accept Section 8 tenants most often cited three reasons: potential problems with tenants, too many regulations, and too much paperwork. Owners of more expensive units cited these problems more often than owners of affordable units. Owners of more expensive units often said that their rents were too high compared with the Fair Market Rents used by the Section 8 program (31 percent versus 5 percent for single-family units and 45 percent versus 13 percent for multifamily properties).

Owners of affordable single-family rental units had a slight tendency to be not as familiar with Section 8 and to receive fewer inquiries than owners of more expensive units, but they were more likely to accept Section 8 tenants than owners of more expensive single-family rental units. Owners of affordable units in multifamily rental properties were at least as familiar with the Section 8 program and were more willing to accept Section 8 tenants than owners of the more expensive multifamily rental properties.

Maintenance And Upkeep

Affordable rental units are generally older than more expensive rental units. Seventy-two percent of affordable single-family rental units were built before 1970, while only 49 percent of more expensive rental units are as old. Multifamily rental units are newer than single-family rental units (55 percent built before 1970 compared with 37 percent built before 1970), but once again the affordable stock is older than the more expensive stock.

A higher percentage of the owners of affordable single-family rental units (9 percent) reported spending no money on maintenance compared with owners of more expensive single-family rental units (4 percent), though the difference is not large enough to be statistically significant. In spite of the fact that many owners spent no money on maintenance, the median percentage of rental income spent on maintenance by owners of affordable single-family rental units is slightly above 10 percent, whereas owners of more expensive rental units spent slightly less than 10 percent. Owners of units in multifamily rental properties rarely spent nothing on maintenance, with their median amount spent on maintenance being about 16 percent of rental income for affordable units and a slightly higher median for more expensive units.

This maintenance spending may reflect the maintenance policies that owners currently pursue. Only 75 percent of the owners of affordable single-family rental units reported handling all problems immediately and practicing preventive maintenance, while 87 percent of the owners of more expensive rental units followed such a policy. The percentage reporting that they postponed handling most problems and handled only major problems as soon as possible was nearly twice as high for affordable single-family rental units than for more expensive rental units (10 percent versus 5 percent). Though owners of units in multifamily rental properties more often followed better maintenance policies, the level of preventive maintenance was lower for affordable units than for more expensive units (86 percent versus 91 percent), and the frequency of postponing most problems was lower for more expensive units (2 percent versus 4 percent) than for affordable units, though not statistically so. When asked about their plans for future maintenance, owners gave almost identical responses as they gave for their current maintenance plans.

Another indicator of maintenance and unit quality can be gleaned from owners' answers to questions about unit inspections in the past 2 years. Between 21 and 23 percent of single-family rental units and between 36 and 41 percent of units in multifamily rental properties were reported to have been inspected in the past 2 years. The most frequent outcome was that the units passed inspection (80 to 93 percent). Though the differences are not statistically significant, affordable units fared slightly worse than the more expensive units, with only 80 percent of single-family units and 89 percent of multifamily properties passing initial inspections, while the rates for the more expensive units were 85 percent and 92 percent, respectively.

Overall, owners of affordable rental units faced more maintenance challenges from their older stock, but at the same time many of them spent no money on maintenance and, compared with more expensive rental units, did not follow as frequently a preventive approach with immediate attention to problems.

Concluding Comments

This paper has delved in a cursory way into the issue of whether owners of affordable rental housing units are different from owners of more expensive rental housing units. The analysis is based on tables with a simple and inexact two-way characterization of affordability. Further analysis is warranted, yet this preliminary treatment clearly reveals important differences that should be recognized in developing national housing policies.

Affordable rental properties are older and are less aggressively maintained. They tend to be less profitable, and the providers of affordable multifamily rental properties are less optimistic about the future. Affordable rental housing providers more often perceive themselves to be in competition with federally assisted housing. Still the majority of providers of affordable rental housing expect to retain ownership for 5 or more years and would acquire the property again.