Multifamily rental housing is financed through a combination of equity and debt. This is analogous to how an individual finances the purchase of a home. Equity is similar to a down payment in providing lenders with a cushion that reduces the risk of lending; equity comes from investors who contribute money toward a project. Debt (in the form of one or more loans from a lender) plays a role similar to a home mortgage in covering the balance of the development costs. For a fully market-rate rental property, equity and debt cover the total development costs of the property without the need for any explicit public subsidy.

Rental housing also has operating costs, like insurance, utilities, property management, security, and administrative expenses; those expenses and the development’s monthly loan payments are paid for with the revenue produced by tenants’ rent payments.

The amount of debt that a multifamily property can support depends on the level at which the rents are set. The higher the rents, the more debt the property can support. Rents that are affordable to lower-income households generally cannot support a high enough level of debt to fully cover (along with the invested equity) the costs of developing the property, leading to a gap that must be filled in order for a dedicated affordable multifamily rental property to be developed.

Developers generally use the fewest subsidy sources possible because each additional source makes a project’s funding more complex and often adds to the development’s timeline. For example, each subsidy comes with its own set of legal restrictions. To reach the lowest-income families with the greatest needs, however, developers often need to cobble together multiple sources to make the development financially feasible.

A development cannot feasibly be constructed unless 100 percent of its funding gap is covered, so every source matters. For example, a small local contribution can be the critical investment that makes a large development financed by Low-Income Housing Tax Credits work, allowing it and the surrounding community to benefit from a large federal subsidy that would otherwise go elsewhere.

To bridge the funding gap, developers usually need help in the form of a subsidy from the local, state, or federal government that can cover a portion of the construction or operating costs. Depending on the income levels that a property seeks to serve, an additional subsidy may also be needed to cover a portion of the tenant’s rent payment.