Record Rental Income, Operating Expenses for Properties in Novogradac Survey; Inflation, HUD Caps Play Significant Roles

Rental income and operating expenses at low-income housing tax credit (LIHTC) properties tracked by Novogradac set records in 2022, each outpacing the rate of inflation during a year that saw the nation emerge from the worst of the COVID-19 pandemic while inflation was the highest in more than 40 years.

That data is in the 2023 Low-Income Housing Tax Credit Income and Operating Expenses Report, published by Novogradac. Novogradac’s report includes information from more than 186,000 housing units in nearly 1,700 affordable housing developments. Increases in both rental income and operating expenses outpaced the rate of inflation in 2022: Rental income increased by 9.2% over 2021, while operating expenses increased by 10.4%. Meanwhile, inflation was 6.8% from December 2021 to December 2022.

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The year-over-year increases for rental income and operating expenses set records for percentage increase and for median dollar amount per apartment for the year: Rental income was $10,594 per unit (surpassing $10,000 for the first time) and operating expenses were $6,405 (surpassing $6,000 for the first time).

The combination meant that net operating income (NOI) also set a record at $4,188 per unit, an increase of 7.4% over 2021–a result of the fact that rental income is a higher number, so the lower percentage increase still means a larger dollar increase in income.

Income Record

It was the fourth consecutive year that properties in the Novogradac data set broke a record for rental income and continued a trend in which the rate of increase in rental income largely mirrors the rate of inflation. Since Novogradac began tracking rental income and operating expenses in 2010, rental income has increased 34.9%, while inflation has increased 35.4%. Specifically, an apartment in Novogradac’s data set brought in a median rent of $655 per month in 2010, which is $887 in inflation-adjusted 2022 dollars. The median monthly rent in 2022 was $883.

Operating expenses have increased 55.3% over that same period.

Median rental income jumped $892 per unit over the full 12 months of 2022, following a year in which that category increased only $80. There are two major related reasons that likely caused the jump:

• After two years of pandemic-related eviction moratoriums and generally flat rents, property owners were finally able to increase rents.
• The U.S. Department of Housing and Urban Development’s (HUD’s) very low-income (VLI) limits, used by LIHTC and tax-exempt bond developments, had a cap of 11.89% in 2022. While that figure was lower than it could have been by nearly half, it was still significant.

HUD Changes, 2023 and 2024 Caps

While the 2022 VLI cap increase was lower than expected due to a change in how HUD calculated the cap, it was still the largest single-year increase in the years covered by the Novogradac report and likely was a major factor in the 9.2% increase in rental income for properties in the Novogradac data set. As stated, the cap was 11.89% in 2022 and the national average increase allowed for rental increases (which includes areas with a lower cap) was 10.5%.

HUD sets the cap on VLI increases at the greater of 5% or twice the change in national median income. In 2022, HUD altered its formula to calculate the change in national median income, which resulted in a substantial pivot: the previous norm of about 10% of areas being capped in any year jumped to 57% in 2022 and 87% in 2023.

Had the cap been much higher (it would have been 25% under the previous formula), that presumably would have led to an even greater increase in rental income for properties in the 2022 Novogradac study. But even with the lower-than-otherwise change, rental income set a record.

While another record for rental income is likely in 2023, the percentage increase may not be as dramatic as 2022. The VLI cap in 2023 was 5.92%, roughly half the 2022 jump. Looking further ahead, Novogradac–after the release of the 2022 ACS data in September–estimates that the 2024 income limits (for the 1,400-plus areas for which Novogradac can estimate), will increase by 5% to 14% (probably closer to the lower figure). That assumes HUD retains the same cap formula as in 2022 and 2023.

So rental income will presumably continue to increase, although not likely at the percentage rate of properties in 2022.

Moving Pieces

The result of the records for rental income and expenses in Novogradac’s data set was a record high median NOI of $4,188 per apartment. That followed a drop in NOI in 2021 (which was the first decrease in NOI since 2017 and only the fourth decrease in the 12 years for which Novogradac has such data).

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Another way to measure such data is to determine the percentage of income offset by expenses. In 2022, expenses constituted 58.5% of rental income, which has been surpassed only three times since Novogradac began tracking rental income and expenses in 2010–in 2017 (60.1%), 2021 (59.8%) and 2018 (59.4%). For contrast, in the first five years Novogradac tracked such data (2010-2014), expenses surpassed 55% of rental income only once.

The 2022 data shows that rental income and operating expenses at affordable housing rental properties are still in a state of flux due to pandemic-related issues with the supply chain, labor costs, general inflation and the resultant increases in VLI income limits. Property owners and managers are keeping a close eye as we near the end of 2023.

Continue Learning with Novogradac

This is Part 1 in a four-part blog series. To learn more about rental income and operating expenses for LIHTC properties, read the rest of the blog series, which is linked below. Also, the Low-Income Housing Tax Credit Income and Operating Expenses Report dives even deeper into this subject matter.

Other blog posts in this series:

Repairs, Maintenance Expenses See Big Jump in 2022: Start of a Trend or Catch-up Period?

Payroll for LIHTC Properties Sees Record Increase, But Maintains Long-Term Stability

LIHTC Property Insurance Increased in 2022, but Jump Differed by Area