If you invest in rental properties or are planning to become a rental property investor, you most likely have a few questions regarding Section 8. Well, we will cover all the benefits and disadvantages of Section 8 to make sure you can make a well-informed decision on whether it should be in your rental property investing game plans.
Before we proceed, let us discuss some basics of Section 8 and how it works.
Section 8 – What is it?
During the Great Depression, there were two crucial pieces of legislation passed by Congress to support Americans with housing. The initial legislation was the 1934s National Housing Act, which established the FHA (Federal Housing Administration.) Later on, this agency was rolled to HUD (The Department of Housing and Urban Development) when officials made it a cabinet-level department in 1965.
The second legislation passed by the Congress was 1937s Housing Act. That legislation’s Section 8 brought forward the Housing Choice Voucher Program. This program ensured the United States government paid subsidies to local housing agencies for helping local residents maintain and establish adequate housing, which they wouldn’t be able to afford otherwise.
Therefore, one of the most important things to know about Section 8 is the fact that while it is administered locally, it is funded federally. Currently, this program funds more than two million American households with housing choice vouchers. Applicants have to meet particular criteria to qualify for a voucher. This includes demonstrating an income lower than HUD’s limits for the program. This is mainly because this program was made to ensure low-salaried people could afford to house.
Every voucher received by people guarantees them that a certain amount of their rent will be supported based on the household’s size. From the point of the landlord, the tenant will pay a part of the rent every month with the balance being directly paid by the local housing authority. The recipient of the balance will either be you or the property manager.
Tenants have the liberty of taking the voucher and moving wherever they please. That is precisely the choice offered by the Housing Choice Voucher Program. It is also worth keeping in mind that Section 8 is applicable to specific tenants and not specific properties.
Over time, people can put the same property up for rent to Section 8 and non-Section 8 tenants. That said, while a Section 8 tenant occupies a property, it is often subject to the government’s oversight to ensure they are maintaining minimum living standards. This means that the local housing authority will inspect each house (usually annually) and the landlord must cover any defects or issues found by the LHA.
Now that we have covered the basics of Section 8, let us proceed to discuss its pros and cons.
Section 8 Pros
Suitable for Different Types of Properties
The Section 8 program helps you rent out houses. When renting apartment units instead of houses, you can enjoy excellent revenue, which means that you will have multiple paychecks coming in instead of just one. Sure, you can get a decent amount of money from a single house as well, but Section 8 opens up the chance to earn more as it is suitable for multiple property types.
Additional Exposure and Advertisement
Section 8 landlords can benefit from free exposure and advertising offered from the internal sources of this program. The section posts the available units on the official website, which is checked by thousands of potential tenants.
There is an Incentive to Keep Your Voucher
Since the program funding is limited and set by officials from the federal government, the local housing authorities can grant vouchers to only a limited number of households. This has resulted in a situation where acquiring new vouchers can be quite challenging. Believe it or not, some waiting lists last for more than five years, and some even closed programs for new applicants entirely.
Section 8 also has a mechanism for revoking vouchers due to various reasons, some of which include failure to maintain the property, lease term violations, failure to pay a portion of the rent, etc. Because of all of this, Section 8 tenants have a strong incentive to hold on to their vouchers. If you lose your voucher, you may not get another one for years.
It would be fair to say that these vouchers are like rare pieces of jewelry, which you must hold onto at all costs. Due to this, Section 8 tenants usually go above and beyond to ensure they care for their property, pay their rent on time, and follow the lease’s terms.
The Rent is Guaranteed
As mentioned earlier, the government pays a small, or in some cases, a significant portion of the rent. This is arguably one of the biggest pros of buying section 8 real estate properties. Nonpayment is among the biggest obstacles to financial success when it comes to rental properties. Therefore, having a guarantee for rent is a massive deal.
The local housing authority reviews the part of the rent offered by the tenant and determines it through a formula that considers the tenant’s overall income. Due to this, your tenant might end up paying half of the rent or nothing at all. Remember, if the tenant does not pay their rent on time, they can be evicted like any tenant.
Tenancy Lasts Longer
Another benefit of investing in Section 8 real estate is that your tenancy will last for a long time. Maintaining a rental portfolio can be quite challenging due to turnover and opting for Section 8 properties is an excellent way to ensure your portfolio remains excellent.
Section 8 tenants often stay in their homes for a long time and there are several reasons why. Firstly, since most of these tenants have relatively low incomes, they often don’t have the means to upgrade or move their living space as much as wealthy tenants do. In addition, moving tends to be more complicated for tenants of Section 8 as they have to find someone who rents their property to them.
Unfortunately, there are plenty of people who do not put their property up for rent when Section 8 tenants are involved (we will discuss the reasons for that later in this piece.)
Opportunities for Above Market Rent
HUD determines each voucher’s monetary value by calculating the overall fair market rent of the area in which the tenant is living in. Fair market rents are revised annually with two-bedroom properties being the standard, followed by indexing the amount for larger and smaller properties. You can search the current fair market rents of HUD for any market-based in the U.S.
From the perspective of the landlord, this can be a massive benefit. In case you live in a neighborhood where the rents are lower than the averages for larger markets where you invested, there is a good chance that you will receive above-market rent with Section 8 tenants compared to the open market.
Of course, this can cut both ways. In case your property can get higher rental rates on the open market in comparison to the fair market rent calculated by HUD, then having a Section 8 tenant could reduce that property’s rent potential.
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Cons of Investing in Section 8 Real Estate
Minimal Control Over Rent Increase
More often than not, property managers tend to handle lease renewals and usually raise the rent by four percent at almost every renewal. Things like these are vital to improving your real estate portfolio. Since costs like insurance, taxes and maintenance go up with time, it is important to ensure the rent increases simultaneously.
When it comes to Section 8, the local housing authority must approve rent increases. Unfortunately, the LHA does not easily approve rent increases. This could mean that the rent you are currently receiving could be lower than what you could get in the open market. Minimal control over how much your rent can increase is arguably the biggest disadvantage of Section 8.
There Could be Delays
Usually, new tenants pay a month’s rent in advance before they move in. Unfortunately, this is not the case when it comes to Section 8 tenants. In fact, you may notice delays in the initial subsidized payments by a few weeks, or in some cases, months, depending on how efficient the local housing authority is.
Of course, you will eventually receive the money owed to you and the rent is virtually guaranteed. However, these delays can be a massive nuisance if you are strapped for cash.
Security Deposits Can Be a Problem
While Section 8 offers vouchers for paying a part of your tenant’s rent, it does not have any provisions regarding security deposits. So, collecting a security deposit from tenants of Section 8 is entirely up to the landlord. This can be quite challenging for tenants who don’t have enough assets.
You may figure that having a security deposit is not too important with Section 8s tenants as a massive portion of the rent is paid by the government. That said, if the tenant does not pay their half of the rent, you will be well within your rights to evict them. Of course, this can be a time-consuming and expensive process, which is why you must ensure every tenant provides you a security deposit.
Annual Inspections could be a Massive Hassle
As discussed initially, local Section 8 admins have to make sure the property tenants are living in meets the minimum habitability standards. They do this by inspecting each property annually. In case the inspector comes across any issues, landlords must address those problems and book another inspection. Doing so will show the administrators that the landlords fixed the issues found in the previous inspection.
It is worth keeping in mind that the landlord does not have to pay any charges for the inspection. Things can get even easier if there is a property manager available, as they can handle and schedule everything. That said, you will near to bear the cost of the repairs. Many investors dislike this part of Section 8 because they have to spend money on different repairs, which they would defer otherwise.
However, if you maintain a reasonable standard for your property, there is a good chance that the inspection will not turn up too often.
Where to Find Section 8 Properties for Sale
It must be abundantly clear by now that investing in Section 8 could be massively beneficial for you as long as you play your cards right. If you are looking for a property that offers long-term cash flow, a few options would be better than putting your money in a section 8 property. That said, you may be wondering where to find such a property for sale.
Well, there are some property management entities that specialize in managing and leasing section 8 properties. These companies are well aware of the obstacles to avoid when getting a Section 9 property approved. There are numerous ways to sport such properties for sale.
HUD offers multifamily and single-family properties through its official website and a variety of federal agencies. Zillow is also another handy source for locating areas with Section 8 real estate for rent. After you narrow down your search, you can utilize Roofstock Marketplace to look for Section 8 properties for sale.
With Roofstock Marketplace, you will also be able to view yields and cap rates for every Section 8 property you are planning to invest in.
Final Thoughts
Considering all of the factors discussed in this piece, you may be wondering whether Section 8 is worth embracing or not. Well, the benefits of Section 8 far outweigh the cons. Therefore, real estate investors are usually open to adding Section 8 to their portfolios. Sure, the cons may be a massive nuisance in some situations, but the benefits are too good to pass up.
Philly Home Investor has been purchasing homes that are section 8 for the last 6 years, if you have any questions or would like a fast free cash offer on your home don’t hesitate to reach out!