If you are a landlord with a few properties or even a massive portfolio to rent out, chances are you’ve wondered to yourself at one time or another whether or not you should start accepting Section 8 housing subsidies for low-income tenants. This can be a difficult choice to make, as many landlords have the idea that opening their doors to Section 8 tenants opens them up to having to accept tenants they would otherwise reject. However, there can be some very significant advantages to becoming a Section 8 landlord, and the cons aren’t as large as some people are led to believe.
Really Quick, What Exactly are Section 8 Tenants?
Section 8 tenants are tenants who qualify for the government’s Housing Voucher Program. Renters who qualify have income that allows them to do so. Every city’s standards are going to vary based on the average income, average housing price, etc. The program helps these people afford local housing by paying for a portion of the rent. The demographics of people in this program are elderly, some are disabled, and some have little or no income.
Advantages of Accepting Section 8
The biggest perk of accepting Section 8 subsidies is the fact that a substantial part of the rent money you are owed will show up reliably and on time each and every month. The portion of the rent that the government will pay is dependent upon a few different factors but is usually between 40 percent and 70 percent of the total. The rest of the rent will be up to your tenant to pay, but with Section 8 subsidies, you at least know that you will receive rental income monthly, even if your tenant slips into paying late.
Another major advantage to accepting Section 8 is that it opens you up to a whole new market of potential tenants, many of whom can’t afford to rent anything that isn’t subsidized. This can give you a competitive advantage over other landlords in your area who do not accept government subsidies. Contrary to popular belief, you can also screen these potential tenants just as you would any other tenants, and you can even rent your property out to someone without Section 8 just as you normally would. In many ways, the benefit of Section 8 is just as great to landlords as it is to the tenants it assists.
Understand, that like anything else, there can be delays. With Section 8 you will receive your first rental payment after the tenant moves in. This is a great example of when you need to reflect on your strategy and where you’re at with your investing financially. If you don’t have the means to wait a couple of months to receive rent, then Section 8 may not be the right choice for you. Focus on controlling what you can control. Section 8 is a government backed agency and there are no promises if your paperwork gets lost in the control. The delay in payment is something to keep in mind when deciding if you’d like to go with Section 8 tenants.
Disadvantages of Section 8
Depending on who you ask there are few and comparatively minor, disadvantages to accepting Section 8. However, there are a few things that can scare away an investor. The first of these is the process involved with Section 8. After filling out the proper paperwork your Public Housing Authority needs to approve your rental property. Next, your property has to have an inspection. To get approved the property much meet acceptable health and safety codes. If you do get approved this is an inspection that must be passed annually.
Another con to consider when deciding if you want to be a Section 8 landlord is you don’t have the choice in how much you charge for rent. After being approved, the Housing Authority looks at your property and other properties in the area and sets your monthly rent charge. As we all know you can’t set your rent at something outrageous compared to other units in your area no matter what. However, when you are not part of Section 8 you do have the ultimate say. The problem that can arise is that investors will want to increase rent as they would normally year by year. However, this is something else that must be considered. When you would like to increase at lease end it must be submitted to the Housing Authority ahead of time. While these are not huge problems for most landlords, it is something to consider when deciding to go Section 8 or not.
Food for Thought
There are some things that are out of your control but must be considered when making decisions with your portfolio.
- If you are a landlord with a portfolio made up of high-value properties in affluent areas, Section 8 will probably not be for you. The rents you can get from those paying on their own on these properties will be higher than what the government will allow you to charge in order to be approved as a Section 8 housing provider.
- If you own a multi-family building you may scare away tenants who do not collect rental assistance by the fact that you allow Section 8 tenants in your property. Unfortunately, there is a stereotype that tenants who are part of the housing program are dirty, disrespectful, and a danger. In my opinion, there are good people and bad people no matter what class you’re in and how you pay your rent. The only thing you can do in these situations is what you would do anyway: screen your tenants adequately and keep your property in great condition. This will show everyone that your building is kept to a certain standard no matter who lives there.
- With a typical tenant you are able to ask for a security deposit and have a good chance of getting compensated for damages on your unit that happened during your tenant’s lease. The problem with Section 8 tenant’s is that there is no security collected and you cannot collect any money from the Housing Authority for damages. Keep in mind that since the tenant is low-income, getting money for the damages can be challenging, not impossible, but more risk. Again, if you’d consider yourself a risk adverse investor then weigh this out.
Whether you’re just getting started in real estate or you have a good size portfolio looking into Section 8 tenants is a great move. Now, don’t get me wrong, this is not the move for everyone. The consistent, on time payments of Section 8 are hard to beat but if you are worried about failed inspections and things out of your control then it might not be the right move you. As we discussed above there are advantages as well as disadvantages no matter what route you take. At the end of the day, you need to go back to what you are comfortable with and what your goals as an investor are when making the final decision.
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Listen to Abhi Golhar’s coaching program on Section 8.