Do you consider your self a Real Estate pioneer? Pioneers are usually among the first to explore a new or unknown area. Real Estate pioneers are alive and well in Urban Landlord investing; I consider myself a real estate pioneer… do you?
Urban landlord investing is the wild west that combines elements of crime, drugs, boarded up assets, and low income tenants. Within all this uncertainty comes a unique risk adjusted opportunity. This post is going to look at one major aspect that most urban landlords (and others as well) are bound to face: The Section 8 Program.
Section 8 – What Is That?
Urban landlords know of and/or have heard of ‘Section 8’ tenants mentioned when they are thinking about investing in urban markets. The Section 8 program is shrouded with myths such as getting awful low life scum tenants to Housing Authority breathing down landlords’ necks. My goal is to help separate facts from myths.
Section 8 is a Government housing voucher program that is managed by the Department of Housing and Urban Development. The goal of the Section 8 program is to help low-income, elderly, and disabled tenants afford decent and safe private rental housing.
Tenants have to apply and get approved by their local HUD, Housing Authority or Public Housing Agency office. Once approved, the tenants are provided a voucher that states that the municipal or state government will pay their rent in part or in full – depending on their income and household size. The voucher is a government guarantee that they will pay a portion of the tenants rental payment ranging from 80 to 100% of the monthly rental payment.
The tenant voucher is the “Gold In Them Thar Urban Hills” opportunity that will allow real estate pioneers to earn high yielding cash flow within urban markets. As an intelligent real estate investor, I always ask “where is the risk.” The risk here is that government stops paying or honoring the voucher.
So, where does the money for Section 8 come from?
Following the Money
Section 8 “Housing Authority” (PHA) works under grants from the federal government to assist low income families, the elderly, and people with disabilities to afford clean, safe, and sanitary housing from owners of private property. Each year, every state receives a block grant from the federal government to cover housing assistance costs that gets divided throughout its municipalities or parishes. The Housing Authority uses this funding to cover the cost of the Section 8 program and to pay for a portion of the tenant’s rent and utility costs.
How to Become a Section 8 Landlord
Becoming a Section 8 landlord is accomplished by having rental units that tenant would want to live in. What you talking about Ankit?
Once a tenant has been approved for Section 8, it is their responsibility to find suitable housing. All participants in the program must search for a home to rent on their own. The rented unit can be a single family home, apartment, townhouse or mobile home. The participants can choose any location that meets both their needs and the requirements of the program. Hence it is important to have a vacant unit that appeals to the tenants as it is their decision as to which apartment they want to lease.
As a landlord, you can make potential Section 8 tenants aware of your unit by listing your property with the PHA office(s) that serve the community closest to the property. Once the unit is listed, the information will be provided to any voucher or certificate holder looking for a property of that particular size. In addition, you can use websites such as GoSection8.com, or Craiglist to make tenants that your unit is “Section 8 friendly”.
Once you find a tenant that wants to lease your unit then follow the Section 8 rental steps below:
- Have the tenant complete your rental application.
- Underwrite the tenant to your standards and utilize the voucher as a proxy for income and credit standards.
- If the tenant works within the underwriting above then you need to sign a lease and send it into the tenants case worker at the housing authority.
- As a landlord, you will need to complete an application and provide personal information to the housing authority. The housing authority will also review your lease and rental rates to ensure that they fall in line with rates for comparable dwellings in your area.
- Once the housing authority approves you as a landlord, an inspector will visit your rental property to make sure it meets all local building and safety codes. At the very least, you must have working locks on every window and door, the structure must be sound, no chipping paint, peep hole, smoke & carbon monoxide detectors.
- Once the inspector approves your property then the voucher is approved and you must provide the case worker your deposit instructions
- Then, once a month, the housing authority will mail you a portion of the rent and the tenant will pay you the rest.
The above is a guide on what the typical Section 8 rental process should look like but it may vary from state to state.
Pros & Cons to Section 8 Tenants
Pros
- Guaranteed Rent. With Section 8, you will always get the majority of the rent on time, every time. Typically, Section 8 tenants pay their portion on time as well. Since failure to live up to the lease can cost them their housing voucher, Section 8 tenants can be even more reliable than private tenants.
- Pre-Screened Tenants. The housing authority reviews every case before approving a Section 8 housing voucher. Mostly, the housing authority is looking at income levels, but many housing authorities will turn down tenants with past criminal problems. This screening process may provide extra protection for your rental.
Cons
- Routine Inspections. To get into the Section 8 Housing Choice Voucher Program, your property will need to pass a safety inspection and annual routine inspections upon lease renewal.
- Rent Control. You will need to keep your rent within the median for your area. If you have an extremely well done or a rental in an improving neighborhood, you may lose out on rent you could have otherwise charged outside of the Section 8 program.
Real Estate pionners seek out opportunity in the abyss of the unknown. Within the urban income investing, Section 8 tenant is that opportunity. I personally own a lot of my firm’s investment portfolio in urban markets of Newark and Jersey City, New Jersey so I consider myself a pionner.
What are your thoughts on Section 8? Have a good or bad experience with a Section 8? Share the good and bad in the comments below
For more information on the Section 8 Program, check out the BiggerPockets Section 8 Resource Page!
Photo: vonSchnauzer
Source for Pros & Cons: http://www.moneycrashers.com/become-section-8-housing-landlord-requirements/#ixzz2MZdaD1SF
{ 12 comments… read them below or add one }
Ankit, hi. We met once before. I was/am the listing agent of a 3family in Newark. You popped up in my email today. section 8 housing is such a timely topic for me since I’ve been assisting my rental clients (Landlords) with the tenant search & screening process. I am no stranger to the section 8 program. As an agent, I hope to place long term, responsible and cleanly tenants in my client’s rental properties. That’s the easy part. Most private landlords though don’t understand the value of the screening process: what to look for, how to size up a tenant or deal with conflict resolution when it presents itself during the tenancy. A real pioneer manages other people’s emotional responses in a tech savvy, efficient way. I am more interested in your screening process. What do you look for in your tenant?
Hey Angie.
Small world isn’t it? My screening process involves a three pong approach of finances, personality and risk. I use various online tools such as My Smart Move, Mr. Landlord to complete the screening process efficiently and electronically. I hope that helps.
Ankit
In the 10 years I’ve worked in real estate, I’ve never dealt with Section 8 housing. However, many of my clients are investors – and they often refer their investor friends to me. So, I appreciate being able to explore options for them and also being able to answer the gambit of questions they pose. The Guaranteed Rent pro you listed makes this option certainly worth considering. However, with the increasing rent prices we’re seeing in our Charleston, SC, may mean that my investors could profit more from charging higher rent prices.
Lee
Great point. An investor needs to balance market v. government guaranteed rents. If market rents are growing faster then maybe it is worthwhile for investors in Charleston,SC to rent out to market tenants. However it is important to risk adjust the market rents by backing out rent loss which would be a higher provision than with Section 8 tenants. Thanks for the great comment.
Ankit
Section 8 is welfare for landlords, don’t get me wrong by providing rental units to some of these truly dysfunctional folks you deserve an award.
The bad side of investing in zombieland is unless some miracle happens the properties will never be worth more then you have in them, and maybe even less if the area really tanks, as it will if it comes to have too many section 8 rentals.
There is money in section 8 I have a REI buddy that owns about 50 section 8 properties, and he is doing pretty good. His plan in the end is to have an absolute auction to unload them all when he has had enough.
Dennis
Great insight. Hence it is important to make Section 8 investments not in war zone but areas with redevelopment or what I like to call a compelling investment growth story. That helps combat some of the zombieland effects.
Ankit
My mother has had the same section 8 renter in her home since 1990. The tenant has paid for the house 4 times over. So she’s definately winning on the cash flow side, not so concerned w/appreciation of the property.
Great Article. We swear by Section 8. We are currently leasing to 2-3 new Section 8 tenants a month. Some of the vouchers are as much as $900 is our area. We have found that not all Housing Authorities are created equal. I love one and actually refuse to work with another one. I do not think of it as settling for Section 8 since the rent is paid through direct deposit on the 3rd of the month. We make our houses nicer than other Section 8 landlords so we have a ton of referral business. Don’t get me wrong though, we are very strict with our tenants and screen them more on personality since financials are not important.
We are are able to buy Section 8 properties in our area for 33 times the monthly rent versus the 125 times rent that the student market costs right now in our market. It is surely worth looking at if you don’t mind working it or if your property manager is committed to doing it.
Richard that is really interesting. I still work on a financial underwrite as not all my tenants have 100% section 8 coverage. Great point on the personality. I look at assets that would yield a 10%+ cap rate post acquisition and value add dollars.
Good article it has given me some insight. We are about to purchase our first rental property and are considering section 8, due mainly to the fact that the median rents in our area are higher according to the Housing Authorities analysis for the previous year by a significant amount. My question would be to those with more experience is how often this may be the case where the rents are more with section 8 and what information exactly the Housing Authority uses to determine the rent prices. It seems to me it isn’t based off of average data but some separate system they use based off of what they pay. Any further insight would be greatly appreciated, thanks.
I’m a listing agent on a Section 8 property. We had the CO inspection today. There are too many people in the house to pass the inspection. It is a 3 bedroom house and by my count there are 11 people: 2 parents with 9 children. The 3 smaller ones sleep in the parents room. The 2 teenage boys seem to live in the basement. How do we have them removed? When they moved in (12/20110) they claimed to be a husband, wife, 2 infants and 3 other children. Infants can live with the parents until the age of 3. At least 2 of the 3 living in the parents room are older than 3 years old. It seems as long as they live there we can’t transfer the CO/ownership to the new buyer…
Couldn’t you evict them for not abiding by the terms of their section 8 housing? Or what about going to their housing officer? Or simply give them a notice to move? I’m new at this, just now looking to purchase a rental property that we’ll live in… so, I’m taking an “educated” guess…