Determining Which Properties Are Best Suited for Section 8
Most real estate investors that have properties for long term cash flow have at one time or another considered putting a section 8 tenant into one of their properties. Some investors swear by Section 8 while others have little, if any, experience with Section 8. While most of my properties have been easy enough to rent with retail renters, I do have a certain percentage of properties that have been leased with Section 8 tenants.
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The name of the program is derived from section 8 of the Housing Act of 1937. This section of the law provides rental assistance to individuals by paying private landlords a subsidized portion of the rent. Interestingly, over 3 million individuals nationwide receive section 8 rental assistance.
As you can imagine, every real estate investor has their own take on the use of section 8 housing as part of a leasing strategy. I’ve talked to numerous investors over the years who love it and some who don’t want anything to do with it. While the Department of Housing and Urban Development manages the program, it’s typically administered at the municipal level. As such, I’ve found that some Section 8 offices operate better than others.
I personally haven’t had any unusually bad experiences with section 8 tenants. Having worked with a number of different Section 8 offices, I can say that some offices are definitely easier to work with than others. But, by and large, my experiences with the Section 8 program in general have been good.
With that said, out of the 300+ houses that I’ve leased over the years, only a small percentage have been section 8. In my market, I’ve found that most of my properties are easy enough to lease to retail renters and aren’t worth the inspections and red tape associated with Section 8. However, there are certain properties that lend themselves perfectly to the program and of which we are more than happy to place Section 8 tenants.
Here are a few of the factors that we consider to be favorable for Section 8 tenants:
Less expensive properties: We’ve found that more expensive properties don’t typically work for Section 8 as most of the vouchers are for amounts on the lower end of a particular market. Not a week goes by where we don’t have a potential tenant with a Section 8 voucher asking us to lower the rent on a particular property to accommodate their voucher amount. Almost all of the properties that we rent through Section 8 are on the lower end of the pricing spectrum.
In addition to this, we’ve found that on the whole, retail tenants in lower priced properties tend to be slightly less stable than higher priced properties. As such, it’s helpful to have the stability of a regular monthly check from Section 8 on these particular properties.
- Municipalities that are easy to work with: With some experience, we’ve learned that certain municipalities in our market are easy to work with while some can be very difficult. Whether it be difficult inspectors or difficultly getting a new property into their system, we’ve decided to avoid the section 8 offices in a few specific municipalities and work with the ones that make sense.
- Competitive Rental Market: There are certain instances where a particular submarket is slightly saturated with rentals and a longer vacancy is of concern. In these instances, we would rather get a section 8 tenant in place than deal with a longer lease up period. Even if we end up taking a slightly lesser amount in rent to accommodate a Section 8 tenant, the amount that is saved by avoiding vacancy time is usually worth a slight reduction in rent.
Talk to any seasoned real estate investor about the Section 8 program and you’ll probably get an interesting story (good or bad) about their experience. As I said, I wouldn’t use the program on most of my properties, but I definitely see the benefit of having it as an option. Every investment property has its own set of variables that may or may not lend themselves to working with this government subsidized program. Having the ability to use it to your advantage and knowing which properties make the most sense is a great tool in your real estate investing toolbox!