This House Hacking Strategy Can Guarantee Your Rental Income Each Month

In This Article

Many of you know that house hacking is a great way to build your real estate portfolio, especially when you’re just starting. By living in the property you’re renting out, you can take advantage of owner-occupant financing. But even more importantly, your tenants cover some or all of your living expenses. 

Of course, when it comes to filling your rooms with tenants, you want someone who is reliable and pays rent on time. What’s one way to guarantee that? Section 8 tenants! 

Unfortunately, there are a lot of myths and stigma surrounding Section 8 tenants, but the landlords I know of who have worked with them have nothing but positive things to say. Just like any other tenant, many are good, and some aren’t so good. What is clear, though, is that only Section 8 tenants can provide you with guaranteed rent regardless of their personal situations.

What is Section 8?

Section 8 refers to Section 8 of the Housing Act of 1937, a federal government program that helps low and fixed-income families afford rental housing.  

Section 8 assistance recipients can use Housing Choice Vouchers to afford rental units in the private market. The voucher amount is based on the locality’s fair market value, as assessed by the Department of Housing and Urban Development (HUD) annually. Families typically pay 30% of the rent while the voucher covers the rest. Vouchers allow families to live in the rental unit of their choice as long as the landlord accepts the vouchers. Each city or county has its own housing authority that administers the voucher program. 

How Do Section 8 Tenants Vary from Other Tenants?

In most ways, renting to tenants using Section 8 assistance is similar to any other tenant. Tenants still fill out rental applications and are subject to the landlord’s background check. The main difference with Section 8 tenants comes down to fair market rent and inspections. 

Fair Market Rent is the government’s assessment of the average cost of rental units and utilities within an area. In Denver, Colorado, where I’m based, the HUD determined that Fair Market Rent in 2022 for a three-bedroom unit is $2,226 a month. Therefore, landlords renting to a Section 8 tenant cannot charge over Fair Market Rent. For a lot of house hackers, Fair Market Rent is what they would otherwise charge, if not higher, for their unit.

Because the goal of the Housing Choice Voucher program is to provide “decent, safe and sanitary” housing, HUD established a minimum set of standards a rental unit must have in order for tenants to rent from a landlord. These standards are pretty typical of what most tenants would look for in rental housing—smoke detectors, at least two exits, working windows, hot water, heating, etc. To ensure the units meet these standards, they’re subject to inspections. 

In Denver, the Denver Housing Authority administers the program and has an inspector come out before the tenant can move in. In addition, there are also annual inspections. On average, it usually takes about 10-15 minutes for the Inspector to walk through the unit and fill out the checklist with a pass or fail result. If the unit passes, you can rent out your unit to a Section 8 tenant. If the unit fails, you can fix the issues and send over a video to expedite approval with the local housing authority. 

Why Would I Want to House Hack with a Section 8 Tenant?

Renting to Section 8 tenants can be a great way to generate solid and stable income. Since the ultimate goal for house hackers is to reduce living expenses, if not live for free, having guaranteed income goes a long way. Section 8 tenants tend to move less than the average long-term tenant, so landlords reap the benefits of a steady income and low vacancy. 

One of the best parts of renting to Section 8 tenants is that rent is guaranteed. If the tenant loses their job, the housing authority will step in and pay all of the rent. This is also a huge bonus during times of uncertainty, such as a pandemic. Many house hackers feel at ease knowing that no matter what, rent will be paid each month.

What Are the Drawbacks to Renting to Section 8 Tenants?

In a hot rental market, some landlords want to get the highest possible rent for their unit. Having to charge fair market rent could be less than what they would receive without restrictions. Also, HUD Fair Market Rents tend to lag behind inflation trends and not make adjustments until the end of the year. If you sign leases before their adjustments, you’re stuck with the lower rent until the lease term expires.  

Of course, there’s extra paperwork involved. If you just don’t want to deal with the hassle of extra paperwork and inspections, then you may want to skip over this strategy. It’s certainly worth the effort, though.

Case Study

One of my clients, Jeff White, is what I refer to as the “ultimate house hacker.” He’s house hacked six different properties and has an impressive portfolio. He uses a variety of rental strategies that are determined based on a property’s layout. Renting to Section 8 tenants is a core part of his strategy because of its guaranteed income.

His property featured in our new House Hackerz series is a great example of why he likes having Section 8 tenants. This property has a 4 bedroom/2 bathroom upper unit and a 3 bedroom/1 bathroom lower unit. Section 8 tenants were already there when he bought it, so he took over the existing lease until termination. The bottom 3 bedroom/1 bathroom unit rents for $1,941 per month, and he receives 95% of rent directly from the Section 8 program via the Denver Housing Authority. 

He rents the upper unit using a rent-by-the-room strategy, meaning that he rents out each bedroom on individual leases. There’s more turnover, so having the reliability of Section 8 tenants in the same property is a nice balance. He prefers to utilize multiple strategies to mitigate risk in every house hack and to not rely on any one strategy for success. 

Conclusion

At the end of the day, house hackers all share the goal of building their real estate portfolio by renting a room, space, or units they’re living in and then moving on to the next property. The best way to meet this goal is to have reliable tenants who always pay their rent on time. Combining rental strategies is a great way to lower the risk of a house hack and allows the house hacker to add another tool to their tool belt.  

Section 8 is a wonderful program that helps many low- and fixed-income families get into a home. The reality is that Section 8 tenants are just like any other tenant. Don’t let the myths you’ve heard about them cause you to overlook this reliable source of rental income.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.