I am new to this forum and have been impressed by the wealth of knowledge in this forum. It is very difficult to get unbiased RE related advice from pros and there is no better place than BP to get that advice.
I had a question related to Section 8 rent increases in California. I have come across a tri-plex located in Northern California (Sacramento area). The property is rented to Section 8 tenants and the rents are 30% below latest FMR for the property in the area. With current section 8 rents, the property is an excellent buy. I am not sure what the procedure is to increase section 8 rents. Is there any reason why the current owner wouldn't have increased rents.
The process you would use for a non Section 8 tenant except that you need to notify the housing authority also. I strongly recommend sending a certified or return receipt copy to the Section 8 office as they have lost/misplaced/not received documents in the past. Also, if you purchase this home ensure to use the correct form when doing rent increases, either the 30 day or 60 day notice, depending on how long the tenants have been residents.
Rents usually are not increased because either the property is not up to current standards, management is afraid the tenant will move out which leads to a big turnover or that area where the triplex is isn't worth the market rent of the area around it.
We do not have many locations with triplexes in our area so I would that the rents are low due to a little of all three of the above but without knowing which triplex you are looking at and more info I can't say for sure.
@David Hutson is spot on as to the procedure. Assuming the PHA accepts the new rent, they will mail both you and the tenant their standard form informing you of the changes in payment amounts by each party.
Its important to remember a few things when looking at how much the PHA will allow you to charge someone. First off, don't forget FMR is a value that's supposed to include projected utility payments for a rental in your area. If your rental doesn't include any utilities (or only some, like water and garbage), you probably won't be able to charge full FMR for a unit. Second, the higher your tenant's income, the closer to the FMR you can charge, as the PHA allows a family to contribute up to 40% of their income towards calculated rent and utilities. If you have folks with higher income for the program, in many areas this will mean they can pay full FMR plus some utilities.
Now, these are hard and fast rules for someone moving in. They only sort of apply for a rental where the rent has increased. One of two things can happen when you increase someones rent. First, the PHA can determine that the rent increase is illegal in some way shape or form. For instance, you can't charge those with a voucher a higher rate than others in your complex, you have to give the usual legal notice for your area, you can't do it mid lease unless there's provisions allowing you to do so, etc. Usually this isn't an issue if you've got some experience with PM, as it sounds like you do. Second, the PHA will process the rent increase, and if it comes to more than they would allow the family to pay at move in, they leave the family to pay the difference, thereby getting around the 40% cap. A word of caution about this though, many PHAs take a very dim view against landlords that do this on a regular basis and strive to make life difficult for them, mine included. It is also possible the PHA may encourage your renters in this over 40% category to look for rentals elsewhere, not out of any benefit to the PHA, but as a suggested strategy to lower the tenant's monthly expense. The PHA would be paying about the same either way.
Finally, be careful with an increase that will put your renters above that FMR rate once utilities are factored in. If you have tenants with very low (under $500/mo) or no income on a voucher in your complex, this would effectively force them out, as they wouldn't have other funds to cover the additional rent above what the PHA would subsidize.
If you need help calculating what the FMR rate is for the complex with the utilities factored in, call your PHA or shoot me a PM and I can walk you through how to do it for yourself.
As for why the current owner hasn't increased rents, here are a few guesses:
- That was the max they could charge X years ago when they bought/built the place and never looked into changing it
- They have low/no income tenants and that's the max that they could charge those tenants and assumed that rate applied to all voucher holders
- They didn't think people would pay any higher than the current rate without a voucher (and remember, you can't charge someone with a voucher more than one without)
Hope this all helps!
Also, apologies, for some reason I was reading the OP as a 5+ unit complex, not a tri-plex. PHAs don't ask for rental info about other units in properties smaller than 5 units, so you can get away with different rates for different units.
@ANuraag M. the housing authority sends out a yearly notice to the property owner. The notice is called... "Request For Contract Rent Increase". I'm looking at one right now. The notice gives you 3 options and you pick one. Basically options are: Are you increasing rent and how much?, no rent increase, or I'm not renewing the contract and I'm requesting the tenant to leave.
You can increase the rents to any amount but they won't necessarily approve it.
Word of advice is if your buying a duplex, triplex or 4 plex... the smaller multi units. I would go all section 8 or no section 8. Commingling tenants is a mess. This is personal advice from my own properties. The reality is GFT's (government funded tenants) don't play well with non GFT's.
I agree that the housing assistance tenants can be an issue with the non housing assistance tenants. I screen them all the same and do not tell any of the tenants who is on assistance or any status of other tenants. Unless you get really low income tenants most others won't know. My Section 8 tenants work so it makes it hard to know unless someone says something.
@Frank Romine The Request for Contract Rent Increase must be a Fresno-Visalia action. I have never seen one for any of my properties here in Sacramento. It sounds like a great idea to me as it creates an action that may seem more credible to the tenant.
@Frank Romine None of the PHAs I'm familiar with send out such a notice, but that's cool that yours does. I'm guessing most don't want to actively encourage landlords to raise rent/increase paperwork.
I usually check the box to raise rent a few bucks. Interesting most of the rent $ is in odd numbers. $837, 529, 935, etc.
The FMR rates are based on a 3 year rolling average calculations of 2 bedroom rents in your area, so they're only ever nice numbers by chance.
ANuraag, everyone gave some really great information. Every HA has different requirements and often can mislead you if you do not take the time to understand their procedures. I have never received a Request for Contract Rent Increase notice, however, I'm not surprised. It is important to know the rent limits and utility allowance when calculating rent increases. This will increase your chances of receiving an approval. The HA also uses a market comparison analysis of similar units within so many miles from your site, as well as, your rent roll to identify the rate of your most recent rental. In Oakland, one of my units did not get approved for market rate rents. I was only approved to receive the same amount of the last rented unit, which was below the market rate for the area. This is something to keep in mind.
Always screen your tenants the same regardless of subsidy programs. Never allow residents to be treated any different and be sure to enforce all community rules. With good management. no one will know if a tenant has subsidized rents.
I recommend calling the housing authority directly and ask them about it. Are they increasing rents to FMV right now? How is FMV judged? (They may only look at their own Sect 8 rental in the area. Oakland looks at similar units in the same building, and mostly section8.com ) Ask them.
In Richmond, where I have one Section 8 unit I inherited, the rents are significantly below market, and they won't raise them because of the federal sequestration. In East Oakland, I was able to rent the units out to non-Sec 8 tenants for $1,400 (2br/1ba), compared to only $1250 approved by Sec 8, in an area where traditionally Sec 8 was higher. They only approve what they think when the inspector comes out, and the appeal process is a PITA. In this case, there was some old cement paint on the driveway, and they wanted the whole driveway and building scraped of not just peeling paint, but any paint that COULD peel. No thanks!
So be forewarned, it is not just as easy as "raising rents to FMV." But do your research, and maybe you can score a deal...
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