Apartment Value when replacing section 8 tenants

8 Replies

Hi Everyone.  

I was wondering what the effect is on the value of an apartment building when replacing Section 8 tenants.

For example, would two identical buildings be worth the same if their rents were the same (same NOI) but one had all section 8?

@Marc Izquierdo To answer your question. Yes the book Value is probably the same. Someone might pay more or less though if they like or hate section 8. Section 8 often pays above market so if you replace them and your NOI goes down then your building is worth less

@Caleb Heimsoth Thanks for the info.  Yea I was thinking that it wouldn’t change (based on the numbers, why would it change) but it seems odd to me.  I figure you could come in, remove a section 8 tenant, maybe renovate the unit to attract better tenants, but still end up losing money.

It's known that section 8 tenants tend to be rough on a property. I wonder if the thought is that by replacing those tenants, my maintenance and repair expenses drop, thus increasing the NOI and value.

@Marc Izquierdo , section 8 tenants generally have little to no skin in the game, so really don't care about your plumbing or walls or how the place looks. If you get a car for free are you going to treat it the same way as if you are making $700 payments every month? Probably not! If you have a car for free and it gets dinged, you say, "Oh well, it was free!" If you're paying $700 a month, you get pissed and do everything u can to prevent getting dings.

So the real value of section 8 vs not section 8 is the tenant and wear on your property.

@Marc Izquierdo - I do a lot of investing and PMing in low income neighborhoods and I will tell you that just being in a low income neighborhood will result in tenants that are hard on buildings, irregardless of how the rent gets paid.  I have over 100 SEC 8 leases.  I much prefer a SEC 8 tenant in a sketchy neighborhood or street, because finding someone who both verifiable and reliable income that meets my incomes X rent requirement is tough, and one life bump will cause the rent to go unpaid.  

As @Caleb Heimsoth mentioned, some investors will be attracted to the property because it is SEC , but others won’t even look if it is.  

@Patti Robertson thanks for the input.  I agree that section 8 is sort of a better play in a certain neighborhood.  However, say I’m looking into an area that is in the path of progress like maybe an opportunity zone or something along those lines.  In that case, I’d want to transition section 8 out and get a better tenant base in there.  In that situation, it seems like my gross scheduled income may not change (as a section 8 tenant vs a “normal” tenant may pay the same rent).  However, what I’m gathering is that what makes it beneficial is that your expenses decrease by having less wear and tear?  So you may not be able to raise rents but you can lower expenses.

@Marc Izquierdo if your screening process is good, how your rent gets paid has no effect on the condition of your property, or your maintenance costs. Section 8 generally pays over market and rarely, if ever, miss a payment. The right section 8 voucher holders will adhere to your rules, or risk losing their voucher. I moved from the Bucks county (Bristol Twp. specifically, small world) to Pinellas County Florida, partly due to the demand for Section 8 properties here.

@Jason D. Yea I remember we talked a few months ago.  You were up in Fairless Hills right?  That's awesome that you made the move.  I wish you the best down there!

Interesting point, and I can understand it.  I've heard, and have seen it a bit first hand, that Section 8 tenants tend to be rougher on properties.  Of course, you can definitely prevent this (or minimize the risk as much as possible) by having appropriate screening in place.

So it sort of sounds like there would be no incentive to an owner to replace section 8 tenants.  Actually, it seems beneficial to get them, but get good ones with the proper screening.    

Section 8 tenants are harder on properties and require more time than regular tenants. I have had many in the past. 

The ability to get above market rents is limited to bad areas. In my area a section 8 voucher is set on square footage and number of bedrooms. This leads to people going to the worst parts of town and loading in a lot of section 8 tenants. In the nice parts of town section 8 may be the same money for more work or less money than a regular tenant.  Also rougher section 8 tenants can scare away better tenants. 

The good news is the government always pays, the bad news is the tenants can be unstable. I have had multiple tenants lose their vouchers for various reasons.  I will admit I do not know how to screen section 8 and have reduced my numbers due to the headaches. However if you get $200 more a month and can screen well then go for it.