Any tips for low income/section 8 rentals?

32 Replies

I'm ready to buy my first duplex. In our market I can buy a habitable duplex in a low income urban market for 30k. Rents are aprox $500/unit but will likely be low income urban or section 8 tenants. The ROI opportunity here seems fantastic. My wife and I are meticulous planners and will heavily screen tenants to find the right fit. We plan on buying for cash so there's no mortgage and no reason to rush and take risky tenants.

Has anyone else out there done this sort of thing? I'm looking for advice, warnings and, hopefully, some encouragement! Thanks.

(My first biggerpockets post!)

I have rented to section 8 tenants on 3 different occasions and have no complaints. The one good thing is, depending on what portion of the rent the tenant is responsible for, most of your money is guaranteed. (i.e. no worrying about whether or not your rent is going to be on time).

You already said you will screen the potential tenant heavily, which is good. Just make sure they know you will inspect regularly and everything will be okay.

I will warn you though, in my experience, a lot of section 8 tenants are not the best house keepers and the fact that they have small kids adds to the mess. So be prepared to paint and clean or replace carpet when they move out.

If you go into it with the right expectations, I think you will be fine!

Oh, one more thing..... In some lower income areas the amount of rent you can get from section 8 is higher than most none section 8 tenants can comfortably pay, so you may be able to charge $550-$600/unit.

when I had low income/section 8 rentals the main thing is keeping costs down. I went for words like "clean" when describing the look of what i was shooting for in fixing them up.

Give a good cleaning, paint whatever cant be cleaned, use paneling on anything that cant be painted.

Make your rentals bullet proof. No sprayers on kitchen faucets. Guaranteed for life plumbing fixtures.

Industrial style towel bars.

No curtains/blinds.

Absolutely no carpet. Painted floors are great.

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Turnover is a great point. In my area it takes 30-60 days extra to get a sec 8 tenant moved in.

They make the tenant jump through so many hoops that they generally dont want to move. Once you get a good sec 8 tenant, never let them leave.

I've rented to Section 8 in the past. You want to visit their offices in your area, where you'll get more info on landlord/tenant laws. you'll also be able to get on their list of Section 8 approved properties. They'll schedule a property inspection prior to getting on the approved list. And as Rod mentioned, you can also get the updated approved rent limits, which can be higher than the market rate. Do your due diligence, as you would with any other applicant and conduct your inspections consistently. Congrats on taking action. Good luck!

I'm going to respectfully disagree with the assumptions in some of the other posts as to the characteristics of a low income/Section 8 renter and what amenities should or should not be provided based on your decision to rent to this population.

We have successfully worked with the Section 8 program for over 10 years. We do not treat Section 8 tenants any different than our other tenants. We have 15 residential rental units. We have had a duplex with a tenant who receives public assistance and Section 8 benefits on one side and a working attorney in the other side. Both given the same amenities. Both given the same respect.

None of our current Section 8 tenants have young children, but we had one Section 8 tenant in the past who did. Only one current tenant is a poor housekeeper and that has nothing to do with their low income/Section 8 status.

The key is, when you provide affordable housing (or any type of housing for that matter) you need to reduce your risk. To do so... screen well, select well, have a well written rental agreement, make sure the tenant understands the rental agreement and enforce the rental agreement.

As for tips... if you decide to work with the Section 8 program, take the time to learn about the roles and responsibilities of all parties involved - case managers, inspectors, tenants and landlords. Develop a healthy working relationship with the people in Section 8 office. Communicate well with the case managers. Follow the requirements they set forth. Do your own regular inspections (as you would with any unit) and don't count on the Section 8 inspectors catching all deficiencies.

As @Rod Smith mentioned, a big plus is the consistency in rent payments when they come from the Section 8 program. The tenant portions also come in on time. If they don't, the tenant is in violation of the not only their rental agreement with the landlord, but also their agreement with Section 8. The case manager can help get the renter back on track.

You are right about the length of tenancy.... we have had good luck in that regard. All of our Section 8 tenants have been in our units no less than 7 years and one has been with us for over 25 years!

Hope this is encouraging!

Wow, what excellent advice. I've read a lot of warnings about section 8 tenants destroying units and being horrible tenants. I'm actually a little surprised because it seems to me like these tenants would be eager to maintain their generous housing benefits by complying with the program. I know there's bad eggs everywhere, but I've heard well-to-do tenant nightmare stories too!

I've been advised that careful tenant screening is the key. We will also insist that the tenant carry renters insurance as an added layer of protection. Our goal will be to provide comfortable, safe housing and to be responsible landlords. We will expect that our lease be followed but we will also hold up OUR end too.

Win-Win is our goal.

Another question: does anyone see any obvious flaws in our business plan? Has anyone tried buying and renting low cost units to lower income tenants?

I'd really like to hear your stories.

Hi Douglas,

Based on the information you posted about your business plan, investing in income-producing real estate and renting to Section 8 tenants is a viable plan. It isn't until you execute your plan, which then you'll be able to see any flaws, and can make adjustments from there. It's great that you both have a plan in front of you, putting it into action, and seeking feedback, which will get you both far more prepared than I was.

Based on my experience, I didn't buy a property with the intent to make it into a section 8 approved property. It was brought to my attention during a vacancy period, so I just looked into it and it went well from there. I don't have any bad experiences, but I did make minor mistakes with my leases, which I immediately adjusted for the following property.

As long as you know your market, in regards to rental rates, and if you're acquiring your properties at $15k per door and can get $500 per unit, then it does look like a great opportunity.

I hope this I was helpful.

Kindest regards,

Tim

Thanks to everyone here for such helpful advice. This process has been exciting and a little scary too. We are nervous that perhaps we've overlooked something important. We believe that careful planning will make up for a lot of lack of actual experience. We really want to make our first property very successful so we can ride that surge of success and excitement into the next one and next one and next one...

I have to say, BP has been a very welcoming place. It's nice to be able to talk so openly with like minded people. I promise that we will pay it forward and help others once we have something to share.

Hi Douglas,

I see your looking at a duplex. I have a duplex with a section 8 tenant in it now for about the last 3 years. Very good tenant keeps the place really clean no real problems. Like others have said sometimes you can get above market rents which is a good thing. Are you including heat and water in the rent? It is not a bad idea to find out how much they will pay if you pay the heat electric and water. I have 1 like that works great and 1 that doesn't work as good as I thought it did. Always find out what the costs will be before you move someone and in. Also you may find they will do a year lease then it goes to month to month.

I have rented to section 8 tenants for the past two years. I have no complaints. Some of them are not the best house keepers, but some are better than what I experienced outside of section 8. Just depends on the tenant. The subsidy being guaranteed is nice. I am only two years into the program, but have not had any turnover yet. I think if you provide section 8 tenants a quality product they will stay longer. Some landlords try and turn the program into slumlording. I don't. I hope they continue to do so, because tenants will leave their unkept units and move into mine. As far as bullet-proofing, I would say no more than any other rental unit. Traffic is traffic. The floor doesn't know that it is section 8 traffic. I tile all kitchen and bathrooms, use clog free toilets, hardwood or laminate everywhere else, and install shower doors to keep water in the shower instead of the bathroom floor. Bottom line, I think that tenants who may have been on the section 8 program for a while, and lived in a few different units, will definitely know when they have a quality home to live in. They are not going to risk being kicked off of the program for two years if they have a good thing going. Of course, there will always be exceptions to the rule. Just a few quick thoughts

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Hi Douglas, welcome to BP!

I don't rent to section 8 (conflict of interest, my husband is a housing commissioner), but I do own the type of duplexes you describe. We have high turnover, but even the worst move outs don't put us negative cash flow. We hustle to get them cleaned and re-rented. What you really need to ponder is if you can handle the extra time and emotional energy the low income can zap - chasing rent, doing the same rehab over and over, not being able to go after damages.

I would do Section 8 in a heartbeat, there are more incentives to do the right thing to keep or reinstate their vouchers. But they often don't know HOW to do the right thing, and the strongest agreement language breaks down when they can't clean, take care of things, or understand consequences. Even with periodic inspections it is very hard to find agreement violations; you find out about the extra people, pets, and damage at move out.

The Section 8 Bible is a great read.

Originally posted by @Marcia Maynard :
...
We have successfully worked with the Section 8 program for over 10 years. We do not treat Section 8 tenants any different than our other tenants. We have 15 residential rental units. We have had a duplex with a tenant who receives public assistance and Section 8 benefits on one side and a working attorney in the other side. Both given the same amenities. Both given the same respect.

...

Wow @Rob K. - here is somebody with an attorney as a tenant; time for you guidance ...

Originally posted by @Steve Babiak :
Originally posted by @Marcia Maynard :
...
We have successfully worked with the Section 8 program for over 10 years. We do not treat Section 8 tenants any different than our other tenants. We have 15 residential rental units. We have had a duplex with a tenant who receives public assistance and Section 8 benefits on one side and a working attorney in the other side. Both given the same amenities. Both given the same respect.
...

Wow @Rob K - here is somebody with an attorney as a tenant; time for you guidance ...

If that attorney/tenant ever becomes a BAD tenant, I would hire a GOOD lawyer to get him or her out. They will know every eviction stopping trick there is.

@Douglas B. Most of the units I'm purchasing could be deemed "low-end". I found a property manager who has years of experience and wasn't afraid of managing rentals in "affordable housing" areas. That has been a huge plus for me. I don't want a part-time job managing these properties and chasing rents.

So far, everything has been going well. I'm happy with the returns. After bantering back and forth on some BP forums, I've set my maintenance at 15% and vacancy at 10%. I think this is pretty conservative in case I run into the high turnover and major repairs which are sometimes more common in these types of rentals.

I also believe buying properties at such low purchase prices allow newbies (like me) to learn and make mistakes without taking huge risks. I don't have to empty my savings account to get into a $30,000 property. So it allows for a bit of margin.

Good luck as you move forward. It is great to read all of the input from more experienced investors.

Mike

Heavily screen renters in a 30K house who can only afford $500 a month?

You're going to get some people who live in the ghetto for a *reason*. Either they are on welfare/section 8, or they are working poor, or have terrible credit, prior evictions or bad rental history, something. People don't often enjoy living in 30K neighborhoods where the areas are older, run down, crime riddled, poor, etc. If they had steady solid income and good credit and no criminal history, they would not be living in a 30K house. 300K, yes. 130K, yes. I like tenants to have a job- and a steady job, good/decent rental history, averagely good/decent credit, no criminal record, and have some *stake* in their lives-- a steady career and a J-O-B, good credit, something. Someone living in a 30K home is less likely to take care of a property in general than someone paying high rent for a 300K home. The more of your butt that's on the line, often the great your desire to take good care of it. Think of it like this: you have a Pinto and a Porsche. Which will you take better care of? There are, of course, sometimes exceptions with the very poor people living in the ghetto who do take good care of their homes. Also in such neighborhoods there are sometimes working poor immigrants who work 80 hours a week cleaning other people's houses and don't have much time to care for their own house. Environment, upbringing, assets, socioeconomic status, having stake on the line (career, assets, security deposit, something) affect these things. And, of course, some renters in $300K homes trash nice homes too-- it's just less likely from what I've seen than in $30K homes as the $300K renter has a job and is more easily garnishable.

I would not buy in that sort of poor neighborhoods, especially not to start, nor would I participate in section 8.

@Steve Babiak and @Rob K. ... you amuse me. :-) It depends on the attorney. That tenant was a perfect tenant, rented from me while his house was being remodeled. His specialty was patent law. If renting to an attorney specializing in personal injury law might I might be more concerned. The attorney we use for evictions specializes in landlord-tenant law and is top notch, so I have a good team if the need arises.

I see even more great advice overnight. This is great. Thanks!

I see the point about HEAVILY SCREENING low income tenants. Good point. Let me clarify: I intend on screening to find the best of the available tenants. My goal is to find quality PEOPLE. I know good and bad people with and without money. I hope to find people who will...

1. Take care of the property. My plan is to find someone who claims to take good care of her current unit. Then, I'll "drop by" their current residence to drop off some paperwork early in the application process. I'll ask to come in and see their place. If it's not well maintained, then I'll pass.

2. I'll call all prior landlords for last 5 years. I'll track the owners down on my own through county tax assessors office (it's easy!) and I'll throw a few questions in to make sure I'm talking to the real landlord and not a fake that the tenant is using to give a good reference. Prior evictions or history of late payments will mean automatic rejection. I'll only accept people with a track record of on time payments. This will be weighted more heavily than credit score.

3. I'll run a criminal background and credit check. Credit may not be great but I'll be looking for charge offs, late payments, evictions etc and taking into a big picture snapshot of the risk of the tenant.

4. I'll be checking the applicants work and personal references. I'll be looking for job stability, longevity. I'll be asking the personal references if the person will take good care of the property.

5. Lastly, I'll be using a little "feel" in terms of how the applicant handles my screening process. Some people are detail oriented and a little more independent and will cooperate with the process without missing details, making excuses, being late, etc. Some people will be obviously trouble. I'll weed them out early.

Any of those things individually might be insufficient but I believe there will be a benefit in redundancy. I suspect those things will likely filter out the vast majority of bad apples. After that, I know I'm playing a numbers game where the odds are overwhelmingly in my favor. Most of the time I'll make steady money off of each tenant. Sometimes I won't. When I don't, I'll get them out in the fastest amount of time possible. You win some and lose some. I plan to do both...

...only winning more than losing. And I build the loss into my financial business plan. It'll be expected as the cost of doing business.

@Douglas B. When applicants call, I like to listen to what's going on in the background. Some red flags are adults screaming at the kids, kids screaming at each other, or someone asking, "Who let grandma out of her cage?"

@Douglas B.

Rereading your post of proposed tenant screening procedures… I wanted to play devil’s advocate a little. Not to be a jerk, bust so that you can think through some of the low income realities earlier and be better prepared.

Dropping by will probably not get you in the applicants current housing. Even if they don’t have anything to hide, I’ve noticed a tendency to pop outside and shut the door. I’ve considered flat out asking if they are comfortable with showing me their current place, especially if other landlord feedback makes you wonder. Another issue is they are often couch surfing, between housing, so where they are now may not reflect their housekeeping skills. Just driving by the outside (front and alley) can often give clues.

As far as verifying landlords five years back, you may not get the data even if you ask for it. Low income tend to move more often, so going 5 years back could be six landlords, and data will get sketchier and sketchier. Lots of missing phone numbers, and in the cell phone age harder to sleuth to an owner phone number from county data. In the economy, we can’t always reach the prior landlord, if they were foreclosed on or are no longer in real estate. We also have an amazing number of landlords and property managers who are unwilling to give us any data.

If one of your criteria is on time payments, you may never get your units rented. I can count on one hand our tenants over the years who have consistently paid by the due date. Most go through highs and lows, come have to habitually pay late or weekly due to how they get paid. If rent is always paid in the same month that it is due, we consider that a win. But we are charging late fees after the first time, and sometimes pointing out that maybe they are in over their head and should look for a cheaper place.

Some employers will share a surprising amount of data, but most will be very tight lipped or refuse to talk at all. For service industry jobs, we love to just go find them at work to verify that they at least currently work there. Put the requirement on them to provide pay stubs and/or have their supervisor call you. For self employed, always ask for tax returns and they will always slither away. If you think they can’t afford the place (and aren’t otherwise disqualified in your criteria, such as borderline income), consider asking them to show you on paper how they will pay their bills for the next three months. This also leads to them fading away. I like to have people disqualify themselves if they are borderline and it makes sense to ask for more info.

Another way to consider weeding out bad apples is to charge an application fee. We don’t do this because we think it would really reduce the applicants, but it would also reduce the number of people hastily filling out a free app because they are truly desperate.

Hope this helps!

A couple of other tips...

Know and understand the contract. My first tenant was through Section 8, and each year I was spending money to fix holes in the walls and abuse to the appliances so that the unit could pass the annual inspection. After about 3 years of this, I reread the contract and realized I could charge tenant damages to the tenant and they would have to pay it or risk losing their voucher. So the next time I charged the tenant damages to the tenant, and although they had to scramble to come up with the money, they did come up with it (about $1,200). The damages decreased after that.

Another tip is to get to know your assigned inspector. My assigned inspector was very hard-nosed and I was spending no less than 1K each year just to get it to pass inspection. He would write up stuff like dust on the window sill. I hired a property manager who has worked with the inspector before, and it's cost me less than $200 over two years to pass inspection.