Section 8
Real Estate Investor · Glendale, AZ · Member since 2014 · 17 posts · 3 votes
Hello so an interesting subject always in my head is should I rent to section 8 or some other form of government housing? I know its a guaranteed rental income, but it is worth the hoops you have to jump through can someone educate me on this?
Hi all,
While I'm a newbie to BP and pursuing my own investments, please allow me to comment on Section 8 and related programs as someone who's day job involves housing veterans in the VA version of Section 8, HUDVASH, and formerly was to house homeless folks at a local shelter who had just received Section 8 vouchers.
I can certainly vouch for the general notion that Section 8 renters, and low income renters in general, require a bit of a different approach to management than your average middle or high income renters. They are, as a whole, tougher on rentals, tend to move more frequently, and generally lack the social grace we expect in fellow people. This DEFINITELY does not mean that, in the right circumstances, you can't still make a great cashflow on your rentals catering to the low income or subsidized renter niche. Podcast #79 talks about this, the challenges, and the benefits. As with any rental, you do need to be educated about your market. Section 8, and subsidies in general, is a different market than than the middle class renters the majority of rental advice is designed for.
Now the landlords I work with on a daily basis have generally devoted a major portion of, or their entire portfolio to, rentals that fit under the Fair Market Rent (FMR) rates with an aim to capture that niche. They've adopted many of the same strategies to make their cashflow work that are advocated in the Section 8 Bible (the portions I've read at least) and BP Podcast #79, basically outfitting their rentals with the aim of simple and durable. They advertise their rentals at the local PHA, get plenty of referrals from current tenants, and have been willing to network with local community agencies that provide assistance, financial and otherwise, to people likely to have vouchers (read: services for poor people). They charge a high to maximum allowable deposit, either screen stringently or basically don't screen at all, and have very low vacancy rates.
This strategy seems to work best where A) the FMR is high enough for you to have good cashflow B) you have a rental where someone actually wants to live (ie not a War Zone) and C) the market is tight enough where your rentals are in demand (ie there aren't an abundance of nicer looking units under the FMR that will accept Section 8). THIS IS NOT ALL MARKETS. FMRs are calculated using a complicated rolling 3 year calculation of rents in an area buy HUD, so places where rents have risen rapidly (San Francisco, for instance) is not someplace to use this strategy, because FMR isn't close to what you could get in the market for rent.
Now on to addressing @Gail K. 's issues. I always hesitate to counter individual examples of anything as single examples aren't rules, but I feel a lot of excellent investors and landlords run into the same issues, simply because the system of Section 8 isn't easy to understand though it sounds like it should be. Please don't see this as a personal criticism, Gail, but just an illustration of what I see as some common misconceptions.
#1 Excellent, most tenants, including Section 8 tenants, are normal renters who pay rent on time.
#2 Section 8 tenants fall into 3 categories: The Working Poor, The Fixed Income Poor, and The No-Income folks. In broad generalities, those who have steady low income jobs or quiet folks on retirement or disability seem to be the most attractive, consistent, and best tenants. Other than some potentially poor decisions in the family planning dept., it sounds like these are pretty good tenants thus far.
#3 A good relationship with your local inspector(s) is key. Be at the rental for EVERY initial inspection, get to know him or her, show that you are proactive in maintaining your units, and you will generally be given some leeway. Perhaps you forgot to swap out a 9V in the smoke detector after the last moveout, or perhaps that pesky drain pan went missing. If the inspector knows you and trusts you they will often let things slide with a promise that you'll be right back with that battery or they'll offer to swing back by in an hour or two to check that you found a drain pan and pass you. They don't want to have to come back to re-inspect, as protocol dictates that he/she notify you in writing of the repairs necessary (which must be mailed if you're not present), schedule a re-inspection (which could be a week or two down the road) and then have to drive to your place to do said inspection for 2 minutes. The best landlords I work with have earned the local inspector's cell #, as have I, which understandably is a great way to cut through red tape. Like any relationship though, it takes time and good will.
Now, as for the yearly re-inspections, I would use those as an opportunity to lay eyes on the unit yourself a week or two prior. I know its time and hassle to walk through your own units while rented, but for renters of any income level, its a good idea. You'll notice the cat that the rich lady moved in, or that the middle income techies fresh out of college haven't cleaned their shower in months and its starting to stain the tile, or that your low income folks have an extra family member or two staying over that aren't on the lease. In all of those situations, you now have the ability to give notice to those tenants that they need to correct their behavior or get out, because you were proactive. At that point, you can also educate your Section 8 tenant on exactly what needs to happen before they get inspected. Letter of the law states that the tenant have the carpets cleaned, the house clean, and that either the landlord or tenant be present. You can decide for yourself ahead of time whether the little repairs that become toss ups or responsibility (like that broken handle) are worth your trouble to keep the tenant, or are left totally up to them. You can also educate them that if they do not take care of their responsibilities and lose their voucher, you will move to terminate their rental agreement, per the laws of wherever you are. Remember, if Section 8 is confusing for you, the savvy investor, its usually pure Greek to the folks with the vouchers. There are exceptions, but usually people that have their vouchers terminated had no clue about what could happen to them if they did/didn't do X. They simply haven't been educated to know better. I'm guessing your stay-at-home mom either didn't get a letter about the re-inspection date (PHAs are generally poor at sending out all the required notices), or didn't have any concept that they would lose their voucher if she missed the appt.
#4 This is where being knowledgeable about the program is key. The FMR for an area is a maximum allowable amount of rent and basic utilities that the PHA will subsidize a tenant for. There are all sorts of reasons why your rental doesn't rent closer to the full FMR rate. Your rental could be located in an area of the county where the average rental rate is lower. If the PHA determines that your rent is $200 higher than everyone else on your block, they likely will reject your tenant's request to rent, even if your rent is well under the FMR. That FMR also includes the PHA's determination of what average utility costs are. If you include no utilities in your rent, the amount you may charge for rent will be lower than if you include all utilities. It is really up to you as a landlord to decide whether the calculated utility rates for your area are advantageous to you to include in your rent (water, sewer and sometimes garbage often are) or aren't (power and gas usually are not). Your tenant's income actually affects your maximum allowable rent, despite what you may have heard. Without going into painful detail, a person making $1000 a month will be approved to rent your unit at a higher rate than someone making $500 a month, due to how PHA's are required to calculate the subsidy based on the non-included utilities. Finally, as a landlord, I would hound the HUD website every January and February to make sure I knew the new FMRs for the new year. Usually, they go up if rents in your area are increasing, thus allowing you to potentially raise the rents for your tenants. If, by chance, they go down and place your tenants over their allowable limits, HUD WILL NEVER TELL YOU TO LOWER THE RENT OR RESCIND THE VOUCHER. They will simply expect the tenant to cover the new difference in subsidy and rent. This will affect how much you can charge new tenants, however. Bottom line, have a firm grasp on the math that will go into your tenant's rent before you start, and not just expect to achieve the full FMR with each rental.
#5 The PHA will never lower their payments to landlords due to budget cuts, with one exception. They will cease to issue as many vouchers, lay off staff, stop allowing exceptions to the FMR for tenants with special needs, etc. but the rules governing payments and their calculation are in stone. The one exception is that if a PHA issues 1 Bedroom rate vouchers to 1 person households, they may elect at some point to move those vouchers to studio rate vouchers (0 bedroom rate), which could serious impact the rate that new tenants could rent at, but again would not change the total amount of rent collected by you for tenants currently under a rental agreement. In theory, a gov't shutdown could cause problems as well, but I didn't hear of a single PHA missing rent payments during the most recent (and longest) one.
Whew! I hope I've been somewhat informative, as subsidized rentals require a good knowledge base to execute well, but in the right market, can be a conveyor belt of good tenants and great cash flow.
Hello so an interesting subject always in my head is should I rent to section 8 or some other form of government housing? I know its a guaranteed rental income, but it is worth the hoops you have to jump through can someone educate me on this?
My recommendation is 1) look over all the forms from your local HA, 2) read thoroughly the HAP (Housing Assistance Payments) Contract , 3) get their newsletter (if any) and verify what they advertise as 'Contract Rent', 4) ask for a reference (referral) or two from local owners who have dealt with your local HA, then 'interview' them, 5) read their "PHA 5-Year and Annual Plan" documents (e.g. notes 3 and 4). Use a google search with "OMB No. 2577-0226 glendale" and for other areas, change 'glendale' to your city or county. Some times there is nothing, sometimes lots of good stuff (LA, CA is 516 pages long.)
Clearly, not all Housing Authorities are the same. All will place contractual limits on you per HAP Contract. There is a possibility you may experience rent decreases (e.g. because of sequestration or other federal or local HA events) even as rents are rising locally. There is no guarantee rents will match the market or that you can adjust the contract rent over time (e.g. increases capped at $20/month and (see note 3, page 7)).
Be aware that your new tenants (new participants in S-8 and current participants that move to new units) may have significantly different contract rent amounts ((notes 3,4) e.g. $634 last year vs. $739 this year) from existing tenants. Also, just a thing to watch for based on experience, these programs are not designed with you or your tenant as a "customers". And the local HA rules may not make business sense. Example: your old S-8 contract rent rate doesn't adjust to the new rate, and increases may take a decade to get there. Be weary of an HA that charges for inspections or has an incentive for your unit to fail inspections.
Over time, you'll learn 'tricks' or methods for containing costs.
Glendale doesn't offer much wrt PHA filed documents. Other larger HAs generally offer more detail into their plans and policies that may or may not be readily disclosed to landlords. Another note... if your HA has a substandard rating, make sure you know why. Per one HA their "...rating is substandard due to missing a deadline by less than an hour"
Example Notes: (*)
1. 2015 FMR/CR http://www.rhaonline.com/HOUSING_TIMES_FEB%202014....
2. 2014 FRM/CR http://www.rhaonline.com/HOUSING_TIMES_DEC%202014....
3. http://www.rhaonline.com/PlanTemplateFYE16.pdf
4. http://www.rhaonline.com/AgencyPlan.pdf
I have 7 SFH rented through section 8. I have rented through section 8 for over two years and have not had a single tenant leave a home.
Be careful with your 7 Section 8 properties.
I have a Section 8 tenant who passed recently after being hospitalised for almost a year. Sections 8 payments stop immediately on death but today we had a phone call from HUD saying that payments should have stopped once the tenant had been out of the home for 6 months. To which we said meh and the lady from HUD intimated that if we had had more than one Section 8 property they would claw back the 6 months from those other contracts.
We got the property back 6 weeks after she passed away, last months rent unpaid, and we were left with a $350 water bill and have just paid $450 to haul away trash.
I know a couple of people who either used to accept Section 8 (my old boss) and someone who is on his last Section 8 property (has converted all other properties to non-Section 8), both live in the East Bay Area of SF. And the reason is that they can get the same amount of rent or more, with far less hassle, if they don't accept Section 8.
The one who still has one multi-family, I think it's a 4 plex, in Oakland, said one of his Section 8 tenants just had her granddaughter move in to raise (I think he said she's around 5 years old) and so HUD had to come do an inspection. HUD nitpicked a bunch of stuff, including having to put a lock on a door that all tenants needed to use, and was normally unlocked, which was really inconvenient for the tenants (forget the details, but it created a hardship for them all). The lock was needed for some reason because of the age of the child.
He also said there were new rules and regulations added recently to the mountain of other hoops he already has to jump through. It's just become too time consuming to deal with everything they want him to do. Things he doesn't have to do with non-Section 8 properties.
It's a shame, because HUD creates different, additional landlord-tenant rules for Section 8 landlords, than are already in place by city/county/state governments.
So, really, unless you can't find tenants any other way, I can't see any reason to accept Section 8 tenants in most circumstances.
The exception would be if you specialized in tax properties. There's a huge demand there, and if I was to do that, I'd go for 55+, or even better 62+ senior buildings - where 100% of tenants are 62+. In these buildings, like the one I live in, there is a mix of units - some are market rent, some have HUD Section 8 tenants, others have other subsidized funding from city/county/state/federal sources. You can put one of these in the boonies, and have a waiting list. There are a lot of baby boomers out there in need of low-income housing. And some seniors can get a little wacky, but they're not likely to be doing anything really destructive.
I've lived in two tax properties so far, and they've been very well-maintained. They have to deal with a lot of inspections and audits, etc., but there is always a waiting list and the tenants are pretty mellow for the most part.
I have 7 SFH rented through section 8. I have rented through section 8 for over two years and have not had a single tenant leave a home. No turnover. Out of my seven homes, I feel like two of the tenants may be taking advantage of the system. The other five are working, but just need some help to make ends meet. Most of the calls I receive AE from single mothers. I can tell you also that it seems that he ones who work are actually better tenants than the ones who don't work. I heard al of the stories about section 8 too, but did my homework, and finally decided the only way to truly know was to try it and see. There are a few hoops to jump through, but most of the things you would have to do outside of section 8. The big difference is the annual inspection requirement. It can be a pain, but if you are a landlord who actually takes care of your property, this is no big deal. And I actually like a third party going in and inspecting my houses. Bottom line, I will continue to rent through section 8, and will continue buying SFH for long term rentals
Randy, I'm in the process of buying a duplex in Chattanooga that has section 8 tenants. What advise could you give me for sourcing quality section 8 tenants? The ones that are in the units seem decent and have taken good care of the place, but one of them intends to leave in February, so I'm going to be sourcing new tenants.
Also, have you raised rents much on your sections 8s, and if so, what's the process like? Unit A is $100 less than the max monthly allowance for 2 BR, and unit B is $50 under. That would really juice my returns if I could max out the rent.
Thanks, Jeff
@Jeff Bonner Me and my wife don't do rentals but we like to connect with other investor in town. Do you ever attend the monthly REIA? We do Rehabbing.
@Shawn Roberson I've not been to any of them. I'd love to check it out though. When and where are they?
@Jeff Bonner here is link with information http://www.chattanoogareia.com. Next event is this Thursday 8-4-16
I enjoyed this entire thread. Thanks to all those who contributed!
I have a question about section 8. If a tenant signs a 2 year lease...pays first, last and security....then at the 3rd year...obtains HUD assistance....how does the LAST MONTHS RENT get handled after 9 years under the HUD umbrella?? Has anyone experienced this? Is the tenant entitled to his portion he only pays at the present day......or is the last month paid .........paid? Although HUD continues to pay month to month w/ no first and last in place ever.
@Susan Spinella - Is it common practice in FL to collect last month's rent up front? I charge a double deposit first, the max my state will allow. Will FL only allow you one month's deposit as the max? If they will allow two, how about if you convert the last month's rent to deposit with a lease addendum and that way there is no disputing that it goes back to the tenant. HUD is going to pay through the end of the lease. You can't take HUD money and then refund it to the tenant. You can, however, refund the tenant their deposit.
@Phillip Gonzales I'm curious to know what you decided after reading all the responses. I think it's worth trying because your experience may be completely different than anothers. Hope this helps!
Yes....first and last is imperative. Security deposit is a separate matter and does not pertain to my question. Basically,, if a tenant moves in...signs a lease.....w/ the first and last in place.....when the final month of lease has entered into play, 11years later ....do you go back to original standing of the lease BEFORE HUD came into play .(note. tenant did not pay last months rent on the due date of his last month in the unit) THIS IS MY QUESTION....that no one seems to know the answer to...including HUD employees.
section 8 is the greatest investment in New Jersey hands down
Funny this thread came back to life now. I actually have a Section 8 voucher now. I got it while living in the subsidized senior apartment building I moved into.
There are a couple of other things landlords might want to check out regarding renting to Section 8 tenants. Sometimes you can't kick out a tenant unless it's for "good cause." And you might have to keep giving them chances to rectify problems.
Also, it's my understanding that you have to give much more notice if you aren't going to renew a lease than your normal state laws require.
Just a couple more things to consider.
From a Section 8 voucher holder's point of view in a tax property (LIHTC), what I love about renting in these properties, is that I can never be kicked out except for "good cause." And unless it's something heinous, it would basically take an act of congress to get me out. They have to give me chances to address problems. They can never just not renew my lease.
What that gives me is lots of security. And the freedom to complain without worrying about getting kicked out at the end of my lease. And complain I do LOL. I think renting to a former manager is kind of like dealing with a former smoker. I have very low tolerance for shoddy maintenance, etc. I just don't understand someone spending more time avoiding fixing things, dealing with complaints, etc., than it would take to just fix something.
But, I digress...
I’ve been a Sec 8 landlord for 12yrs, owned around 20 properties in the program most of that time. Most of mine are single family and some are 2-4 units. They’re all in Chicago, most on the south side which is a rougher area. I’ve managed them myself the entire time and have had well over 100 different Sec 8 tenants over that time. I also own non Sec 8 rental property in more expensive areas of Chicago.
I have a lot to say about Sec 8, the good and the bad. But to sum it up in a number, and this is crucial information I really wish I knew when I started. The repairs and other losses are much higher than market tenants in more expensive areas. I have calculated an average of around 20% of gross rent in repairs, credit losses, and other miscellaneous losses from the building getting raided by police to burning down garages and many other crazy things. I could easily write a book with the crazy stories. 20% of gross rent is obviously a high number considering market tenants in decent areas average about 3-4% maybe. I am not including vacancy in this number. I have very detailed records over more than a decade and into the triple digits in different tenants so this is not a few bad apples throwing the average off. I know all the available techniques for screening these tenants and implement them.
This doesn’t mean you can’t make money doing this but you have to understand it’s not the same calculation as market tenants. I did not understand that going in and got burned on the first couple I bought because I paid more for the property then will work with a Sec 8 voucher tenant, even though I knew what the rent would be. Properties that would make a couple hundred a month with market tenants in different areas end up braking even or losing money due to the issues I mention above.
I have bought a couple more with cash recently because you can now easily pick them up for $20-30k and get $1200-1500 a month rent in Chicago and it’s been this way since about 2010. That is the ratio it needs to be to make money on it in a city like Chicago.
Anyone know anything about NYS section 8 laws? Are we prohibited from NOT accepting section 8 tenants???
section 8 is the greatest investment in New Jersey hands down
Would you care to expound on that? Do you not have issues with problem tenants or inspectors? I am currently looking at a 2 family in NJ with one apartment rented to section 8 tenant and being the first time dealing with this I am looking for more info.
I started in November of 2016 and have not had any issues (knock on wood) I currently have a 2-Family with Section 8 on both floors. The inspectors could be a little annoying before the tenants move in and yes the tenants could be a little needy, however, this is typical for section 8. All tenants are completely different in each circumstance. Rent is always on time, and if there is a major issues with anything then talk to the Section 8 case worker for that tenant at the Housing Authority. The Housing Authority is kind of the police overseeing everything which is great. If you already have a section 8 tenant in there then that means your apartment was already inspected and approved. See if they are on a full payment from section 8 or partial payment. My one tenant is paid 100% direct deposit from section 8, my other tenant has a rent of 1296/month with Section 8 paying $858 and she pays remaining balance. In the event she doesn't pay (lets hope not) I would call her Section 8 caseworker immediately to straighten out any issues. You might have to get your apartment re-inspected with Section 8 after the 1 year lease is up. It is also good to be handy or have a handy-man which I have in the event something breaks, fix is ASAP.
Be careful @Phillip Gonzales
I'm not a lawyer, but I can read. In my state (Connecticut) I understand it to be illegal to discriminate against a tenant based upon their legal source of income. So, if someone otherwise meets rental qualifications here they can't be turned down simply on the basis of the fact they're Section 8 recipients because it's legally obtained income.
You may want to have a conversation with a Real Estate lawyer in your home state prior to declining a tenant on the basis that they're a Section 8 recipient.
Here is a link to a short but relevant article: Connecticut landlord pays $9,000 for violating state law against source of income discrimination.
All that said, I've heard horror stories too. I can sympathize with your hesitance.
You're absolutely right. You cannot discriminate against the source of income. However you are not required to enroll in Sec8 programs. While not all S8 tenants are bad, I know a few people who are on Sec8. A few play games and know exactly how to game the system. Some are decent people that simply don't have enough to cover everything. Like any applicant if you choose to do a S8 housing acceptance it's a matter of screening and doing your due diligence. While our rentals would easily be allowed in the program I simply choose not to enroll in the program.
I started in November of 2016 and have not had any issues (knock on wood) I currently have a 2-Family with Section 8 on both floors. The inspectors could be a little annoying before the tenants move in and yes the tenants could be a little needy, however, this is typical for section 8. All tenants are completely different in each circumstance. Rent is always on time, and if there is a major issues with anything then talk to the Section 8 case worker for that tenant at the Housing Authority. The Housing Authority is kind of the police overseeing everything which is great. If you already have a section 8 tenant in there then that means your apartment was already inspected and approved. See if they are on a full payment from section 8 or partial payment. My one tenant is paid 100% direct deposit from section 8, my other tenant has a rent of 1296/month with Section 8 paying $858 and she pays remaining balance. In the event she doesn't pay (lets hope not) I would call her Section 8 caseworker immediately to straighten out any issues. You might have to get your apartment re-inspected with Section 8 after the 1 year lease is up. It is also good to be handy or have a handy-man which I have in the event something breaks, fix is ASAP.
Thanks for the quick response.
Section 8 program has been great for our portfolio! We get guaranteed rent every month and 75% of our voucher holders work or receive some sort of income. I love it because if my tenants lose their income, I wont miss any rental payments. Section 8 will pay 100% of the rent if the participate loses their job. The tenants on the program seem to take care of the properties pretty well because they know the property has annual inspections that must be passed. I also do a complete check on ALL of my applicants whether they have section 8 or not. I have never had to evict a section 8 tenant. However, I am chasing my market tenants on a regular for rent payments.
Phillip
People usually reject things they do not know about.
Here is what I did, starting 50 years ago. I used to do flippers but found they were too much work.
When I started, I needed cash flow as soon as possible. I did not have the luxury of buying regular single family homes with little profit for many years and waiting for them to be paid off.
So I came up with a better way. This was all in Northern Calif. I bought groups of older run down houses ON A SINGLE PARCEL. It takes some effort to learn this but it was hugely profitable.
Because these were lower income houses in old parts of town (NOT SLUMS), I rented to Section 8 tenants a lot. I screen the tenant like any tenant and choose if I want to rent to them. Mainly Section 8 is going to inspect for "habitability". No big deal.
I actually have more creditability over Section 8 tenants than my non Section 8. Why? Where are they going to go if I kick them out?
Also easy to determine rents that section 8 will pay. This varies in every county in the country. Some pay more than others. On the HUD site it will show you the max. rent amount they will pay for 1, 2, 3,4, 5 bedroom homes for every single county in the United States. Google "Hud, fair market rents, 2017".
Good luck.
Let me know if I can help. Generally speaking, for my affordable rentals, I prefer tenants with a Section 8 voucher.
Fixer Jay DeCima
There are always mixed reviews on this section 8 topic. I have a question though for anyone with section 8 experience, we are looking at purchasing a triplex which is not section 8 but does have 1 long term tenant who is section 8. We were told the "section 8 runs with the tenant not this property" and he is on a month to month lease. We plan on renovating the units and eventually will need this tenant out in order to do so, and then will be raising the rents to current market. Are their different laws for getting a section 8 tenant out? Not trying to evict cuz I'm sure he's a good guy but just need to vacate the property to get the work done and the rent up. I've heard 60 day notice is standard procedure? Your insights are greatly appreciated :)
Hello! I've enjoyed reading this thread. I'm new to section 8 and have read in this thread that the contract rent can be lowered for whatever reason. Can I add language to the lease to protect my cash flow, essentially adding an inverse effect if the subsidy is reduced? This is based on the tenant paying the difference from what section 8 covers and not section 8 paying entire rent. Thus if the subsidy decreases the tenant portion increases.
Thanks,
Francisco