Section 8 rent increase - only after new one year contract

20 Replies

Hey BP,

Background:

I bought a property a few months ago in Indianapolis. The property has a section 8 tentant with a contract ending this summer. The tenant is a lady who has lived in the property for 25+ years, happy where she is and will probably stay there until she moves on to the next world. 

The problem is: The rent is at $525, which is way below all comps. My PM suggests $725-750 and this is the number I used when doing the numbers buying the property (understand that my numbers look terrible with the current rent) . The rent has not been rasied for the last 10 years by the precious landlord for some reason.

Now that the contract is coming to an end (it has actually already ended), section 8 tells my PM that they want me to sign for a new year before starting negotiations for a rent raise. To me this sounds crazy, I am risking signing a new one year contract ending up at $550 rent for the next year.

To me I have a few options and I hope that I could get some good feedback here.

1. Sign a new one year contract and hope for the best. The tenant is a very cool old lady and I would proably not have to deal with vacancy for many years to come. I would ask for a raise now, and then rehab for $5-6k (Paint & Floors) the coming year and ask for another raise because of the improvements next summer (Hoping to end up at $725-750 next fall). My PM also informs me that I can only ask for a rent raise ONCE per year.

2. Walk away from Section 8 and start fresh with a $725-750 rent. Hoping for a good tenant (In this case I would probably have to spend $5-6k at a turnover) and deal with vacancy in the meantime.

Any feedback is greatly appreciated.

Regards,

Johan

Good question.  First, that rent seems way low.  Apply immediately for a rent increase.  Your tenant probably pays a portion of the rent.  If that portion is low, a rent increase will not have a substantial effect to her.  Alternatively, you don't have the increase to her portion, if you want to retain her.  Carefully understand the rules of your local housing authority.  

My business plan is to keep long term tenants.  It would be a mistake to let this tenant go.  But also a mistake to take a long term, under market tenant.

Conclusion - keep the tenant, try to get more rent.  Do NOT put additional money into the property, except for maintenance issues.   When you get the property back one day, you will have to reinvest into that property.  Hopefully, that is 10 years from now.

Thanks @Brian Ploszay

The thing is that Sec 8 wants me to sign for a new year before asking for a raise. This way sec 8 will have all the power and I will basically just have to accept whatever rent increase they think is reasonable. Could be anything as far as I know... So It's gonna be a gamble if I decide to sign for a new one year and let sec 8 decide what the rent should be.

In this case the tenant pays only $55 per month. So Sec 8 pays $470 per month.

Ask yourself if you are in business to start a local community outreach program for senior citizens ...or are you trying to make a profit? . If you are not going to actually invest and make money then You should apply for a nonprofit 501c status as a tax exemption .

HUD has predetermine sect 8 rents according to zip codes. Find out how much the sect 8 max would be for the unit and that will give you an idea of what they will pay. The tenant will most likely have to pay a portion of it.

Originally posted by @Julie N. :

HUD has predetermine sect 8 rents according to zip codes. Find out how much the sect 8 max would be for the unit and that will give you an idea of what they will pay. The tenant will most likely have to pay a portion of it.

Nice! That's the kind of info I need. Where would I start the search?

Found something on google saying the fair market rent for my 3 bedroom in Lawrence, Indiana would be $932.. Is that for real?

Ask for a raise for sure and get that new lease signed.  And carefully work it out with the tenant that her portion (collected) does not increase.  Again, abide by the rules of the local housing authority.

Something doesn't make sense.  If you sign a new lease before asking for a rent increase, you won't be getting a rent increase because you'll be locked in to whatever rent amount is listed in the lease for the term of the lease.  You can't raise Section 8 rent (or even a non-Section 8 tenant's rent) during the term of a lease. 

Here's a tip for you though....I have one Section 8 tenant and after the initial one year term of the lease, I just let it expire and go month-to-month.  When they're month-to-month they're just like any other tenant, which means you can raise the rent with proper notice (30 or 60 days in my state, depending on the amount of the increase). 

Last year I did two rent increases in one year....one for 7% and the other for 8% (that's 15% combined!) and the Housing Authority approved both. 

Originally posted by @Johan Hultman :
Originally posted by @Julie N.:

HUD has predetermine sect 8 rents according to zip codes. Find out how much the sect 8 max would be for the unit and that will give you an idea of what they will pay. The tenant will most likely have to pay a portion of it.

Nice! That's the kind of info I need. Where would I start the search?

Found something on google saying the fair market rent for my 3 bedroom in Lawrence, Indiana would be $932.. Is that for real?

 

You can go online and check the Fair Market Rents that HUD uses to the determine payment standard amounts for the Housing Choice Voucher (Section 8) program in select counties throughout the country here: https://www.huduser.gov/portal/datasets/fmr.html.

(Note: The amounts listed are not necessarily what HUD pays the landlord. They are gross rent estimates that include the rent plus the cost of all tenant-paid utilities, except telephones, cable or satellite TV service, and internet service. However, the published amounts can give you a ballpark idea of what HUD will pay.)

What is your current cash flow if you proceed with option 1 and rental increase is denied (basically staying at square one)?

If you move forward and take option two and decide to terminate the current lease, even though you are spending money on the front side and risking the possibility of vacancy for a month or two, you'd make more money on the backend with raise in rent of almost (or just about) a 50% increase? Think about it this way, you are going to have to put money into the place eventually when this tenant moves out. The question you need to ask yourself is if you want to do it now, or down the road. Really depends on your current numbers and your goal with this property.

Good luck!!! 

Originally posted by @Kyle J. :
Originally posted by @Johan Hultman:
Originally posted by @Julie N.:

HUD has predetermine sect 8 rents according to zip codes. Find out how much the sect 8 max would be for the unit and that will give you an idea of what they will pay. The tenant will most likely have to pay a portion of it.

Nice! That's the kind of info I need. Where would I start the search?

Found something on google saying the fair market rent for my 3 bedroom in Lawrence, Indiana would be $932.. Is that for real?

 

You can go online and check the Fair Market Rents that HUD uses to the determine payment standard amounts for the Housing Choice Voucher (Section 8) program in select counties throughout the country here: https://www.huduser.gov/portal/datasets/fmr.html.

(Note: The amounts listed are not necessarily what HUD pays the landlord. They are gross rent estimates that include the rent plus the cost of all tenant-paid utilities, except telephones, cable or satellite TV service, and internet service. However, the published amounts can give you a ballpark idea of what HUD will pay.)

From the information you and the others are giving me it sounds like Section 8 will be obliged to give me a raise? I mean kind of a "rent correction" so that I end up at fair market rent? I'm pleased to hear that they have guidelines and don't simply decide from case to case.

Given the information am I correct feeling pretty confident about getting a good increase in rent if I ask for it?

It varies.  Each local HA does it differently.  Here, they pay under market rents and only allow for a 4% raise each year.

I purchased a property with an inherited section 8 tenant in place.  The previous owner never asked for a rent increase so the tenant was way under market.  I brought this to the attention of the HA (tenant was long-since on a MTM) and they said I could only ask for a 4% increase each year, on the anniversary of the original lease.  Additionally, the amounts they pay are based on the county, not on the city, and I invest in very desirable city that demands market rents well above what is typical for the county.

IMHO, the housing authority is trying to bully you.

I would lay out my argument to them, with comps, and be willing to tell them to pound sand if they can’t agree to a reasonable way to get you up to market rents. Of course that means you would have to be willing to boot your tenant. Unfortunately, she is the pawn in all this. Expect them to try to play if your feelings as well, so pack them away and put under lock and key. It is not your duty to subsidize housing for anyone, which is what the housing authority is basically trying to do to you. They don’t want to deal with the issue either, so keep pushing it back on them. Don’t sign a new lease either. As previously pointed out, you then loose all leverage.

Managing rentals you will always be hit with some tough decisions, but you have to ask yourself, is this a hobby, or a business? That answer will give you a clear path forward for almost all issues that have to be confronted when owning and managing rentals IMHO. Make decisions based on it being a business, or soon you will not have your business. That is my thought patterns anyway.

Best of luck.

That's right, I need to make money on the property.

It seems like some people here mean that Sec 8 will be obliged to pop my rent to "fair market rent" if I ask for a raise. That they cannot bully and use me to save their own money.

I need to know for sure that this is the case tho, because I definately see your point and that gamble scares me.

Any update on the rent increase @Johan Hultman ?  

I’m in the exact same situation.  Got a duplex with one unit Section 8, month to month and in Indianapolis 

Max rents for 3 bed in Marion county was about $1,200 when I searched online,  though that seems not to jive w what you are experiencing   

@Keith Shadle   as we discussed yesterday, the VOUCHER amount may be 1200 but that includes more than rent and each tenant may be approved for a different amount. VOUCHER MAX is on line for each Housing Authority.  As far as rent increases , each Housing Authority can have a different policy on rent increases. In Indianapolis it may be applied for 1 time since the LAST rent increase of if the tenant is in 1st year after 10 months. Rent increases are based on market comps and if the rent currently is more than the market comp it can be lower. When doing market comps all amenities are used to compare with the units. @Johan Hultman Your PM needs to fight for that increase as something doesn't sound correct. Also the HAP contract must be in YOUR entity name before you can request an increase as the sellers contract ended the second the deed was transferred.  Finally it is important to remember that your tenant does not have to agree to the increase so make sure when you sign the contract (which requires a 1 year lease) that there is an amendment in place that if the tenant will not agree, or if the increase is denied, that the lease reverts back to a month to month lease. This way the tenant can  apply to Section 8 to move out.  

Our housing authority initially denied our 4.7% increase and countered with a 1.7% We sent a spreadsheet with comps: address, sqft, bedrooms, bathrooms, price, price/sqft.

They approved it and stated " because you submitted comps the increase was approved"

They do however have a policy on the website saying anything over 5% has a bunch of hoops to jump through. 

Originally posted by @Keith Shadle :

Any update on the rent increase @Johan Hultman ?  

I’m in the exact same situation.  Got a duplex with one unit Section 8, month to month and in Indianapolis 

Max rents for 3 bed in Marion county was about $1,200 when I searched online,  though that seems not to jive w what you are experiencing   

Well. When my PM went over for the tenant to sign a new contract he found out that she had moved weeks earlier. So nothing happend with sec 8. I decided to put it on the market instead of going through sec 8.

Sorry I could't provide a more informative answer.