How often does Section 8 end up paying less than the previous Section 8 lease?

Question

I'm contemplating diversifying into an area near me that is predominantly section 8 ("S8") housing.  I enjoy the idea of having a "guarantee" of payment for a portion of my portfolio, if you will.  I am reviewing some deals that already have section 8 tenants in them.  These S8 tenant's rent payments are below HUD's max payment standard for the area, but they are above what I would feel comfortable stating is the market rent based on other listings in the area.  For example, S8 tenant is in there and the lease is paying $1500/month, similar unit nearby with similar amenities is listed on Zillow for $1200/month.

For those who invest in S8 areas, does HUD in your area generally continue paying the same or more amount of rent each year?  Have you ever experienced a drop in rent from one tenant to another (assuming unit is in similar condition)?  Is it common for there to be a discrepancy between what section 8 is paying and what market rent is?  I understand that there shouldn't be as section 8 is supposed to be paying market rent.

I thank you for any insight!

Pertinent information: Location of properties: Western Pennsylvania Where I am, in western Pennsylvania, the tenant is not allowed to pay anything extra on top of what Section 8 is paying.

Don Konipol · Answer

Lots of investors see this “government guaranteed” rent at a higher level than “free market” rent and think they’ve uncovered a gold mine.Perhaps some have.  But, I will give you my personal experience with a 12 unit building I owned in a “down and out” section of Arlington, Texas.I was fortunate to be able to retain a great property manager throughout the entire 2 years I owned the property.  He was called to come out to the property average about two nights a week by police for everything from drive by shootings, to drug raids on premises, to violent domestic disputes, to arson. Any positive cash flow I had was eaten up by repairs necessitated by purposeful property damage, a lot of it by random vandals, and by former tenants who were kicked out.  Many tenants were constantly in arrears in the relatively small amounts they owed as there share of the rent monthly, which the government required we evict them as a result.  What the government wouldn’t do was pay for the property damage that they inflicted as “payback” for their eviction.  The turnover rate was about 100% annual due to relationship breakups, prison sentencing, job loss, disqualification of benefits, etc. Roof repair cost doubled because contractors charged premium for the fact that to get workers they needed to pay double - because workers would be constantly harassed by “neighbors” who thought throwing rocks at workers on the roof was a fun sport. I sold the property to University of Texas - Arlington which was going to wait until leases expired and completely remodel property and turn it into student housing. Closing the sale was one of the happiest days of my real estate life.

April Adams · Answer

In the S8 world this is called Reasonable Rent.

HUD allows PHA's to conduct a FMR survey and redetermine the rent at anytime.

If the FMR don't support the current rent you are receiving they can 'ask' you to reduce the rent. If you don't, the tenant will have to vacate your unit to find a unit that meets HUD guidelines on affordability.

If the tenant moves, now you have a vacancy and you will have to find another tenant. If the new tenant is on S8, the PHA will use the new lower FMR to make a rent offer to you.

So, basically, there is no way around having a lower FMR affect you. Your true decision is, do you want to keep your current tenant or not.

Ned Carey · Answer

@Karolina Powell we rent mostly to section 8. I don't think we have ever had a rent decrease but it can happen.

In my area section 8 does sometime pay a higher rent than market. i have not had the issue @Don Konipol had but we are in decent areas of Baltimore and are careful screening out tenants. One issue with section 8 is it takes an additional month to get approved and the lease signed so even with higher rent, the extra month vacancy eats up most of the higher rent.

Although it is a federal program each area runs its own dept with varying rules. So section 8 in one area may be less  advantages than in another area. Baltimore city and Baltimore county run separate programs for example.

Matt Dingus · Answer

Hi Karolina,

In Pittsburgh, we typically list Section 8 rentals on Zillow and similar platforms at the standard market rent you'd expect for a long-term rental. In the listing, you can include language like “Section 8 tenants welcome!” to attract voucher holders.

Once you begin receiving Section 8 applicants and move forward with submitting the voucher, that’s when we adjust the rent to match the maximum allowable amount for that property’s specific Section 8 tier. In many cases, that approved rate can be significantly higher than the standard long-term market rate—especially in areas where the Section 8 payment standards are more generous.

It’s worth noting that these rates can change over time. For example, this past year I believe Turtle Creek dropped from a Tier 6 to a Tier 1, which resulted in a steep decrease in the allowable rent. So yes, they can fluctuate.

Hope this helps.

Bruce Lynn · Answer

Also think about DOGE.  Just because Elon is gone, doesn't mean DOGE is gone.  They're still active.  Who knows where that goes, but they were talking about reducing S8 by 40% next year.  I doubt it goes away entirely, but I expect there will be substantial cuts over the next few years.  So be ready for that.

While you hear a few people think it is guaranteed government rent, there are plenty of headaches and it typically isn't easy street.  Issues like:

1. Big hearts, tenants let boyfriends, relatives, moms, dads cousins, and all kind of other people move in.  Pretty tough to prove who is a visitor and who lives there.  So not unsual to have single mom and 3 kids on the lease, but get another 3-4-5 people living there.  Most houses weren't designed for that.

2.  Job change/job loss/less hours...tenants can't pay their fair share of the rent, so you either live without that and get 75% or whatever the voucher % is, or you evict.  Vacancy and make ready kill your returns.

3. Yearly inspection comes with tenant expense or landlord expense.  I've never seen a S8 tenant have money to fix their designated repair.  So if you want to stay on the program, guess who gets to pay for the holes in the wall or other damages S8 inspector says need to be fixed to make it livable.

4. Ask in your screening process if they have a vacuum?  Pretty often I feel like these houses never have been cleaned or vacuumed during the entire occupancy....and I don't know how people rub paint off the walls, but it seems to happen.  Your make ready will be more costly than average I expect.

Plenty of other issues, but that a few....so factor that in your purchase price or rent.

Kerlous Tadres · Answer

Yes, it's common in some Section 8 markets for the voucher amount to be higher than what you'd see on Zillow or Craigslist. HUD determines "reasonable rent" based on its own comps and sometimes pays above what the private market commands, especially in lower-income areas. That said, rents can go down between tenants, particularly if the household size changes, the unit condition doesn’t justify the prior rate, or HUD reevaluates the area. In many cases, payments stay flat or increase slightly year to year, but nothing is guaranteed. Since tenants can’t pay extra out of pocket in your area, make sure the current HUD-approved rent still works for your numbers in case it drops with turnover.

How often does Section 8 end up paying less than the previous Section 8 lease?

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