Rent by Room or Section 8?

Question

Hello!

Looking at a lower price point ($90-100K) for my 2nd investment property and that has pretty much taken all possibility of small multifamily out of the picture.  So I have set my sights on single family and want to maximize income potential.  I'm considering both Rent by Room and Section 8 strategies and was hoping to hear insights from ppl who utilize these strategies.  I understand both of these are a bit more hands on than regular buy and hold.

What systems/strategies do you use to minimize headaches?

Is there a strategy that you think is more profitable?

Should I avoid both and do regular long term buy and hold?

I thought Section 8 was supposed to pay 110% of market rent but have started hearing otherwise. Can anyone support/refute that statement? I'm in Tampa/St. Petersburg market.

Thanks,

Tim

Tim Kaminski · Answer

@Brenden Mitchum Thanks for your response!  The link you provided, those rates are the max, correct?  Not every 3 bedroom in X zipcode is renting out at the same rate I assume.  Some are nicer/worse than others.

I agree that Rent by Room seems to be more hands on as most ppl going that route are not going to stay for years and years.  More of a temporary stay whereas I have heard Section 8 tenants almost never leave.  Section 8 deals with 1 lease vs 3-4 leases per home.

I think I would lean towards Section 8, but was hoping some other ppl who have used this strategy would confirm how hard/easy it is to get the premium rental rates they advertise.  Have heard from one source in my area that it isn't what it used to be and no longer offer 110% of market rent.

Brenden Mitchum · Answer

Hey @Tim Kaminski

While I do not have personal experience with either, I still think I may be able to help you out here.

Rent by the room is more hands on just because you have more individual tenants with different goals, lives, personalities and you will find yourself being looked to as the problem solver for any disputes between housemates. For this strategy, you will want to make sure you screen your tenants to match each others' personalities or even have the new tenants meet the current ones before signing the lease.

In regards to Section 8, if you screen correctly you should not have any more headaches or issues than with a non-voucher tenants. You can find the fair market rents here. You can search by zip code so this will give you a good idea of what you can expect in terms of Section 8 rent.

Then you'll want to determine price of rent per room for the rent by the room strategy. Craigslist is a great source for this. Now just compare the numbers and that will tell you which is more profitable. If neither is more profitable than going the traditional route or if the profitability is not worth the "risk" you associate with this then don't do it, but at least do some research to determine what those risks truly are.

And feel free to message me anytime if you have other questions or just want to chat!

Ron Todd · Answer

Yup, we usually do 6-10 months for the by room rentals. Airbnb works for us because we have a hospital nearby that has a lot of traveling nurses visit to work at. We also host military that have training at the local base. I don't think we would be successful in renting out the house room by room without those industries to fill it. As far as above market rate for the section 8, I think I'm near the top but not above. The voucher from the government is nice since you know you will get paid and being qualified for section 8 reduces vacancies since there are a lot of people (in my area at least) that are on waiting lists for housing.

Tim Kaminski · Answer

@Ron Todd "Long term" as in more than 30 days rent by room?  Do you make more profit going through Airbnb vs regular rent by room?

Do you find that your section 8 rents at a higher rate than it would at regular market rate?

Bill Goodland · Answer

@Tim Kaminski I don’t do either, but from my experience and what I’ve heard, I would recommend doing rent by the room in an expensive market and rent to section 8 in a less expensive market to optimize rental income potential

Steve Morris · Answer

"my section 8 rental has been almost no work since I have a strong pm that takes care of everything and only calls when they need me to pull the trigger on a larger maintenance issue. I make less cf but I put less effort into it (ymmv)"

Count yourself fortunate to get a good tenant, the same thing goes for market-rate stuff with a good tenant.  Being a good tenant isn't related to having a Sec 8 voucher and may actually be a negative since rent is mostly (excepting the copay) not the tenant's out-of-pocket money.

Steve Morris · Answer

LIH? AMI?

WIth income-qualified properties (i.e. tenants at lower rents 60% AMI = they can't make more than 60% of median income), your income on a similar unit (vs. market-rate) will be lower even with vouchers.

Yet your expenses will be the same.  Plus, since LIH usually requires more compliance paperwork, mgmt will be higher (most market-rate mgrs charge 8% of gross vs. 13% for LIH mgrs).

This gets reflected in the pricing since LIH units are anywhere from 25% to 60% lower $/unit based on NOI of each.

I'm not knocking the need for LIH at all, but it's a lot less wieldy animal to manage and profits are lower.  There are very few for-profit owner/operators.  Most o/o are non-profits or housing authorities.  Plus they usually need a tax break of some kind or tax credit financing for debt.

Ron Todd · Answer

I fit into both categories, I rent a long term Airbnb by the room and I have section 8. The long term Airbnb is much more work, because I have tenants moving in and out every few months. Cash flow wise, I make a lot more from the Airbnb but I also put a lot more effort into it. It's hard to find a pm that is good with Airbnb listings in my area so I have ran it with my partners for a few years. On the other side, my section 8 rental has been almost no work since I have a strong pm that takes care of everything and only calls when they need me to pull the trigger on a larger maintenance issue. I make less cf but I put less effort into it (ymmv). Given the current climate, I'd lean towards section 8 since you know you will get most of your rent guaranteed by the government.

tldr: rent by room = more work and more CF. Section 8 = less work less CF.

Nicole Heasley Beitenman · Answer

Are you looking in a college town or somewhere where a lot of young professionals congregate? If not, renting by the room probably isn't practical. I'd also look for a BIG house if you're going this route--at least 4 bedrooms.

Tim Kaminski · Answer

@Steve Morris - LIH? AMI?

Can you explain more why you would not target them as a small investor?

Rent by Room or Section 8?

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