If you’re a property investor and you’re looking to get into Section 8 properties, there are plenty of gurus online who will happily tell you to RUN! Section 8 tenants are too unreliable, too desperate, too disrespectful, too, well, poor to be good tenants.
In the most respectful way possible, we’d like to tell those gurus to take a short walk over a long cliff. One of the Metro Detroit cities we do business in, the City of Detroit itself, is one of the most desperate urban areas of America, and we almost have to accept Section 8 there to find tenants. After dealing with Section 8 for almost 20 years, we can attest that it’s not nearly as bad as the gurus make it out to be.
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The Bad News
Section 8 requires a lot of work — specifically, you have to deal with Section 8 applicants who never seem to understand the program, even after being on it for years. Also, housing counselors who are overworked and underpaid (and almost absurdly hard to get ahold of) must be constantly nudged to move their process forward. Then there’s annual property inspections and, oh yes, even more paperwork to get the rent payments coming in.
If you can handle the paperwork and have a good followup reminder system, the extra time and effort can pay off, with government payments coming in like clockwork. If you screen the applicants correctly, you can also avoid some of the pitfalls associated with Section 8. Let’s go over some of those pitfalls we listed a bit more closely, so you have a better understanding of them.
How Much Will Section 8 Cover?
The problems start when they call on your ad for a 3-bedroom you’re asking $1,000 a month for. You need to ask how much their voucher is for — and understand they really don’t know or care what it is! They’ll tell you with complete confidence that their voucher will cover the rent amount when it really doesn’t. YOU have to understand the Section 8 program so YOU can ask the right questions!
For the record, the (most important) “right question” is, “What is the HUD-determined Fair Market Rent (FMR) for a unit with ‘X’ bedrooms in my area?” The answers are available here — if the applicant wants to pay more than the FMR, they’ll have to make up the difference, and either way, they’ll pay 30% of their monthly income as rent, with Section 8 paying the difference between that amount and the FMR.
But! There’s a hitch. Because FMR isn’t intended to cover “rent,” it’s intended to cover “total costs of housing (TCH),” which includes electricity, gas, water, sewer, garbage, and recycling costs. So if the FMR for a 2-bedroom is, say, $911 (which it is in the Metro Detroit area for 2017), and the tenant has $281 in utility bills and is paying $750 in actual rent, the TCH for them comes to $1,031. But because Section 8 only covers 70% of the TCH up to $911, the most it can contribute is $638, meaning that regardless of their income, the tenant must pay the remaining $393. Of course, because your tenant is virtually guaranteed not to understand that, it’s up to you to either explain it to them up front or risk having the tenant vanish on you when they fail to pay (because failure to pay means they’re booted off of Section 8).
Section 8 Applicants
Telling everyone that they need to be better at tenant screening is probably one of our favorite pastimes. But if you’re going Section 8, you have to take that warning as though your life depends on it. Master your tenant screening process, make no exceptions, and dot every single “i” and “j” and “ö” you come across.
Here’s the simple logic: If everyone is complaining that Section 8 tenants are low-quality, be picky! Choose only the tenants who meet the “strict version” of whatever your standing requirements are and delve deep into every one of them. If you avoid the “bad” tenants, you avoid most of what people’s Section 8 nightmare stories are all about — so screen like you’ve never screened before!
You have to get certified by the HUD, and you have to re-certify every year. That means inspections, paperwork, and doggedness in the face of mindless bureaucracy. We’re not going to lie: It can suck. Filling out the forms and waiting for them to call you back is the easy part — the hard part is dealing with the Housing Quality Standards (HQS) inspections that happen every year. There’s a pleasant little booklet called “A Good Place to Live!” put out by the HUD that explains everything you need to do or have to pass the inspection, but it’s 20 pages long.
Here’s the short version:
- All windows must be present and undamaged; ground floor windows must have working locks.
- All exterior doors must have deadbolts and locks.
- The floor, walls, and ceilings must not have any serious defects such as would indicate structural problems or present a danger to the tenants.
- The ceiling and roof must not leak.
- The paint on the interior walls must not be chipped or peeling.
- A fixed water basin, flushing toilet, and shower are necessary in every unit.
- No water leaks are permitted.
- The kitchen and bathroom must have hot and cold running water and a hard-wired light.
- The bathroom must have a window or fan that exhausts outside.
- All electrical outlets must have cover plates (and function!).
- Every unit must have independent heat.
- Every floor of every unit must have a smoke detector.
- All stairs and railings must be secure.
- All common areas must be maintained and free of dangers to the tenants.
Most of this is pretty obvious, but the inspectors are very meticulous — a 1/4″ crack in a window you never knew existed (like one of those tiny ones at the top of a basement wall that happens to be hiding behind an armoire), and you’re kaput. Then you have to reschedule, pay for a new inspection, and get the problem fixed.
What’s more, these inspections happen whether the property has a tenant in it or not, and the inspectors don’t particularly care if a particular problem was caused by the tenant or not — you still have to deal with it, and fast. But seriously, guys — that list basically amounts to “you can only rent out units that are safe to live in.” If you can’t handle that, you shouldn’t be a landlord in the first place.
So, is Section 8 worth it? If you’re discerning, patient, able to follow rules to the T, and willing to put in a little extra time elbow greasing the red tape until it gleams, absolutely! The benefits boil down to four items:
- Section 8 isn’t easy to qualify for — so (to a degree), anyone offering you a voucher has been pre-screened (but that’s no excuse to skip your own screening — ever!).
- There is never a shortage of Section 8 applicants, so vacancies are limited.
- You can advertise on SocialServe.com and at your local Public Housing Authority to fill vacancies even faster.
- And the big momma of them all: Rent comes in on time, every month, like clockwork. The government pays part of it (sometimes all of it), and the tenant is well aware that any violation of their lease — including a late payment — will result in a loss of their Section 8 status. Now, this obviously doesn’t keep emergencies from happening occasionally, but by and large, the reliability and timeliness of Section 8 rental income is the big draw.
Investors: Do YOU accept Section 8 applicants? Why or why not?
Let me know your experiences with a comment!