Real Estate 013: Pros and Cons of Section 8 Rentals

When placing a tenant in your newly rehabbed or purchased rental property, finding a suitable candidate may often depend on various factors such as neighborhood, schools, type of home (single family, duplex, bedroom/bath count), and time of year (winter vs spring). The US government has a housing assistance program called “Section 8” that is funded by the Federal government but administered by the local authorities. This may present an opportunity for real estate investors to tap into a different kind of pool of tenants. Potential candidates for Section 8 assistance must submit an application and become accepted into the program. Typically these spots are reserved for low income families, disabled persons, and/or senior citizens. As a landlord, you can legally choose to participate or not participate in the Section 8 program. As I have two Section 8 properties, I wanted to share with you my experience with the program and dispel some myths:

Advantages of Section 8

1. Tenant Pool

By choosing to accept Section 8 applicants, you are “widening the net” to include both market rate tenants and Section 8 applicants with vouchers. This will allow you to be more selective in your tenant placement and technically have more candidates that meet your pre-defined criteria.

2. Guaranteed Monthly Income & Higher Rent Rates

One of my favorite parts about participating in the Section 8 program is that a portion of the rents (70-80% average for my rentals) is being paid on the 1st of each month by the Government. As long as the tenants do not lose their voucher or you, as the landlord, do not fail multiple Section 8 inspections, you should be receiving these checks via ACH like clockwork.

Further, as the Government determines the appropriate rent range in a given market for the type of house (3 bedroom 1 bath $750-850 vs 4 bedroom 2 bath $900-1,050), the landlord is able to select the higher rate of the range as long as the tenant has the voucher to support the rent (3 bedroom vouchers vs 4 bedroom vouchers).

3. Lower Vacancy

Tenant turnover is one of the single biggest expense an investor faces. When your property sits vacant, it generates no income, but there are many fixed expenses such as the mortgage, taxes, and other fees that occur monthly. Based on conversations with other investors who have done Section 8 for 10+ years, if the Section 8 tenant is happy with the property and landlord, they will stay put for a longer time than their market rent counterparts who often move more frequently for their children’s schooling, new job opportunities, and to find a larger home/purchase their residence.

Disadvantages of Section 8

1. Section 8 Inspections

On an annual basis, you are required to undergo a Section 8 inspection with the housing authority’s designee. This may cause you to make some rehabs sooner than later if the inspector feels that updates need be made immediately. There is not cost involved for the landlord (other than your property manager potentially charging you for their time to meet the inspection and perform the updates).

My take: I personally feel that having an annual inspection at no charge is a benefit for real estate investors as it forces me to take a look at my property and ensure everything is up to code, there is an liability exposure, and preventive maintenance items are taken care of. As the inspector is not looking to make cosmetic improvements, but make sure the property is functionally sound, it serves as an additional line of defense.

2. Wider selection, but “rougher” tenants?

Generally speaking, it appears to be widely accepted by real estate investors that Section 8 tenants are rougher on the homes and cause more wear and tear on their properties. This idea stems from the fact that since they are receiving assistance, and not pouring all of their own hard earned cash into the rent, they have less skin in the game to care about what happens to the property.

My take: I think that regardless of market tenant, or Section 8, you still need to do your due diligence and be thorough in your tenant selection process. Contrarily, as tenants may lose their voucher if they cause excess damage than normal wear and tear, and as Government funding gets tighter, Section 8 tenants will think twice before “trashing a property” that they live in. I’ve had B class market rate tenants trash a unit, and also had C class Section 8 tenants who were very clean and left my property in great condition.

3. Dealing w/ a Government Agency

As this is a Government program, you will have to work with local authorities when issues arise and that may mean time lost. Some counties are notorious for not responding to an email for weeks and taking up to two or three months to setup a new tenant in the system for payout. However, all strategies have their pros and cons, risk and rewards. As for Section 8, after it has been initially setup, it has been on autopilot, and I have received the Government’s ACH and tenants money order every month without issues along with an addition $100-200 what I would have received with a market rent rate tenant.

In conclusion, I think there are different strokes for different folks and some may not see the benefit of working with Section 8 tenants. I personally feel like in the markets which I invest in have a great Section 8 tenant pool, with above market rents that will allow me to cash flow a minimum 5% higher with little to no additional risk. Furthermore, on a personal level, it gives me a sense of pride that I am providing a roof over the heads of those who need it most: senior citizens, disabled persons, and/or low-income families.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!