The HUD Section 8 Program: What Multifamily Investors Need to Know
The HUD Section 8 program is the largest federal subsidized housing program in the United States, providing financial assistance to nearly 5 million households across the country. The Section 8 program was first authorized by the Housing and Community Development Act of 1974, and is managed by the U.S. Department of Housing and Urban Development (HUD). In order to make housing more accessible to low-income Americans, the program makes rental payments directly to landlords.
For multifamily real estate investors, participating in the Section 8 program has a variety of advantages, as well as a certain number of disadvantages. On one hand, investors can receive regular rental payments from the government, while obtaining a ready supply of tenants waiting to fill their units. On the other hand, Section 8 tenants can be often be a serious hassle, and dealing with HUD can require a significant amount of paperwork.
The Two Types of Section 8: Voucher-Based and Project Based
There are actually two main variations of housing assistance provided by the Section 8 program; the Housing Choice Voucher Program, referred to as voucher-based assistance, and the Project-Based Voucher (PBV) Program, referred to as project-based assistance. Tenants with voucher-based assistance may choose where they live, while project-based vouchers are attached to a specific unit or building. Therefore, if a project-based tenant moves, the rental assistance stays with the unit, and cannot be carried with them to another building.
The Section 8 Landlord Application and Approval Process
For some landlords, the Section 8 application and approval process can be a headache-- but, for many, it can be well worth it. The first step is to visit the HUD website and fill out a Section 8 Landlord Application. This will involve providing personal information, as well as the current asking price of the units in your property. If your landlord application is approved, your local public housing agency (PHA) will schedule a property inspection. In general, they will analyze the property for general safety and livability, looking at overall building quality, and attempting to ensure that plumbing, HVAC systems, and door/window locks are all in working order. Each public housing agency (PHA) has slightly different standards, so you should check prior to your inspection to ensure your property is up to par.
If you pass the inspection, you will then enter into negotiations over the rent. Section 8 offices will want to bring the rent as low as possible, while you will generally want the opposite. When a rent has been decided upon, you will receive a Housing Assistance Payments Contract. This contains a lease agreement that will be provided to all new Section 8 tenants.
The Advantages of Being a Section 8 Landlord
If the Section 8 program didn’t have serious advantages, there wouldn’t be so many property owners offering units through the program. The main advantage of the program is the fact that landlords can expect a regular payment from the U.S. government each and every month that their unit is rented. However, there are several other benefits, too. The major upsides of the Section 8 program include:
Regular Payments from HUD: For landlords, especially those who own properties in lower-income areas, getting payments on time is a major challenge. For Section 8 landlords, however, this isn’t really a problem, since the U.S. government will pay either 70% or 100% of a tenant’s rent (depending on their income level and the specific program). Plus, rents aren’t static-- in order to keep landlords participating in the program, HUD will typically provide a rent increase of between 5-8% each year.
Reduced Vacancy Issues: After getting approved for the Section 8 program, you will be able to access a verified waiting list of Section 8 tenants in your area. Plus, you can list your property on websites-- which means that tenants will actually reach out to you in order to rent out your units. In fact, there is generally long wait list for Section 8, so landlords need not worry about a lack of interest. As a landlord, this means your marketing expenses are basically zero, which can be a massive advantage in today’s market. This is especially the case if there are a lot of vacancies in your area and market-rate apartment complexes are competing for tenants.
Reduced Capital Expenditures: While you will still need to keep your property reasonably well-maintained, if you are renting to Section 8 tenants, you will generally not need to make large capital investments in upgrading your property’s aesthetic nature. Things like fancy landscaping, brand-new appliances, and new flooring can be incredibly expensive-- and, since the Section 8 program brings tenants to you, you will not need to invest in these things in order to keep your units rented.
The Disadvantages of Being a Section 8 Landlord
While there are certainly many advantages to becoming a Section 8 landlord, there are also quite a few downsides. In fact, depending on who you ask, some would say there are quite a few more downsides than upsides. However, in reality, this is mostly dependent on individual factors, including the location and condition of an investor’s property, their level of experience dealing challenging tenants, and their tolerance-level for government bureaucracy and red-tape. That being said, here are some of the major disadvantages of owning and operating a Section 8 property:
Bureaucracy and Red Tape: In order to apply for the Section 8 program, as well as to stay current, you will typically need to fill out a very large amount of paperwork. And, unlike with renting out units privately, a single error could lead to a delay in your payment from HUD, or worse, nonpayment. In many situations, initial Section 8 applications can take up 4-5 months, which many landlords may not find acceptable. Even after a landlord is granted final approval, it may take several more months for them to receive their first payment.
Rent Limits: Perhaps the most significant downside to participating in the Section 8 program is the fact that rent must be limited to a prearranged amount set by HUD. These amounts are based on the Fair Market Rent (FMR) for the specific are in which a property is located. While it’s true that rents are generally given a 5-8% boost each year, if they are substantially lower than what a landlord could get on the open market, this may not matter. In general, if an area is desirable, and rents are growing quickly, a landlord will often be able to earn significantly more profits outside the limitations of the Section 8 program.
Tenant Damages: Section 8 tenants often have a bad reputation of being careless, due to the fact that they are not generally responsible for paying for any damages they cause. In reality, this varies based on the individual tenants in a building-- if a landlord is relatively selective about the tenants they choose, this may not be much of a problem.
No Security Deposits: Security deposits are pretty much standard for apartment landlords seeking to ensure they they aren’t left holding the bag if a tenant damages their property. However, security deposits are somewhat more tricky in the Section 8 program. The government will not provide them-- and, while a landlord may ask for a tenant to pay a deposit, tenants often do not have enough money to pay for them.
Eviction Challenges: In general, if a tenant will not pay rent, vandalizes your building, or engages in aggressive or disruptive behavior, it would be natural to evict them. However, evicting a Section 8 tenant can be a logistical nightmare, due to the fact that HUD’s Section 8 eviction rules are extremely strict. Even if you do end up successfully evicting the tenant, they can contest the eviction using a publicly-funded attorney, (or, at the very least, a partially subsidized one) meaning that you could spend thousands of dollars and hours of time defending yourself against a single troublesome tenant.
Inspection Requirements: Unlike private landlords, Section 8 landlords will face regular inspections, which can be a hassle. In many cases, landlords will be asked to fix problems caused by tenants and request a re-inspection. This can be an expensive process, especially if a landlord does not have any security deposits from their tenants.
Recommendations for Section 8 Landlords
Decide Intelligently if Section 8 is Right for You: For desirable properties in great locations with low average vacancy levels, Section 8 is typically not the best choice. In this case, you can usually keep your property filled with tenants who will pay higher rents, without the hassles, risks, and bureaucracy of the Section 8 program.
Manage Tenants Wisely: Managing your tenants can be one of the biggest challenges of the Section 8 program. In general, it’s recommended that landlords set rules and enforce them strictly; otherwise, serious issues could ensue. Of course, landlords may wish to hire a property management company with specific experience in Section 8 properties. However, this can be difficult, as many mainstream property management firms are hesitant to work with Section 8 tenants.
Remove Non-Essential Property: Since HUD does not provide any kind of security deposit for Section 8 properties, you will want to limit the amount of things in each unit that can be broken, misplaced, or outright stolen. This includes appliances, screen doors, furniture, ceiling fans, and garbage disposals. These are not required by HUD, and will not affect the rents you receive, but will increase your expenses.
Inspect Your Property Regularly: Even if you have decided to farm out many of your everyday responsibilities to a property management firm, you should still regularly do in-person property visits in order to check for problems, including utility issues (i.e. water leaks), which can be incredibly expensive over time.
Choose Your Tenants Wisely: As a Section 8 landlord, it’s incredibly easy to find tenants-- but you still have the final say over who gets approved. If you decide to participate in Section 8, choosing good tenants may be the most important element to your success, as they can save you thousands in property repairs, and prevent hours upon hours of hassles.
How to Choose Quality Tenants for Your Section 8 Property
As we just mentioned, choosing good tenants is one of the most important things a Section 8 landlord can do to ensure the long-term financial success of their property. And, in order to select good tenants, landlords generally need to do a little homework, evaluating potential tenants on factors including:
General Background and Criminal History: While it may be expensive, running a background check can help prevent you from accepting a tenant with a serious criminal history. In addition, doing a simple Google search can also help you make sure you aren’t accepting a tenant that’s been involved in any suspicious activities-- which can save you a lot of grief in the long run.
Rental History: Checking a person’s general history is important, but checking their rental history is also essential. If a tenant has rented long-term at other properties, it’s generally a good sign, while landlord issues and evictions are generally warning signs. If you’re on the fence about a tenant, you may wish to ask them if you can contact previous landlords to learn more.
Tenant Income and Credit: While many Section 8 tenants have 100% of their rent paid for by the government, some only have 70-80% of their rent subsidized. For instance, a renter with $800 rent and a 70% subsidy would be responsible for paying $240/month. In general, a tenant should make 300% of their rent per month, so, to be safe, you would want this tenant to have an income of at least $720/month. However, income isn’t the only factor you may want to look at-- credit score is also important. Obviously, tenants with good or great credit (650+) are more desirable than those with poor credit. In addition to credit score, you may also want to look at the amount of overall debt they have.
In many cases, landlords create a point system, where they add or subtract certain number of points for each positive or negative fact about a potential tenant. For instance, a good rental history or a good credit score would receive positive points, while credit issues or a past eviction would lead to negative points. Systems like this can also be outsourced to property managers or leasing agents so they can pre-screen tenants for your final approval.
In Conclusion: Section 8 Can Be a Great Opportunity, But It’s Not For Everyone
In the end, the Section 8 program offers a great opportunity for landlords, especially those who own older properties with vacancy issues. Despite that, the program isn’t for everyone; the long wait times, bureaucracy and red tape, and the risk of obnoxious (or dangerous) tenants can be a turn of for many property owners. When it comes to being a Section 8 landlord, knowledge is power. If you do decide to apply for and participate in the program, learning as much as possible can help you improve your property’s profitability while greatly reducing potential hassles and your own financial risks.