Section 8 housing has been a controversial subject among real estate investors for a long time. While some think investing in section 8 housing is a great opportunity to make easy money, other investors wouldn’t touch real estate section 8 with a ten-foot pole.
In this article, you will learn what section 8 investing is all about, as well as the pros and cons of section 8 investments.
Related: Investing in Real Estate: Money and Wealth
What Is Section 8?
In the US, the cost of housing has spiked drastically over the past decades. Within the same period, average wages have barely gone up. As a result, many low-income families have been unable to pay rent even in relatively affordable neighborhoods.
In 1974, Congress came up with section 8 as a way of addressing concerns on affordable housing. Section 8 is an attempt to deal with the problem using a ‘free market” approach. Tenants who qualify can choose where to live and have 70% of their rent covered by the government (as long as the home is section-8 approved).
Project-Based vs Tenant-Based Section 8
There are two types of section 8 initiatives; project-based and tenant-based.
- Project-based Section 8 aka project-based vouchers (PBV): Project-based section 8 is where you as a landlord get in touch with the local public housing authority (PHA) and express interest in housing low-income renters. The government will then assess your home and (if approved) request you to fill out some paperwork. With project-based 8, the government places the responsibility of vetting tenants on you. You will need to come up with a selection process that adheres to the HUD rules
- Tenant-based section 8: This is where the government provides vouchers to qualifying low-income renters. If a potential tenant wants to use their voucher at your home, you will need to screen them and agree on lease terms. The renter will then submit a notice to the local PHA, after which the authorities will inspect your home. If everything is in order, you will get about 70% of the tenant’s rent directly from the government every month.
Section 8 Housing Pros and Cons
Pros of Investing in Section 8 Housing
- Guaranteed and stable rent payments: One of the greatest benefits of section 8 is the guaranteed payment you receive from the government each month. As mentioned earlier, the government pays up to 70% of the tenant’s rent. Once the lease agreement is written and all the paperwork is done, you will get a timely check from the government. The tenant will send a separate check to cover their portion of the rent, as well as utilities
- A larger pool of potential tenants: Opening your properties to section 8 renters means having a greater pool of tenants to choose from. A wider selection of potential tenants will enhance your chances of finding someone that is a good fit for your rental
- Lower vacancy rates: Minimizing vacancy is crucial for rental property investors. Whenever a home remains vacant, there are no earnings to cover HOA fees, insurance, taxes, and other monthly running costs. The good news is that section 8 tenants tend to reside in a property for long periods
- Favorable rental rates: In any housing market, there is always a range of rental prices for comparable properties. As a section 8 landlord, you can charge monthly rent that is towards the higher end of the market rates. In addition, you are allowed to annually reassess the rent, and increase it by as much as 8%
- Additional exposure: Once your rental is approved for section 8, you can list it on PHA’s website where millions of voucher holders can see it. This is a free advertising opportunity for your listing. Other sites where you can
- Incentives to maintain property: Under section 8 housing, renters are required to take care of the rental property. This incentive will keep your investment property safe
Cons of Investing in Section 8 Housing
- Delay of payments: The whole section 8 process can be extremely slow and frustrating. This will result in a delay in getting a renter into the home. After a tenant moves in, you will have to wait for 30-60 days to receive the first rent payment from the government
- Government bureaucracy: One of the greatest downsides of investing in section 8 housing is dealing with the government’s red tape and regulations. Qualifying a home for section 8 housing can be a headache especially due to government bureaucracy. In addition, offices of the HUD are understaffed, thus resulting in painfully slow and unreliable service
- Strict and costly inspections: For a property to qualify for section 8 housing, it must undergo strict inspections. Rehabbing a home to meet the strict section 8 standards can be very expensive. The smallest mistake can cause the home to fail a section 8 inspection
- Delinquent tenants: Though the government pays the bulk of the section 8 rent, the tenant is still responsible for paying their portion. If the tenant defaults, the landlord will be forced to follow the section 8 eviction process. Removing a section 8 tenant can be a very long, bureaucratic process
- Increased wear and tear: In some instances, section 8 tenants are more destructive than private pay tenants. Since their rent is subsidized greatly, the tenant might feel entitled to the property, which could lead to careless behavior. Maintaining a section 8 home can therefore be quite costly. It is important to note that the government is not obligated to compensate you for any damages
How to Invest in Section 8 Housing
Here are the steps you need to take towards investing in section 8 housing:
Find Section 8 Properties
Besides the multiple listing service (MLS), you can find section 8 houses for sale on sites like Zillow, Realtor.com, and Redfin. Filter your results by searching for ‘section 8’ on these sites. Alternatively, you could visit a section 8-specific site like GoSection.com. Realtors that specialize in section 8 can also come in handy for finding such properties.
Contact the Local PHA to Apply
To participate in section 8, you will need to work with your local PHA. Visit this site to see a list of public housing authorities by state. As part of the application process, you will be required to submit some details about yourself and your home.
Prepare the Home for Inspection
Section 8 inspection checks for hazards such as lead-based paint, subpar infrastructure, structural issues, and security flaws. Inspectors will also look at components like the home’s roof and gutters, chimneys, porches, and foundation. To get an idea of what officials look for during inspection, click here.
If you feel your home doesn’t meet these qualification requirements, be sure to make the necessary repairs before you apply.
Related: How Long Does a Home Inspection Take?
Create a Tenant Selection Plan
Once you’ve passed the inspection, you can then create a selection plan and make it public. Visit this webpage to see a full list of regulations regarding tenants’ selection plans.
Find and Manage Tenants
Depending on where your property is located, it shouldn’t be difficult to find a qualified tenant. PHA’s usually have a list of prospective tenants that landlords can skim through. You should also be ready to handle the property management responsibilities that come with investing in section 8 housing.
Related: How to Screen Tenants for a Rental Property: 7 Steps
Conclusion
Investing in section 8 housing is obviously more involving than being a traditional landlord. While it is possible to make a good profit, section 8 investors also have to deal with government bureaucracy and problem tenants. Be sure to weigh the pros and cons before investing in section 8 housing. In the meantime, click here to learn more about how we will help you make faster and smarter real estate investment decisions.