Heard tales of guaranteed rent payments, courtesy of Section 8? Furnished by the government, and paying higher-than-market rents?
If these stories perked up your ears, you’re not alone. Section 8 landlords can make good money, with lower risk of rent defaults.
But Section 8 tenants come with other risks as well. If you’re looking to learn how to become a Section 8 landlord, here’s a quick overview of what you should know, and how to get started.
Back in the dark days of the Great Depression (I just got a déjà vu of my grandfather’s stories), the federal government came up with two programs for low-income housing under the Housing Act of 1937.
Yet it was not until the mid-‘70s that the infamous Section 8 program was born.
It was initially intended as a project-based rental assistance system. Hence, the term, “the projects” which has a negative connotation among landlords and tenants alike.
For instance, I bet you can think of some troubling movies and TV shows set in the projects (The Wire comes to mind).
Although lawmakers’ intentions were good, by the 1980s the backlash was mounting. Criticisms poured in that the project-based rental assistance program served only to clump together low-income families in high-poverty, high-crime locations.
So, Congress flung about for a fix. Instead, they just added another housing program to the books.
We still have a project based voucher program in place, but now we also have a tenant-based voucher program, geared to the individual or family. Enter: Section 8.
The Basics: How Does Section 8 Work?
Tenants apply with a local housing office for Section 8 vouchers, and are either approved, denied, or wait-listed to join the program.
You – the landlord – decide if you will accept tenants who will be paying with Section 8 vouchers.
But wait one moment… does the good ol’ government pay for all the tenant’s rent?
Not always! Increasingly, they only pay a portion of it. About 70%, in many cities nowadays.
When you accept a Section 8 tenant, expect some red tape. Your property will undergo an inspection for approval, at the very least.
And that’s if everything goes smoothly. But more on that later.
Advantages to Section 8 Tenants
What are the advantages to signing a lease agreement with Section 8 tenants?
Here are a few:
1. Reliable on-time rent payments (for the government’s portion, anyway).
2. Allowable rent increase of 5-8% per annum (varies locally).
4. Occupancies tend to be longer-term which usually means lower vacancy rates. Shorter vacancies is the name of the game in cash flow.
5. Sometimes Section 8 tenants do pay higher rents than market tenants. To research Section 8’s “fair market rates” (FMR) for your market, go to HUDuser.gov, select your state and then your county. There you will find a chart providing the FMR for efficiencies up through 4-bedroom rentals.
(article continues below)
Free Mini-Course: Passive Income from Small Multifamily Properties
Disadvantages to Becoming a Section 8 Landlord
Section 8 tenants can come with plenty of their own risks and drawbacks. Before you take the plunge and invest time and money into becoming a Section 8 landlord, consider some of these disadvantages:
1. Lots of red tape! The bureaucracy can cost time and money, in delaying new tenants moving in, or delaying eviction of non-paying tenants.
2. Delayed payments at first. Sometimes your first rental check can take up to two months. Oh, you will get it but it will be delayed. Try telling your mortgage company that!
3. Inspections, inspections and more inspections. Did I say inspections? We are talking about a white-gloved, look everywhere inspection. (incidentally, this is the top reason many landlords do not accept Section 8 vouchers. It’s also why Brian stopped accepting Section 8 tenants – every year, his entire cash flow for the year would be wiped out by repairs ordered on a whim by local inspectors trying to prove they visited each home on their schedule.)
4. Sure, the government portion will come in every month, but what about the tenant’s portion?
5. Tenants can put the proverbial beatdown on your rental unit and you, the landlord, are left with the bill. What, you thought the government will accept liability for tenants’ actions, and reimburse you for any damage caused? Sure, you can take that tenant to small claims court for the damages, but don’t count on getting that moolah, even if you win a judgment.
Tips for Working with Section 8 Tenants
So, after reading the above, you still want to become a Section 8 landlord?
We’ve got you covered. Here are some tips for success, when starting out with Section 8 vouchers!
1. Screen all tenants thoroughly and rigorously. Think of it as a mechanical process – remove any attachment and emotion from the equation.
2. Have a written policy on your tenant screening criteria. The National Housing Law Project contains a great example under the heading “Screening Process and Eligibility Criteria”. This will help keep you in compliance with landlord Fair Housing laws. Of course, make sure that your policy adheres to FHA regulations.
3. Use a system to make your decision. Whether it is a spreadsheet, or you are a world-class app developer, list out all your criteria such as criminal background, employment as applicable, credit check and score, eviction history, landlord referrals, condition of their current home (if you visit and you should try) into one place.
4. Make your rental “strong like bull”! Use neutral, glossy, inexpensive paint. If you are using carpeting, use a strong padding with darker colors. I personally steer clear of providing real hardwood floors in rentals. However, the sturdy look-alikes are perfect. Use tamper-proof smoke and carbon monoxide testers. Use second-hand appliances. No need to provide screen doors. They end up costing more and rarely last long, anyway.
5. Remove unnecessary perks. No reason to include garbage disposals (they break easily), ceiling fans, window air conditioning units, or anything that is not a required addition. Bare minimum equals less inspection, less maintenance, and less damage to worry about.
6. Visit the unit. Schedule inspections and throw in a “I am doing a smoke detector check” surprise. Don’t harass but do visit. Check for running toilets, leaking faucets and anything that may be flushing your money down the proverbial drain. Did you know that one toilet with a slow constant run costs about $75 per month? You will also be able to be sure that the tenant is complying with your lease agreement terms. Are there any unauthorized occupants? Pets?
7. Make the rules and enforce the rules. Start by using a sturdy, state-specific lease contract with lots of rules and then, keep it going. If the tenant, the tenant’s visitors or their kids are breaking rules, get right on top of it. Send that notice out.
8. A tenant voucher holder who breaks the lease can be evicted. And frankly, if this happens, more often than not, that tenant will be bounced from the program. So, you see, a tenant has much to lose if they are evicted. With that said, an eviction can be trickier for Section 8 tenants.
9. Know your neighborhood. If you have a great rental in a desirable neighborhood, you may want to rethink becoming a Section 8 landlord. Chances are that the FMR will be lower than what you can fetch on your own.
Now that you are armed with the info, the good, the bad and the truth, go forth and choose well! Section 8 or the Housing Voucher program has its place and can be a good, viable option for many landlords. But before jumping in, make sure you know what you’re getting into.
What to Do Now:
1. Comment below: Have you ever worked with Section 8 renters? How did it go? Will you consider working with Section 8 renters in the future?
2. If you’re new to the rental investing game, download our free Recipe for Rental Income: 5 Steps for Your First $500/Month in Passive Income.
3. Enjoy this article? Did it raise some questions and ideas that got you thinking? If so, your friends, colleagues, and family members will probably also get something out of it. Share it with them on Facebook or Twitter. You can also follow us on Facebook and or Twitter for awesome daily doses of, well, real estate awesomeness 😀