Heard tales of guaranteed rent payments, courtesy of Section 8? Deposited 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 a lower risk of rent defaults – at least on the government-paid portion.
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 need to know, and how to get started.
A Quick History Lesson
Back in the dark days of the Great Depression (I just got a déjà vu of my grandfather’s stories), the federal government launched two programs for low-income housing under the Housing Act of 1937. They were early predecessors of Section 8, and provided subsidized housing.
Yet it was not until the mid-‘70s that the modern incarnation of Section 8 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. I bet you can think of some troubling movies and TV shows set in the projects (The Wire comes to mind, set in Brian’s hometown of Baltimore).
Although lawmakers’ intentions were good, by the 1980s backlash started 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 To Rent a Home to Section 8 Tenants
Tenants apply with a local housing office in order to get Section 8 approved vouchers. Those perspective Section 8 tenants will be 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 of the tenant’s rent?
Not always! Increasingly, apartments and houses that take Section 8 are only receiving a portion of the entire rent amount. Often this portion falls around 70% nowadays.
When you accept a tenant who has been accepted into the Section 8 housing assistance program, 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
So should I become a section 8 landlord? What are the advantages to signing a lease agreement with Section 8 tenants?
Here are a few pros of accepting Section 8 tenants.
1. Reliable On-Time Payments
Well, for the government’s portion, anyway. But there’s no guarantee the tenants will pay their portion on time; not from the government, anyway.
Fortunately, you can buy a rent guarantee from private insurers. Check out Rent Rescue or Sure Insurance to buy rent default insurance, that kicks in and pays you the rent if your tenants stop paying.
And through good ol’ fashioned tenant screening, you can weed out unreliable renters with a poor credit history, showing a pattern of paying bills late (or not at all). It helps if you automate your rent collection to receive rent electronically, direct-deposited into your bank account.
2. High Allowable Rent Increases
Most cities allow landlords to raise the rent in the 5-8% range per annum. These are determined by the federal government’s findings of fair market rents; more on this below.
But since the government pays the lion’s share of the rent, Section 8 tenants tend not to complain as much about rent hikes.
3. Fill Vacancies Faster
When you accept Section 8 tenants, you can fill your vacancies faster. First, because many landlords don’t accept Section 8 vouchers, leaving tenants with fewer options.
But there are also extra websites and newsletters specifically for Section 8 rental listings. Check out GoSection8 and WeTakeSection8 as two examples where Section 8 landlords can market their vacant rentals.
4. Lower Vacancy & Turnover Rates
Because Section 8 tenants often have a harder time finding landlords who accept vouchers, they tend to stay longer-term. That in turn means lower turnover rates and vacancy rates.
Both of which mean higher profits and better real estate cash flow.
5. Potential for Higher Rents
While it was more common in decades past, 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.
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. Red Tape
The bureaucracy can cost time and money, and delay new Section 8 tenants moving in. Worse yet, local housing departments often require extra steps in the eviction process, delaying eviction of non-paying Section 8 tenants.
Which, in turn, means months of unpaid rent.
2. Delayed Initial Payments
Sometimes your first rent check can take up to two months. Oh, you will get it eventually, but count on covering your expenses out-of-pocket for the first few months.
Just imagine telling your mortgage company “I’ll get it to you eventually!”
3. Inspections, Inspections & More Inspections
Did I say inspections? We are talking about a white-gloved, look-everywhere inspection.
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. Tenant Quality
Sure, the government portion will come in every month, but what about the tenant’s portion?
The simple fact is that lower-income tenants often mean lower credit, lower reliability, and less stable income. Look out as well for “professional tenants” who know the system better than any landlord accepting Section 8 rent vouchers.
5. Property Damage
Higher-risk tenants aren’t just a risk for rent defaults. They also pose a higher risk to your property itself.
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 the Section 8 tenants’ actions? That you’d be reimbursed for any damage caused? Never.
Sure, you can take that Section 8 tenant to small claims court and sue for the damages, but don’t count on getting that moolah, even if you win a judgment.
Brian shared some of his horror stories with me, and pointed out that the less financially invested people are in, well, anything, the less attention they pay. His Section 8 tenants often treated his properties badly, because they had little or no financial investment in it.
(article continues below)
Tips for Working with Section 8 Tenants
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!
Screen Tenants Like $150,000 Depends on It
Or however much your property is worth. Because you are handing complete control and possession of your asset worth hundreds of thousands of dollars to these people.
Think of tenant screening as a mechanical process – remove any attachment and emotion from the equation. You need a written policy on your tenant screening criteria, that you follow like clockwork every time you collect rental applications.
List out all your tenant screening criteria such as income, criminal history, employment, credit score and credit history requirements, eviction history, landlord referrals, and condition of their current home. Feel free to start with a free tenant background check (hint hint!).
Following a set procedure also keeps you in compliance with landlord Fair Housing laws. Assuming, of course, that your policy adheres to FHA regulations.
Tenant-Proof Your Rental Property
Make your rental “strong like bull”! Start tenant-proofing your property by painting the walls with glossy, neutral-colored, inexpensive paint. It’s easier to rub scuffs away on glossier finishes rather than flat paint.
I personally steer clear of both carpets and real hardwood floors in rentals. However, sturdy lookalikes are perfect, from waterproof luxury vinyl tile (LVT) to faux wood to bamboo.
If you insist on installing carpets, use a thick, higher-grade padding, and lower-grade carpets with darker colors. You’ll have to replace the carpets often, but not the padding.
Use tamper-proof smoke and carbon monoxide testers. If you provide appliances, install second-hand ones with few bells and whistles. The more complex an appliance is, the more likely the tenant is to misuse and break it.
Likewise, remove other unnecessary features. 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.
Don’t provide screen doors. Tenants – particularly Section 8 tenants – end up breaking them, and if you include them when tenants move in, they’ll expect you to repair or replace them when they break them.
Many of the common repairs can even be done cheaply and by you, thus saving money but still maintaining the property in a good strong condition.
Inspect the Property Every 6 Months
Your goal is not to harass, but to look for needed repairs and ensure the tenant is complying with all lease agreement rules.
Schedule inspections and throw in a “I am doing a smoke detector check” surprise. Check for running toilets, leaking faucets and anything else that may be literally or figuratively flushing money down the 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? Dogs? Alligators in the bathtub?
File for Eviction Immediately if Tenants Break the Lease Agreement
If the tenant, the tenant’s visitors, or their kids are breaking rules, get right on top of it. Start the eviction process as soon as possible; it takes several months (or longer, for Section 8 tenants) from the initial eviction notice until the eventual lockout. So the tenants will have plenty of time to correct the violation and avoid the eviction.
Often tenants who break their lease agreements will be bounced from the Section 8 program; they have much to lose by not following the rules.
Above all, 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! The Section 8 Housing Voucher program has its place and can be a viable option for many landlords. But before jumping in, make sure you know exactly what it is 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 ?