The Advantages of Being a Section 8 Landlord

The sheer amount of units in the country offered through the section program should speak to its benefits for investors and borrowers alike. One key advantage of the program is that landlords can expect a regular payment from the U.S. government for each and every month that their unit is rented. And it doesn’t stop there either, there are several other benefits, too. The major upsides of the Section 8 program include:

• Regular Payments from HUD: One of the major drawbacks for landlords, especially those who own properties in lower-income areas, is the challenge of getting payments on time. Section 8 landlords, however, need not to worry about this issue, 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). Furthermore, rents don’t remain static-- in order to incentivize landlords to keep 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, landlords are able to access a verified waiting list of Section 8 tenants in their area. Additionally, they can list their property on websites-- which enables tenants to actually reach out to them in order to rent out their units. In fact, there is usually a long waitlist for Section 8, so landlords typically don’t have to worry about a lack of interest. As a landlord, this means that marketing expenses are virtually zero, which can be a massive advantage, especially in today’s market. This is particularly true if there are a lot of vacancies in your area and market-rate apartment complexes are competing for tenants.
• Reduced Capital Expenditures: While the property must still be kept reasonably well-maintained while renting to Section 8 tenants, landlords generally don’t need to make the more common large capital investments in upgrading the property’s aesthetic nature. Unnecessary things like fancy landscaping, brand-new appliances, and new flooring tend to be incredibly expensive-- but, since the Section 8 program brings tenants to the property, landlords will not need to invest in these things in order to keep the 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 some downsides to consider. As a matter of fact, depending on who you ask, some would argue there are a few more downsides than upsides. In reality, this is mostly dependent on individual factors, including the location and condition of an investor’s property, their level of experience dealing with section 8 tenants, and their tolerance level for government oversight 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, investors will need to fill out a very substantial amount of paperwork. Additionally, unlike with renting out units privately, a single error could lead to a delay in the scheduled payment from HUD, or even worse, nonpayment. In many situations, initial Section 8 applications can take between 4 to 5 months, which many landlords/borrowers/investors may not find acceptable. Even after a landlord is granted final approval, it has been known to take several more months for them to receive their first payment.
• Rent Limits: One of the most significant downsides to participating in the Section 8 program is the fact that rent must adhere to a prearranged amount set by HUD. These prearranged rent amounts are based on the Fair Market Rent (FMR) for the specific area in which a property is located. While it’s within the framework of the program that rents are generally given a 5-8% boost each year, if they start off 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. Objectively speaking, this varies based on the individual tenants in a building-- if a landlord takes care to be particularly selective about the tenants they choose, this may not be much of a problem.
• No Security Deposits: Security deposits are typically a standard for apartment landlords seeking to ensure that they aren’t left holding the bag if a tenant damages their property. However, security deposits are somewhat more elusive in the Section 8 program. The government will not provide them-- and, while a landlord is still within their rights to ask a tenant to pay a deposit, section 8 tenants often do not have enough money to pay for them.
• Eviction Challenges: 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 turn out to be a logistical nightmare, due to the fact that HUD’s Section 8 eviction rules are extremely strict. Even if a landlord does end up successfully evicting the tenant, the tenant can contest the eviction using a publicly-funded attorney, (or, at the very least, a partially subsidized one) meaning that the landlord could end up spending thousands of dollars and hours of time defending their decision against a single troublesome tenant.
• Inspection Requirements: Unlike private landlords, Section 8 landlords will face regular inspections, which can be daunting. 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.

Advice for Current and Prospective Section 8 Landlords:

• Do Your Due Diligence and Decide if Section 8 is Right for You: For desirable properties in great locations with low average vacancy levels, Section 8 is typically not going to be the best choice. In that case, it makes more sense financially to keep the property filled with tenants who will pay higher rents, without the hassles, risks, and bureaucracy of the Section 8 program.
• Manage Tenants Wisely: Managing tenants can be one of the biggest challenges of the Section 8 program. It’s recommended that landlords set rules and enforce them strictly; otherwise, serious issues could ensue. Of course, landlords may very well be inclined to hire a property management company with specific experience in Section 8 properties. However, this too 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, and many section 8 tenants simply can't afford to pay a deposit, landlords will want to limit the number 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 have the capacity to increase your expenses.
• Inspect Your Property Regularly: Even after making the decision to farm out many of the every day responsibilities to a property management firm, landlords 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 Tenants Wisely: As a Section 8 landlord, the program makes it incredibly easy to find tenants-- but landlords still have the final say over who gets approved. To succeed as a section 8 landlord, choosing good tenants may be the most important factor to consider, as they can save (or cost) you thousands in property repairs, and hours upon hours of hassles.

How to Choose Quality Tenants for a Section 8 Property

As we’ve previously mentioned, choosing the right 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 a landlord from accepting a tenant with a serious criminal history. In addition, doing a simple Google search can also help to make sure a property isn't accepting a tenant that’s been involved in any suspicious activities-- which can save 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 crucial. If a tenant has rented long-term at other properties, it’s generally a sign of good standing and responsibility, while landlord issues and evictions are almost always warning signs. A good piece of advice; for landlords who are on the fence about a tenant, it is actually acceptable to ask them if it is okay to contact previous landlords to learn more.
• Tenant Income and Credit: While a decent portion of Section 8 tenants have 100% of their rent paid for by the government, some only have 70-80% of their rent subsidized. For example, a renter with $800 rent and a 70% subsidy would only be responsible for paying $240/month. In general, a tenant should make 300% of their rent per month, so, to be safe, a landlord would want this tenant to have an income of at least $720/month. However, income isn’t the only factor a landlord may want to look at-- a tenant’s 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, the amount of overall debt they have is also worth examining.

In many cases, it isn’t uncommon for landlords to create a point system, where they add or subtract a 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 final approval.

In Conclusion: The Section 8 Program can be a Worthwhile Endeavor for the Right Landlord

All things considered, the Section 8 program offers a great opportunity for savvy 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 challenging tenants can be a turn-off for many property owners.

When it comes to being a successful Section 8 landlord, knowledge is power. Any property owners or buyers who do decide to apply for and participate in the program should focus on learning as much as possible to help improve their property’s profitability while greatly reducing potential hassles and financial risks.

Related Questions

What is the HUD Section 8 Program?

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.

How does the HUD Section 8 Program work?

The HUD Section 8 Program provides financial assistance to nearly 5 million households across the country. The program is managed by the U.S. Department of Housing and Urban Development (HUD) and makes rental payments directly to landlords. There are two main variations of housing assistance provided by the Section 8 program; the Housing Choice Voucher Program (often 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 exclusive to a specific unit or building. In practice, for example, if a project-based tenant moves, the rental assistance stays with the unit, and cannot be carried with them to another building.

What are the benefits of investing in HUD Section 8 apartments?

The HUD Section 8 Program offers several benefits for investors and borrowers alike. The major upsides of the program include:

• Regular Payments from HUD: Section 8 landlords need not worry about getting payments on time, 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). Furthermore, rents don’t remain static-- in order to incentivize landlords to keep 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, landlords are able to access a verified waiting list of Section 8 tenants in their area. Additionally, they can list their property on websites-- which enables tenants to actually reach out to them in order to rent out their units. In fact, there is usually a long waitlist for Section 8, so landlords typically don’t have to worry about a lack of interest.
• Reduced Capital Expenditures: While the property must still be kept reasonably well-maintained while renting to Section 8 tenants, landlords generally don’t need to make the more common large capital investments in upgrading the property’s aesthetic nature. Unnecessary things like fancy landscaping, brand-new appliances, and new flooring tend to be incredibly expensive-- but, since the Section 8 program brings tenants to the property, landlords will not need to invest in these things in order to keep the units rented.
• Consistent Returns: The Department of Housing and Urban Development agrees to cover any difference between a contracted, subsidized rental rate and what a resident can pay through the use of HAP contracts. This essentially means that, even should a resident become unemployed, the government will pick up the tab in ensuring rent is paid.

What are the risks associated with investing in HUD Section 8 apartments?

The risks associated with investing in HUD Section 8 apartments include bureaucracy and red tape, rent limits, tenant damages, no security deposits, and eviction challenges.

Bureaucracy and red tape can lead to delays in payments from HUD, or even nonpayment. Rent limits are based on the Fair Market Rent (FMR) for the specific area in which a property is located, and may be lower than what a landlord could get on the open market. Section 8 tenants often have a bad reputation of being careless, and landlords may not be able to collect security deposits from them. Finally, evicting a Section 8 tenant can be a logistical nightmare, due to the fact that HUD’s Section 8 eviction rules are extremely strict.

Sources:

• The HUD Section 8 Program: A Guide for Apartment Loan Investors
• Section 8 Investing: A Comprehensive Guide

What are the requirements for obtaining a HUD Section 8 loan?

In order to obtain a HUD Section 8 loan, you must meet certain requirements. These include:

• You must be a U.S. citizen or have a valid immigration status.
• You must have a valid Social Security number.
• You must have a minimum annual income of at least $20,000.
• You must have a good credit history.
• You must have a valid driver's license or state-issued ID.
• You must have a valid lease agreement with the landlord.

For more information, please visit the HUD website.

In this article:

1. HUD Section 8
2. Voucher-Based and Project-Based Section 8 Housing Assistance
3. The Advantages of Being a Section 8 Landlord
4. The Disadvantages of Being a Section 8 Landlord
5. Advice for Current and Prospective Section 8 Landlords:
6. How to Choose Quality Tenants for a Section 8 Property
7. In Conclusion: The Section 8 Program can be a Worthwhile Endeavor for the Right Landlord
8. Related Questions
9. Get Financing
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• HUD
• Section 8
• FHA
• Affordable Housing
• Apartment Loans
• Section 8 Financing
• Section 8 Loans