Are Section 8 Apartment Complexes Worth Looking Into?

Question

I have heard that dealing with the government as it pertains to section 8 can be a pain. Are section 8 MF properties even worth looking at or should they be avoided?

Stace Caseria · Answer

That's a really complicated question. There are many, many variables at work, and some have nothing to do with the tenants, program administrators or properties. Your feeling about your tenants and process affect the outcome to some degree. Personally, I am not crazy about Section 8 tenants, but I have some. Here's why. I own a 6-unit building that had 3 tenants on a RAP (rent assistance program) when I bought it. And I've felt constrained by the limits on my ability to raise rent (market is a bit higher than what Section 8 will pay). On March 1 one of those Section 8 tenants told me she planned to move out the middle of March (needed a place with an elevator -- and I wasn't putting one in). I said, great, here is my opportunity to improve the unit and get market rent. Then Coronavirus begin ramping up in earnest. By that point I was 1/2 into a remodel and was worried that I should not have been investing in the unit, rather holding onto my cash as reserves. I said to myself, I should have left the apartment as it was, gotten another Section 8 tenant been happy with 3 guaranteed rents. But I couldn't stop 1/2 way, so I finished it and rented it for April slightly above what I had expected I would get. So I'm happy right now. Something else to note about Section 8 -- since this tenant did not give full 30 days notice (only gave 2 weeks), Section 8 still paid the entire month. I was able to begin reno March 15 the day she moved out. My point is, in good times, Section 8 can seem like you're shortchanging yourself. When times get tough, those guaranteed payments bring a sense of relief. Going forward, for that building at least, I will keep 2 Section 8 tenants in place since they'll at least cover my mortgage if everyone else stops paying rent. The property is not in a Class A neighborhood and is older, but makes decent money every month. It sounds like from your post you are looking at an entire building with Section 8. Is that the way it's been operated in the past? If so, how do you think the current owner has managed it? Is there excess deferred maintenance? Outdated units? Overdue exterior upkeep? Finally, Section 8 tenants are people. And like people, they're different from one to the next. Some expect the world on a silver platter. Most are reasonable individuals. But I always remind myself, there's a reason the government is paying their rent and a reason it doesn't have to pay mine.

Ryan Daigle · Answer

Hi @Kreig Jarnagin - I would say your experience with section 8 tenants will be highly dependent on your property management team/approach. As my current PM says, just because they're section 8 doesn't mean they don't have to pass our screening requirements and background check. If you can get high quality section 8 tenants that come with the stability of a government check well then... that can be a pretty great deal. But it takes vigilance and an active management approach to get that perfect balance.The other aspect of course is that many properties that have section 8 tenants might be in rougher areas, so you're just not going to be able to attract the right tenants section 8 or not. You should certainly factor in what your sub-market can support when doing this up front calculus.Hope that helps!

Avery Carl · Answer

Just because they are section 8 does not mean you can't get a quality tenant. You can tell by a person's initial questions if they are going to be a good tenant or not. If they ask something like "will the areas underneath the appliances be cleaned before I move in?" they are probably a person who keeps a clean and nice house, and will take care of the unit. If their first question is "Can I get a discount on the deposit?" They are probably someone who is going to destroy your unit and they want you to be holding onto as little of their money as possible when they do.

Evan Polaski · Answer

@Kreig Jarnagin In general I had success with my section 8 tenants in my single family properties. As mentioned, there are some good tenants that happen to be on Section 8. Sometimes you just need to screen more than a market rate place to find a good one.One big upside is these tend to be life long renters and not used to much service from their landlord. So if you can offer a decent place and be responsive to their needs, they will often stay a long time. And many of mine only call when they are not able to fix the issue in the first place.The biggest downside I have had was the annual reinspections continued to get more and more stringent and expensive. And often times they are just annoying: I have failed several times because "the fan in bathroom didn't work". The issue is, a) I don't need a fan since I have a functioning window, and b) it is not even a fan but a round HVAC duct.

Beck Joyner · Answer

Yes. For starters, there is a huge demand. In my area, many landlords will not consider it. There are a lot of desperate single mothers who lack decent housing and that is shame. I know there are drawbacks but it is a reliable income source especially in this post COVID environment.

Chris C. · Answer

2 out of the 6 tenants covers your mortgage... sounds nice

Kreig Jarnagin · Answer

@Stace Caseria thank you for that insight.

Tim Vitale · Answer

"Worth it" is highly subjective. If it fits into investment criteria, then yes. If it doesn't, then no. Some people will like it as an asset class, others don't. One size doesn't fit all.