Rents under market- section 8?

Question

My husband and I are newbies and are looking for a multi family for our first investment property. After looking at rent rolls on several properties I have realized that the rents most of the units are getting is below market. How do new owners of a multi family typically handle this? I imagine most will purchase the home, and ask tenants to increase their rent over a period of time. Is it safe to assume that if tenants are "at will" that they are section 8? Is this something that is typically asked prior to purchasing? Is it challenging to get section 8 to increase the amount of the voucher to match the increase in rent you are asking? It is seeming to be more cost effective to purchase a property that is vacant so that you can start rents at the market price rather than attempt to increase? Any input would be greatly appreciated!

Kathy Henley · Answer

@Courtney Kelly When investing, one never assumes. One verifies the income and the expenses.

If you are investing in properties that qualify for housing vouchers, check out the rent rates set by the county housing authority overseeing the area. It varies by location and its poverty level, but most have landlord information on their website. What is the top rent that they would authorize? If you buy a property with existing leases, the leases run their course and the new owners get income from day one. When the lease fulfills, LL can choose not to renew. It is painless. (Terminate a lease means something else.)

If you find properties that are rented below market, the first question might be: how much work is needed to refresh the unit to earn market rents?

It costs money and time to reposition a building.

Who lives in the area and what are the local expectations - are dishwashers and central air worth the upgrade? Decide if the purchase price, plus the needed upgrades, make the investment 'a deal'.

Brian Garlington · Answer

This one of the (many) reasons I love renting to tenants with a Section 8 Voucher. In a rent controlled area like the Bay Area I was able to raise rents out here by anywhere from 4 to 8 % annually, even during the pandemic. If a person's income is subsidized by the governmen then they are not subject to the restrictions of rent control. I could have tried to get the rents higher all at once but that would be stupid. Raise it 6% per year and keep it pushing. Has minimal impact on the tenant as well.

Tim Bellnier · Answer

If you inherited tenants that are on Section 8 they do have a lease.  You might just not know about it because the seller did not disclose it.  They may even have a security deposit that you are unaware of.

Jane S. · Answer

AS NEWBIES YOU ARE GONNA BE VERY SORRY THAT YOU INHERITED CHEAP TENANTS WHO PROBABLY DONT PAY ON TIME AND LET THEIR ANIMALS DO DAMAGE. Be smart and ask yourself why the owner wants to sell? Better yet ask the owner! They wont tell the truth but you should be able to see through their stories after you tour the property.

Maybe consider building from the ground up so you don't go insane from problems you didn't cause.

Section 8 rents are cast in stone and will not increase unless HUD says so. Do your research on this and talk to your local housing authority, Section 8 is like getting caught in a bear trap. Your plans are scaring me and I’m experienced!

Michele Fischer · Answer

If the property was vacant, you'd be paying more for it.  There is some discount by you inheriting tenants that aren't pleasant, at market rate, and/or paying on time consistently.  It is almost always better for everyone to encourage them to move on and start over with your own tenant selection, but it is honorable and sensible to try to keep them and stagger the vacancies.

We usually start with an inspection of the unit and make some minor upgrades.  The upgrades help justify in their mind that they are getting something for the rent increase, plus the fact that they cannot find equivalent housing elsewhere.  A landlord who isn't keeping up with rent increases probably isn't keeping up with maintenance either.

We like to raise rent to the midpoint of the difference between market rent and actual rent each year.  Tell them to expect a readjustment each year and actually do it.  It's far easier to not change rent, but it is an issue when you go to sell, as you are finding.  If rent is $400/month too low, raise it $200. This is still a good deal for them but will make steady progress toward market for you.  Whatever logic you use, apply it consistently to all tenants that year.  Of course, you may need stronger revenues to justify the purchase.  But I like to be conservative (run the numbers both ways to see the impacts) and always plan at least 6% of rent as uncollectable/vacancy.

Mike D'Arrigo · Answer

@Courtney Kelly this is a common situation when buying an existing rental. Often times, a landlord hasn't increased rents for some time for one reason or another or hasn't kept pace with market increases. Rents have gone up significantly in just the last 12 months in most markets. If the current rent is not too far below market, you can probably bring it up to market level without losing the tenant. If there is a big gap, you could very well have to replace the tenant, although they may not be able to find anything cheaper. If you have a property manager, this is where a good one can give you guidance.

Joy Allen · Answer

Hello

I have 3 rentals in 3 different housing authorities. I have not had a problem increasing the rent to market value in 2 out of the 3. To be honest I wish all my rentals were section 8. I am not great at raising rent on folks when I know it is coming out of their pocket. Biggest piece of advice I have is check credit. My tenants all had fair credit but no evictions and no collections. Most responsible people have decent credit and no way do they want to lose thier vochers.

Keith Dunn · Answer

Section 8 programs are rent-controlled, meaning the rents are based on fair market value for that neighborhood. If you were to increase the rent, section 8 may cover up to 80% of the rent and the tenant will pay the difference. Most section 8 tenants are at or below the income level of $26,000. A rent increase

could cause some tenants to look elsewhere, then you have to deal with the loss of rent from those tenants. Now if you want to increase the rent you would have to upgrade the units to justify the increase. That could be costly. I would visit the property, asked to see the units, and see if you can talk with a tenant and find out from them if they're happy with the condition and maintenance of the property. My opinion.

Rodney Sums · Answer

If your rental market has high demand don't hesitate to increase rents to what they should be out of fear of vacancies. Someone else will move in. If you can't budget all tenants moving at once due to the increase, stagger it so one moves at a time. You shouldn't have to resort to something as complex as section 8 especially if you're new and inexperienced.

Just because a tenant is "good" does not mean you should lose big money in rent. When things break they will expect repairs Pronto regardless if your rent is below market. Good tenants can go bad. I've had tenants pay on time every single month until the last one that resulted in their eviction.

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Rents under market- section 8?

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