How to do Section 8

Question

Section 8 sounds like a good way to go for rental properties, since the rent checks come from the government. So how do you set up a unit for Section 8? Do you have to register it or have it inspected? Are there any downsides to owning section 8 rentals?

Bob E. · Answer

I would recommend the book "The Section 8 Bible".

Bradley Bogdan · Answer

Hey @Scott Campbell  ,

Section 8 comes with its own set of challenges and rewards, as any target population for your rentals. @Gerald Harris  has given you two good spots to pick up some basics for how to get started, so I'll give you a few suggestions of things to look out for that might impact your decision and probably aren't well explained or found in those links.

- Look at what HUD has established as Fair Market Rents (FMRs) for your area. Note that these are set to be INCLUSIVE OF UTILITIES. Most people assume they can rent up to that limit and include none or some of the utilities until they get their first prospective tenant and are denied by the local Housing Authority. My rule of thumb in my area is $50 less max rent for a 1 bedroom that includes water sewer and garbage, and $75 less than max for a two bedroom is usually safe. These rules will vary both on the projected utilities for your area (also publicly provided) and the income of the tenant. The higher the income of the tenant, the closer to that max rent you can charge. The lower the utility projections are, the closer you can charge, and vice versa. If you'd like an in depth course once you're ready to rent on how much you can charge a particular person, PM me and I'll walk you through it.

- Unlike Account Closed  suggests, the large majority of folks on the program actually do have income and will owe you a portion of the total rent every month. It unfortunately is a very common misconception that most or all of the folks on the program have no income. That portion they pay will depend on their income, usually about 30% of it, give or take depending on those projected utilities and the total rent. You can make sure to set your rent price over the maximum allowable rent for someone with $0 income to avoid those folks, if that's a major worry.

- Make sure you have a legal discharge tube on your water heater. It has to drain outside or to a pan on the floor and the tube needs to be heat resistant PVC, not the normal stuff. It also needs to reach to within 2-3 inches of the floor pan. I don't remember if its 2 or 3 exactly, but it needs to be very close to the floor. This is the one thing that causes 90% of units that I see that flunk the initial inspection to fail. Its a $5-10 fix, if that. Save yourself the trouble of a re-inspection.

- Identify local non-profits and programs that help with things like deposits. Call them up and find out what kinds of assistance they offer to low income persons. Section 8 does not provide any assistance with deposit, so tenants have to come up with it on their own or through another program. If you already have a list of who can help, you'll expand your pool of potential tenants and be able to keep higher deposits, which in turn gives you added security. If you make friends with these non-profits, you'll also often get referrals for tenants directly from them, also increasing your pool of applicants. Often these agencies have assistance for rental arrears as well, which can be a great place to turn if a tenant you like has hit a rough patch but you'd like to keep them.

- Have appropriate standards for tenants. Do not demand everyone get co-signers because they have tiny incomes, or expect everyone to have excellent credit, or to have made similar life choices to your own. This is not to say throw your standards away, continue to be super wary of anyone with a prior eviction, etc., but do remember that everyone on the program is poor. Just because they're poor doesn't mean they will be bad tenants, have substance abuse issues, or are bad people.

- Have rentals in a part of town people want to live in. If the FMRs are at least reasonably close to the actual rents in your Housing Authority area, you will still need rentals that people actually want to live in and take care of. That means you can't just scoop up houses for 30k in the ghetto and expect to make a mint. Poor people don't want to live in the crappy neighborhoods any more than we do, so when they have the choice, they don't.

- Do regular walkthroughs. This is a must for any landlord, but is especially helpful for avoiding problems with the yearly HUD inspections. Many low income tenants are used to landlords that will kick them out if they ask for repairs on a unit, especially in big cities, so they wont necessarily say anything if the sink is leaky, etc. Its an understandable learned reaction, but it can be countered by a peek in every once in a while.

Finally, have fun! Assuming your numbers work, enjoy the fact you're making an excellent investment for your future, and take a bit of solace that the portion of income you're forking over every year to uncle sam is coming right back to your pocket with the next month's rent.

Bradley Bogdan · Answer

I took out my paragraph on Section 8 and property values when i noticed you edited your previous post, but since you've mentioned it again... :-P

The literature on Section 8 and its effects on local rents and property values is mixed, mostly owing to the fact its tough to get enough good data on a homogeneous neighborhood over time to have any power to your statistical analysis. In the best studies, the ones that are able to get around this issue by having bigger better data sets, the research suggests Section 8 rentals in an area actually increase both property values and rent, despite popular opinion pieces, such as this fear mongering story where the only expert interviewed is an eviction lawyer:  http://www.abcactionnews.com/marketplace/law-tv/se... . Needless to say, there's nothing scientific or data based about an article like that.

Now, why would this be the case? Aren't Section 8 rentals full of low income people who are, on average, tough on rentals which will bring down the look of a neighborhood? Well, sort of. In all but the major cities where FMRs aren't close to actual market rents, Section 8 rents actually encourages investors, like us, to purchase low cost properties in cheaper sections of town and raise rents to the Section 8 level, which in turn raises values because those properties are making good money. If your PHA is any good, they'll prevent slumlording through the inspection process, and over the course of time, property values rise, more people invest, and eventually rents rise to above Section 8 levels. Now, this is a general trend, we all can point to neighborhoods where this hasn't happened, but overall, this is the case. Also, it should go without saying that there are many many other factors that have an effect on local property values outside of affordable housing programs.

If you'd like to take a read of some of the aforementioned research, try these:

A list of articles I can't post due to journal subscription stuff, but are cited in a short explanation of values by Habitat for Humanity: http://www.habitat.org/how/propertyvalues.aspx

A working paper by NYU students that provides all the dense dry stuff I love, but bores most people to tears: http://furmancenter.org/files/publications/Does_Fe...

And finally, what should be considered a holy grail source for us here on BP, the National Association of Realtors agrees with me, and links to some of my favorite research (and opinion pieces for those who like more interesting writing): http://www.realtor.org/field-guides/field-guide-to...

Bradley Bogdan · Answer

Sorry Account Closed , when you stated that "People tend not to take care of something that they don't have to pay for" it sounded like you were referring to the Section 8 tenants that have an income low enough, or no income, where they pay no portion of rent to the landlord. My apologies, not trying to put words in your mouth.

(Edited to remove a short discussion on research into Section 8's effects on rent and property values, now deemed irrelevant :-) )

Now don't get me wrong, renting to low income renters has its risks and downsides, no question. I just often see folks in my community and here on BP that have awful perceptions of the program or the people on it, and when they are based on erroneous information or a misunderstanding of what the program will or will not provide the tenants. I just attempt to correct those understandings when possible.

Curtis Bidwell · Answer

I have rented to sec-8 for years.  I only allow them in our apartments and not in our SFR.  I also limit the total number to about 35-40% of our units.  I have had excellent tenants as well as ones that I've had to remove.  On average they take decent care of the units, being in a community of other renters with jobs and incomes.  They do help drive the rents to full market and keeps the complex full.  And that keeps the value growing!  Do regular screening, charge a full deposit and follow up diligently with any notices and inspections.  I haven't found Housing inspections to be any real problem. They simply ask that if it is there, it works.  Safe and clean living is expected.  That's not a problem for us because I want every unit to be good and attractive for any potential tenant.

Scott Campbell · Answer

Thanks Brian! There is some really good stuff on the NAR website... Great info

Account Closed · Answer

No I agree the stereo types are dangerous, but when we are investing our future we have to go with the rules not the exceptions.  I have seen first hand how section 8 has brought down property values on entire towns. It's not to say everyone on section 8 is bad for a tenant but section 8 has a huge risk when you think about the fact that people who invest nothing (30% of the total rent is hardly an investment) tend to be more neglectful. Like everything in life it depends on the investor and what they're willing to risk. People who have 70% of their rent paid for them will take whats given to them for granted much more than someone who has to earn it. I don't think that's an unfair assessment or something that just applies to section 8 but human nature in general.

Account Closed · Answer

I'm guessing the downside is the quality of tenant in most cases. People tend not to take care of something they don't have to pay for.

Gerald Harris · Answer

Hey scott.  I am in no way promoting this site but here is a link for you to follow.

It gives you all the information about section 8 and housing and how to set it up

http://www.haphousing.org/default/index.cfm/landlo...

Also, here is a link from the bigger pockets blog it talks all about section 8.  These are different articles regarding section 8

http://www.biggerpockets.com/renewsblog/?s=section...

Have a good 1

How to do Section 8

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