Section 8? Accept or Don’t? Why?

Question

What are the pros and cons of accepting section 8?  Any pitfalls, do’s or don’t?  I don’t know what I am getting into.

Jason H. · Answer

I posted this response below in another discussion related to Section 8 and thought it might be helpful to you as you consider whether or not to engage the program.

I may represent the minority viewpoint in this discussion, but if you are not in a rush to get a tenant, I would hesitate before going the Section 8 route.  I have been there and no way will you be getting me back into the program.  I will copy a response below that I gave to another investor in another discussion as to why I do not recommend it.  Like I said, I may be the only one who feels this way based on my specific experience with the program and the program rules in ATL may likely be different where my properties are.  I know you’re going to get a gamut of experiences from different people, so I just wanted to give you mine, since it was not a positive experience whatsoever.

“I do not recommend going the Section 8 route whatsoever, from a short or long term perspective. I know there are is a handful of investors who swear by it, but they are probably in a different market. In PGH, it’s not worth your time. There are so many hoops you need to jump through and so many inspections you need to pass in order to get paid by the program. You need to spend a lot of money to get your property in compliance with what the program deems as safe and habitable conditions (which is beyond what any normal investor would think is reasonable). There are annual inspections and if tenants damage your property and cause you to fail the inspection, they will immediately stop your rent payments until YOU fix them to a satisfactory level. And even upon re-inspection, there is nothing preventing them from nitpicking and giving you a new list of issues you need to fix, thus putting you in a never ending cycle of repairing the property and chasing your rent payments that you will likely never get. If your property is not in compliance, the tenant also has the right not to pay their portion of the rent to you as well. So they end up living there for free. It’s not worth the headache. Just put your property up on the open market and find yourself a great PM.“

Alyssa Dyer · Answer

I'll throw in my 2 cents. This is all from experience in Oklahoma, so it may differ for the market you're diving into. Happy to answer any questions!

What we like:

1. The government pays a portion or all of the rent. That’s a guaranteed payment every month.

2. If a section 8 tenant doesn’t pay they are at risk for losing their assistance.

3. Oklahoma is VERY landlord-friendly, even with section 8. If tenants don’t pay we are able to evict in ~45 days for under $500. Of course, this only applies to this market!

4. Again only for this market, for 4 and 5 bedroom homes, the government is willing to pay higher than market rent rates for section 8 tenants. That said a tenant often pays a portion of their rent, so you must update cosmetics, etc to make it worth the applicant's extra payment to you in order to actually get applicants at a higher rate. You also have to prove to section 8 that the property is worthy of higher payment.

5. We see section 8 tenants have longer stays at properties. It’s not across the board, but it is common.

What do be aware of:

1. Your first 3 months of rent payment will be delayed after you take over ownership. This is providing time for the agency to process the change in ownership in their end. You will be paid all back pay.

2. Your property manager should handle all correspondence/paperwork/leasing with section 8. No extra burden should come to you personally.

3. Once a property is qualified for section 8 it does not mean that you can ONLY lease to section 8 tenants. At turnover, you can market to section 8, non-section 8 in conjunction. Or if you no longer want to market to section 8 tenants, that’s totally fine!

4. If you have a section 8 tenant in place, once a year section 8 requires an inspection and repair of anything they deem deficient. Your PM should schedule this and also schedule any repairs and ensure that you stay within the guidelines. The repair requests are sometimes a bit nitpicky, but if a section 8 tenant has been in place for some time we are very rarely surprised by what comes up on these requests. The requests are a bit more expensive if it’s the first time you’re getting approved by section 8.

How you should best position yourself:

Because section 8 tenants often have families there can sometimes be more wear and tear on your house. We suggest keeping costs low by replacing any damaged items with durable items. So LVP instead of carpet, dome lights instead of ceiling fans etc.

Bryan Devitt · Answer

In most states you can't refuse to take it, in my state they pay above market in most cases so you can't price it above what they allow. You can refuse to fix stupid items so you don't pass inspection (i.e. paint worn off a stair riser). on average, it will not be taken care of as well, there will be more maintenance calls, more things will be broken, you need to have more documentation for everything before, during and after it is rented but you will get rent on time. In times like this, not having to worry about rent coming in might make it worth it. I think it really depends on where you are, what class you're in (there is a huge difference between war zone section 8 and the upper tiers of section 8), what condition you want to keep your buildings in, if you want to use a management company, if they're used to section 8, how much profit you want to make, etc

Marc Winter · Answer

@Celeste Nadal, to me it's not about 'section 8' per se, but rather who is the tenant and what is the character and background.  Section 8 is a subsidy, not a class of tenant.

There are good and bad in every group; one of our jobs as investors/landlords/property managers is to find the good ones!

We have very little problems with our local Sec 8 Housing Authority, and the tenants, if screened properly, are mostly 'ok' to 'pretty good'.

Crystal Smith · Answer

I was on a phone call yesterday with a mentee. During the discussion, he bought up a friend of his that was cash flowing about $10K a month on properties in Detroit (trying to get my partner and me to invest in Detroit. Not going to happen) During the pandemic friends cash flow has gone from $10K to $5K. The $5K all comes from Section 8.

I start my post with the story because that's the biggest pro.  My opinion regarding the do's around that Pro- Your standards for accepting applicants should be the same for section 8 as they are for a market-rate tenant. It's just a matter of finding a combination of objective requirements that you can use to attract the type of applicants you want.

Establish a minimum income requirement- 3x the rent- including the voucher as a source of income. Don't use 2.5x the rent. Your lease can also include periodic verification of employment.

Minimum FICO score requirement - The FICO score requirement should be high enough to attract Section 8 applicants that are working on improving. Set the requirement to low and .....

A maximum number of people in the property- This is where we use to run into problems. Your lease should clearly state the maximum number of people allowed to reside in the property and also give you the right to independently verify how many people reside there.

Naturally no previous evictions or rental judgments.

John Warren · Answer

@Celeste Nadal the only positive to section 8 and other similar voucher programs is the "guaranteed rent". The thing is, most of my tenants here in the Chicago area are fantastic and I really don't have collection issues. I also tend to target folks with good jobs who don't tend to bother me much unless there is a real maintenance issue. I had one section 8 tenant, and it was a nightmare. I cannot legally turn away section 8 in Cook County, nor would I break the law, but I do not have to accept tenants who do not qualify based on my minimum criteria. My minimum criteria typically are too high for section 8 tenants.  I also do not have to hold apartments for 45 days (the average time to get a unit approved) when I can have a market rate tenant in 2 weeks.

Matthew Terry · Answer

@Celeste Nadal

I'm closing on two Section 8 C+ SFH 3 bed properties in Oklahoma City. The PM I'm using specializes in Section 8 and will help guide me through all the paperwork and inspections. When they did initial walk-throughs, they noticed the home was in good condition, average wear	ear, and the houses were clean. I wanted Section 8 because I want to secure the rent during this pandemic. Even if the tenant stops paying or loses their job, I'll still break even on the property. Both leases are up later this year and I can choose not to renew and put the homes on the normal market if I feel that the required fixes upon inspection unnecessarily eat into profits. Some investors love Section 8, some hate it. The common theme is that Section 8 requires a lot more work on the management side. Since I'm investing out of state and my PM specializes in Section 8, that isn't an issue for me.Follow up with me in three months and I can update my experience after I close and have some experience with the property.

Nzinga Young · Answer

I agree with @Marc Winter and @Crystal Smith. While I did have a small headache with my local Section 8 screening process, I also got an excellent tenant and guaranteed rent. There's a lot of peace of mind that comes from Sec 8 tenants during this pandemic. I'm happy with my decision and will probably go this route in the future. Find out the HUD fair market rent in your area to see if it's even worth it and take your time finding the right tenant if you decide to go for it.

Justin Abdilla · Answer

I just wanted to chime in that this was my exact experience as counsel for someone who was renting section 8 in IL.  The payment was not an issue, but compliance with regulation was a huge huge hassle.  It's so easy to find a private tenant in Illinois that you should just list the property on any of the million sites that help people find housing.  I prefer hotpads, but your mileage may vary.  Good luck!

Alex Deacon · Answer

@Celeste Nadal I agree with @Jason H. on not going the section 8 route. We manage 700 units and about 10% are section 8. They take up 50% of our management time and you have to deal with a lot of nonsense with the government program

Section 8? Accept or Don’t? Why?

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