Section 8 - how does FMR work?

Question

So i’m considering looking into investing in section 8 In my area because there’s a few places where i noticed the fair market rent was a good deal higher than normal rent. This gave me the thought that it would be a good idea to purchase in this area and receive these higher than average rents that HUD was advertising.So before i put any money behind the idea i looked into this further. I found a “landlord info pamphlet” for my town about section 8 rentals. It says “The Housing Authority does not approve rents based on the payment standard“ (which is listed right next to the FMR on their website, but is a few hundred less, or 90% of FMR in this area). It also says that “the amount of rent that will be authorized is based in rent reasonableness.”What does any of this mean? Why do they use “payment standard” instead of FMR. And if their rent standard isn’t even based on this and is compared to other rentals in the area, doesn’t that completely eliminate the advantage of renting section 8? Why would anyone take that extra risk if it’s required to generate the same income as a standard rental but will require much more work dealing with HUD?Am i misunderstanding something here? Are they basically saying that in this area they will only pay what a normal rental would get? In which case the FMR and even their own “standard payment” are essentially useless figures.Anyone who has experience with Section 8, please help!

James Mc Ree · Answer

One more thought... Section 8 is an income source, not something you invest in. Saying you invest in Section 8 is roughly akin to saying you invest in teacher salaries, as a teacher salary could be what pays your rent. Instead, think of it as you invest in a rental property. Anyone meeting your qualifications may rent the property. Your applicants may have income sources of a job salary, Section 8, Social Security, alimony, etc. Section 8 is just an income source regarding the money itself. Section 8 discrimination is being banned in more places, so check your target markets to see if you can opt out.Section 8 adds its own set of rules that come with the guaranteed payments. That's where a little bit of overhead comes in. Your property needs to pass an annual inspection in order to keep receiving those payments. No pass = no payment, but they do give you some time to address issues. I haven't found it to be onerous as most of what they ask for are things I would fix anyway.The biggest fear I have for Section 8 is my tenant does something fraudulent and it comes back to bite me. For example, suppose a Section 8 tenant receives a 100% rent subsidy of $1,000 because she is unemployed for a year ($12,000). I'm happy as I got full rent on day 1 of every month. It turns out she actually got another job and didn't tell Section 8 or me. She didn't qualify for any of that money. From what I hear, Section 8 will claw back $12,000 from me and tell me I need to sue her to get my past year's rent. That's a bummer if that is how it works out. I haven't had that experience, but it is a risk.You do have a very strong cudgel with Section 8 tenants that you don't have with traditional tenants. You can cause their voucher to be revoked. This is much stronger than eviction as it completely throws them out of the program. For example, suppose your tenant does $1,000 damage more than the security deposit. You say, "Pay up!" Your traditional tenant may just leave and not pay you anything. You can sue, but good luck getting it back. Your Section 8 tenant can say the same, but you can tell them you will inform Section 8 they moved out having caused uncompensated damage. That could cause them to lose their ticket to any future subsidized housing. In Delaware County, PA it's a 7 year wait to get another voucher. That tenant is more likely to stay and try to work something out with you. (You might not want that which is another problem.)

James Mc Ree · Answer

Section 8 will pay market rent, maybe a little more. Think of the FMR table as providing an upper bound, not a floor, on rent.The primary advantage of S8 is guaranteed rent payments. That is huge in COVID times and significant pre-COVID. You still have to screen your tenants well and will likely find they are rougher on your property than others. They will probably also stay longer. It's not a panacea. Most important is screening your tenant, just like any lease.Dealing with HUD is not difficult if you maintain your property well. You may find them frustrating if you strive for a "just over habitable" living standard. They primarily inspect for safety and basic functionality. You have about 15-30 days to fix a problem or they stop their payments. That can seem severe, but it also gets you moving on the fix.

Alex Nelson · Answer

This just seems contradictory to everything i’ve previously read about section 8. There’s hardly any incentive. As far as i can see it’s more work with less reward. It’s more hoops To jump through and more damage for just a tiny bit of reassurance that rent will be paid. I understand how it sounds good during COVID, but from what i’ve heard most people aren’t having much issues with receiving rent.