Hard to become Section 8 rental owner or bad idea?

Question

I know that most landlords avoid this route but I heard it provides stable cash flow and less evictions required but you need to make the property pretty durable. A high NOI portfolio has come up and is affordable/possible to do compared to CA prices.

Anyone have any experience with Section 8 rentals?

Anyone have any experience with Section 8 rentals?

Kiera Underwood · Answer

Hey Gary! Here's my 2 cents on Section 8. I am speaking from experience in the Oklahoma City market so this could differ from where you're looking.

What I 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. I can’t speak for other states but 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. 4. 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 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 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.

The truth is that section 8 IS more work, but your PM should absorb that. I know of property managers that will advise against section 8 and I wonder how much of that comes from them wanting to avoid the process because they've not developed systems to effectively handle the process.

Jennifer Donley · Answer

Hi Gary, I have a portfolio of 26 Section 8 properties in the St. Louis area and love it.  It's now the only thing I do.  Here are my experiences.

My properties are all in B and C class areas.  I love Section 8 for all the reasons stated above and a few more - the demand for Section 8 housing is very high and the supply is low (at least it is here and I hear this is the case elsewhere too). If you add on 1 more qualifier - supply of quality housing - the supply is very low.

So my strategy is to provide one of the nicest units in the neighborhood.  I don't go crazy but the units have modern colors, a relatively updated kitchen and is very clean.  Doing this means I get a lot of interest quickly - the last unit I put out for rent had 30 showings and 13 applications in 4 days.  Then I screen meticulously (as I would for market tenants too), pick the best applicant, and I do a home visit as the last piece of the screening process (again, would do this if I took market tenants too).

In my areas, I get 5 to 10 percent more in rent than I would from market tenants. I don't know how that will play out where you are but it's not uncommon to get more from Section 8 than from market rents.

Lastly, I have made it my mission to understand the rules & processes of my local housing authorities (I deal with 2 here) so that I can maximize rents and ensure good lease compliance from tenants.

I am currently owed $0 in past due rent (including the tenant portion) and my tenants are taking good care of their properties and are easy to work with.

I think every Housing Authority operates a little differently but ours here don't take 3 months to start payments.  Usually within 30 days of move in, we get our first payment and it's clockwork from there.  Knowing the steps of the process so knowing how/when to follow up has helped me here.

Jennifer Donley · Answer

@Hank Walter I don't think you can do a 2 year lease w Section 8 tenants.  At least, we can't here.  The lease dates have to be the same as the HAP contract dates, which are always for a year initially.  You may be able to do a longer lease after the initial 1 year term.

Pete M. · Answer

@Gary Garcia  I've got a few Sec 8 rentals (SFRs) in Oklahoma City.  To avoid repeating much of the same, I'd say @Kiera Underwood is spot-on, and @Noah Chappell as well.  The rules and processes will vary per area (and per housing group).  Once COVID hit, many housing groups also kind of "froze," meaning they weren't doing inspections--which then meant they weren't approving applications for new tenants or moves.  As you can imagine, that basically then means you couldn't place a new tenant (unless you were willing to let them live for free, since housing won't pay until inspection is done), and tenants trying to move were suddenly stuck in limbo.

Sec 8 tenants also often have large families, so go for durability when doing a rehab.  Flooring life will be much shorter than in a traditional rental (in many cases), for example.  Screen the heck out of the tenants, you need to find the better ones to make it worth it; bad tenants will cost you way more than you stand to gain.

Hank Walter · Answer

Gary,

Section 8 Tenants are usually solid options as long as you screen well, like mentioned above. I've talked with several other investors in the Minneapolis Area whom have Section 8 and Market tenants. I currently have market tenants myself but actively pursuing some Section 8 opportunities. Their Section 8 tenants have had no complaints and are low maintenance where as the market rate tenant has complained constantly about the property, paid late, and cannot be evicted right now. It pays to screen as well as you can.

Taking a look at some of my other markets such as Akron, OH and Oklahoma City, OK. I've noticed in Akron, OH many Single Family Rentals are getting leased up at below market rate to fill the vacancy when they could be leasing up a Section 8 tenants and receiving a stronger Cash Flow. The Akron example was leased at $795/month to a market tenant when they could be getting 90-110% of $1,069 (3 bedroom), which is how Fair Market Rent is calculate by the HUD.

As for Oklahoma City, refer to Kiera's post above as she and her team gave us an amazing tour, provided in-depth knowledge, and discussed what methods they have developed, in terms of leasing up properties.

A common theme I've picked up on for Section 8 is to make the property a little more sexy than usual, some tenants with vouchers have never had granite looking counter tops or stainless steel appliances and would love to stay there long term now that they have had it. The catch .22 to that is not to make toooo sexy and over it improve it. If you really like them after having screened and doing a home visit, lock them into a 2 year lease.

Alyssa Dyer · Answer

I'd echo on everything @Pete Krentz and @Kiera Underwood mentioned. I think the biggest thing people overlook with Section 8 is the management team. If the management team you hire is taking the work begrudgingly or doesn't want to do the work, I'd find another company to handle your Section 8 rentals. it's more work, often for the same pay. The incentive isn't there for your management company, unless that's a service they're excited about and have built systems for.

Pete Krentz · Answer

I used to manage a portfolio of apartments that had a lot of section 8 tenants. I didn't do leasing so can't get super specific but can offer at least my 2 cents on what I observed as the portfolio manager.Section 8 had both +/- as you're aware. The income was stable and the tenants on it in our area were more likely to pay because they didn't want to lose their section 8 vouchers. It can take years to get into the program so they generally are pretty cooperative. Section 8 had some weird habitability rules but in general were straight forward and easy to comply with. I just remember getting a lot of letters in the mail for a unit inspection where I had to send a maintenance man over to fix something very minor before they would sign off. Minor being replace a light bulb/plate cover to something real like broken toilet/appliance etc.

Section 8 does tend to fall into a certain category of tenants. Not always, but in general, are pretty hard on units as a lower income tenant tends to be. They were however better on them than my non section 8 tenants in the same buildings. Again, they don't want to lose their voucher so try to comply as much as they can. I personally didn't have any major issues with the section 8 system. They aren't tenants I would pursue in my own personal rentals because my units aren't priced for that type of tenant. If I did have those units, I wouldn't mind participating.

Zachary Ray · Answer

Section 8 requires a lot more hands on style of management. You have the housing authority as a middle man. Payment does come from the government and usually the tenant has a portion you must collect monthly. Avoid rough areas and you will be okay.

Gary Garcia · Answer

Wow, awesome input and advice. I am going out of my home state CA to find more affordable units for cash flow. I am thinking of a mix of section 8 and regular rentals.

Will Fraser · Answer

Well said, @Pete M..  Durability is your friend here!

Hard to become Section 8 rental owner or bad idea?

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