Section 8 or Traditional Rental?

Question

With so many "experts" on Section 8 pushing courses out there right now I was tempted to get into Section 8 rentals. I would use a property manager to manage them as I only have experience with traditional rental properties.

I would love opinions from investors who actually use the Section 8 program and those who do not.

What is your opinion on which one is better long term and brings in more cash flow now.

I appreciate any information.

Greg Scott · Answer

I have had section 8 tenants in both SF and apartments. We still have a few legacy section 8 tenants.  Since they have been good residents, they can stay as long as they like, but we are not accepting applications for new section 8 residents.  Otherwise, our properties are now 100% market rate.

Why?  The reasons are many.

1) My top reason is that I can't stand bureaucracy.  If you invite the government into your business, you get the good and the bad.

2) In my experience,(and I may get some hate mail for this) the average section 8 resident is harder on the property.  I am speculating as to why, but it could be a lot of different factors.  Perhaps it is because hey have none of their own money on the line so they may not care for it as much as someone who does.  By definition, they are from a lower income bracket.  While there are amazing and awful people at every level of income, generally the lower the income, the more likely you are to have a rougher tenant.  Being harder on the property means more intensive repairs & maintenance, particularly on a unit turn.

3) If your focus is just cashflow, this may be a good strategy because the tenants tend to stay longer and the rent is backed by the government.  However, I like to focus on both cashflow and appreciation or forced equity.  I do that by upgrading the property, making it a more desirable place, which often allows me to get higher rents too.  That is harder to do if you have a rougher tenant base.

Related to the above, I've had much better experience with section 8 residents that pay a portion of their own rent. They seem to be more responsible, and the setup gives you some flexibility that you don't get with either market rate or tenants with 100% paid by section 8.

We had an elderly woman who was partly section 8 and her rent was $200 below market.  We applied to section 8 for an increase and they said they would pay $150 of it.  We did not want to raise our tenant's out-of-pocket by $50 so checked and were told section 8 would pay $150 more regardless of what we set the rent at, so we only raised the rent $150.  In this case, we got to keep a great resident, give her zero rent increase, and also improve the financial performance of the property.

Drew Sygit · Answer

@Larry Nielsen we manage almost 100 S8 leases.

Most important: THEY ARE ON SECTION 8 FOR A REASON!

Most S8 tenants have a history of bad decisions and from all that, many have only learned how to game the system.

We embrace S8 applicants, but screen them just like any other applicant.

Many have an entitlement mentality and try to leverage their S8 voucher and pretend to be helpless:

1) A percentage won't apply because they expect a landlord to waive application fees for them.

2) Many cry broke and expect a landlord NOT to charge them a security deposit.

3) Many of those same S8 tenants trying to avoid paying a security deposit, won't make an effort to call the list of nonprofits we send them that will pay their security deposit if they apply.

4) A lot of them try to avoid paying for utilities. S8 will include utilities in the rent payments to the landlord, BUT ONLY UP TO A CERTAIN AMOUNT. Many tenants abuse free utilities and stick their landlords with the amounts that exceed what S8 pays. Don't even get us going about S8 tenant retaliation via abuse of utilities!

5) Those that have to pay a portion of their rent - some don't. Again, they try to leverage the majority the landlord is getting, so they don't have to pay their portion.

6) We get the most maintenance requests from S8 tenants. Many won't lift a finger to do anything. They expect us to replace lightbulbs, won't change furnace filters and we also have lawn maintenance issues with them. Forget trying to walk them through a simple repair over the phone, to avoid sending a ServiceTech and saving an owner money. They always pretend to be confused and just want us to send someone.

7) Some will cause damages that S8 won't require to be fixed, but will threaten to move if you don't fix it. One demanded we paint the interior the color they wanted or they wouldn't renew their lease.

8) MoveOut damages typically exceed their security deposit.

These are the horror stories.

We also have several S8 tenants that keep their homes immaculate!

So, proper screening is EXTREMELY important!

Larry Nielsen · Answer

Thanks Drew. That's what I hear from people who have Section 8 rentals. That's good to hear. Screening is screening and just because someone is on Section 8 doesn't make them a bad person or mean they will wreck your house. Anyone can do that. That being said, I only have experience with traditional rentals personally so I am seeking advice and information. I appreciate your reply.

Drew Sygit · Answer

@Larry Nielsen with the proper screening system, whether S8 or cash-paying tenants - doesn't matter:)

Drew Sygit · Answer

@Matthew Banks yes to all you mentioned!

How can you screen ANY applicant without verifing their income & employment STABILITY - which requires verifying their last 2 years of employment history?

Same goes for verifying their last 2 landlords, unless same landlord for 5+ years.

We also have a screening requirement to do a video interview with any applicant having a FICO score under 620 - the whole point is to have them show us their kitchen, bathroom and one other room. How they look is how they will treat the place rented to them.

The requirement that they MUST pay an Application Fee and a Security Deposit, seems to filter out many of the potential problems.

Matthew Banks · Answer

Hey Drew, what type of things help you identify a good potential tenant? Do you check their current/previous residences & landlords? Do you check their employment? Are there things you look for when talking with them?

Balakishan Chenna · Answer

sorry Travis, you had bad experience. I did leased to 200 sections8 teanants in last 12 months . and overall 300+ in last 8 years. I personally own 22  homes and the tenants are 100% section 8. I did both section 8 and non section 8 past few years . And i had damages / evictions in both cases. Somehow I am sticking to section 8 for 100%. For cashflow ( higher than FMR / market rent) and guranteed rent ( offcourse you had bad experience). Guaranteed rent as in 99%+ sections8s

Travis Biziorek · Answer

I'd echo @Denis Ponder. I have 8 cash paying tenants and 3 S8.

Well, technically I now have 2 S8 because one of them had their voucher reassessed and it went to $0.

There are pros and cons to the program, and you need to be aware of them all. I'll take whatever tenant makes the most sense but I'd prefer a cash paying tenant.

My experience is in the Detroit market FWIW.

Denis Ponder · Answer

I have both.  I will take any tenant that meets the other requirements; between these two options the funding source doesn't really matter to me.

Section 8 or Traditional Rental?

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