Why a Large Chunk of My Portfolio is Section 8

I remember the first time I read about the section 8 system. It was way back before I ever bought my first property, when I knew basically nothing about real estate. But, the concept of section 8 and guaranteed rent blew my mind! That basically solved one of my biggest fears in investing, the “what if my tenants don’t pay me” scenario.

Flash forward to today, where a large chunk of my portfolio today has subsidized tenants. In the wake of the pandemic and coronavirus, I couldn’t be more thankful that I had made this business decision.

I’ve been wanting to write an article on this topic for a long time because I know it’s such a contested subject in the real estate investing community. Don’t get me wrong, working with section 8 is far from a merry ride of guaranteed rents; you are doing business with the government, and with that comes plenty of headaches. In this article, I’m going to cover some of the reasons why many people pass over working with section 8 as well as some of the benefits and hidden opportunities.

Why People Are Afraid of Working with Section 8

The number one reason I’ve read or heard as to why investors don’t want to work with section 8 is the stigma around the tenants. “Aren’t they bad tenants” and “I’ve heard they destroy your unit” are some of the more common things I hear about. The truth is some of my section 8 tenants are some of the best tenants I have. Sure, you’ll have ones that are bigger headaches than others or may cause more issues, but you’re bound to have that either way the bigger your portfolio gets.

Even better, I’ve noticed that these tenants tend to be much more cooperative and even grateful. I don’t know if it’s true across the country, but in Boston, it’s incredibly hard for a tenant to secure a section 8 voucher. The waitlist here is at least a couple of years, and I’ve heard of numerous accounts of people waiting 5-10 years. So, once they get onto the program, the tenants have less incentive to be disruptors, as any tar on their record could potentially jeopardize their status with section 8.

The other issue I hear quite a bit about section 8 is that it’s too hard dealing with the authorities and the inspections are too much. With regards to dealing with section 8 directly, sure it can be a pain. It’s a government program, and when has anything been easy when it involves Uncle Sam? Yes, you’ll have more paperwork, and yes when you call you’ll have to be put on wait lines and talk to some less motivated employees, but I think that’s a pretty small price to pay for what you are getting.

And finally, in terms of dealing with inspections, there is a misconception out there that section 8 inspections are some difficult stress tests. No, the folks at the authorities don’t want people living in dumps, but that doesn’t mean they are looking for anything extravagant. As long as you provide a clean unit, which you should one way or the other, then you’ll be fine. Are there things that they can be sticklers about during inspections? Absolutely. But once you do it a couple of times, you’ll start to figure out what they prioritize and look for. Again, I think I the headache is well worth it.

Opportunity in Working With Section 8

Now that we debunked some of the common objections, you should know that there are a number of opportunities that come up when working with section 8 that can actually make your investments more profitable.

The one opportunity I’ll talk about here, and probably the biggest one that I’ve found to be true is the deficiency in the method section 8/HUD uses to slate market rents. They typically break down market rents by zip code, which in a big and very pocketed city like Boston can lead to major inefficiencies. In Boston, there are neighborhoods that are under one zip code but can vary drastically in pricing from a property valuation perspective as well as rent figures. What that means is I can essentially find a property in a “less desirable” neighborhood in zip code x, and then push the rents up pretty aggressively based on the rents that section 8 may be willing to pay for a different (and potentially more desirable) neighborhood but in the same zip code.

Now in reality it doesn’t always play out so cleanly, but most of the time we are able to get very strong rents for our buildings compared to the neighborhood, especially when we provide nice cleaned-up units. However, I will concede that Section 8’s inefficiencies is not the only reason for this premium; the demand for clean rental units close to the city in Boston has been astronomically high. Given the economic expansion of the last 10 years across the country, I would venture a guess that most big cities have also had major demand build up for more affordable/basic housing.

Know Your Market

You can see there are some opportunity gaps by using section 8, though I should say that this is heavily market dependent and you really need to know your local markets inside and out. There are certainly plenty of pockets even around Boston where this sort of strategy wouldn’t make sense. The more expensive/ premium markets’ rents are so high that you would likely be losing money working within section 8’s rent standards.