By: Lance T. Denha, Esq.
Many people approach me on a regular basis and ask me why, in certain circumstances, would I advise a prospective investor or current investor of residential units to purchase inexpensive homes and rent them to low income families rather than purchase reasonably priced homes and turnaround and rent them to middle class families? Well, the answer is simple: accountability, security, guarantees, and instant cash flow! Let me explain.
Landlords and investors of residential housing seeking alternatives to increase and/or generate cash flow from their properties should seriously contemplate utilizing the Section 8 Housing Assistance Program. If all the steps are followed, an investor may find it an easy and effective way to have their properties fully rented, even in slow retail markets.
Section 8 Housing Assistance Program is a program setup by U.S Housing and Urban Development (HUD) to provide safe and sanitary housing to low-income individuals or families, the elderly, disabled or disadvantaged. Through issuance of Section 8 housing vouchers, HUD helps assist tenants by paying a portion of their rent. In order to receive Section 8 benefits, individuals are required to go through an application process through their local Public Housing Authority (PHA) office. Eligibility for these Housing Choice Vouchers is based on the applicant’s total annual gross income and family size. The gross income cannot exceed 50 percent of the median income in the area where the applicant is seeking assistance. However, PHA is required to provide 75 percent of its Section 8 vouchers to applicants whose incomes do not exceed 30 percent of the median income.
One of the core goals of HUD Section 8 Housing Assistance program is to provide safe, secure, liveable, sanitary, yet affordable housing for families through the issuance of Housing Assistance Vouchers. Keep in mind that the local Public Housing Authority never requires a landlord to house a particular family. The Landlord has the right to rent to anyone he or she wishes. However Federal law clearly states that “no Landlord may discriminate against any potential tenant on the basis of race, color, sex, religion, national origin or familial status.” The Landlord has the right to verify that the tenant is acceptable based on the Landlord’s normal and customary screening process which could include credit checks, background checks and employment verification, to name a few.
If investment properties are in a mid to low demand area then section 8 tenants could be the way to go with guaranteed rent for Landlords. If, however, such Landlords are in a particularly high demand location, such as close to a university, a hospital, a major company where renting demand would be high you would be better off going with more conventional market approaches. As any astute property investor understands, location of the real estate is essential for determining the demand base and seeking out prospective tenants!
As in any other type of investment which requires occupying the premises with tenants, there are some positives as well as some drawbacks to Section 8 Housing. Some Section 8 tenants really do have legitimate reasons for the subsidy, while others may have questionable motives. In short, some section 8 tenants abide by the rules while others abuse them. Below are some pros and cons of renting out units as a Landlord to Section 8 Tenants;
- Lower turnover and shorter vacancy periods- Typically lease agreements for Section 8 Housing lasts anywhere from 1 to 3 years, sometimes even longer;
- Rental Security- Rents are subsidized by the government therefore there is some form of security that the Landlord will be receiving payments on a monthly basis;
- Large pool of potential renters- In the event an existing renter moves out or if a Landlord is seeking renters, there is a wide array of access to finding existing tenants or replacement tenants through the Section 8 program.
- Strict Rental Responsibilities- Section 8 Lease Agreements are considered a great contract for the Landlord as there are very strict guidelines for their tenants to adhere to.
- Must bring House Up To Code- As a Section 8 Landlord, Full Inspection Necessary by local authorities is necessary and these local authorities will require Landlord bring the house up to code;
- Fear that Section 8 Tenant will not properly maintain premises;
- Inspections- House must be up to the Section 8 Housing Quality Standard.
Because the program is not widely understood, some misconceptions exist about section 8 housing, some deservingly so. Obviously, investors have to be careful who they place into their properties and be familiar with Landlord’s rights throughout the process. Investors would be wise to designate a professional agent to act on behalf of the Landlord to perform a complete screening of the prospective Section 8 Tenant. Nevertheless as an Investor/Landlord, Section 8 Housing remains another viable alternative to consider and potentially a great way to have properties rented out and ensure cash flow for years to come.