Advantages and Disadvantages of Section 8 Real Estate Investments May 19, 2015 By Homes4Income.com.
Photo Credit: David Sawyer/Flickr. Section 8 housing is a controversial topic among real estate investors. The program comes from a housing law passed in the 1930s during the Great Depression. At that time, the government was focused on providing high-quality public housing for low-income tenants. Over time, the program has changed, and its main purpose is to provide subsidized housing to low-income Americans.
The controversy is whether Section 8 housing is a good real estate investment. If you ask different investors, you are bound to find several conflicting views.
In the end, Section 8 housing has advantages and disadvantages. Depending on your specific situation, the details of your property, and the type of investment you are interested in, Section 8 housing may or may not be the best choice for you.
Advantages of Section 8 Real Estate Investments #1 Stable and Guaranteed Rent Payments: One of the biggest advantages of Section 8 property investments is receipt of stable and guaranteed rent payments from the government. In most cases, after someone applies for Section 8 housing and passes the screening process, the government gives them a voucher for 70% – 100% of their monthly rent.
Once you have a Section 8 tenant, you will begin receiving monthly payments from the government after a delay of 30-60 days for processing. And you’ll also receive rent from the tenant in most cases.
Though there may be an occasional glitch receiving government payments, these payments are more reliable than payments from some private pay tenants.
#2 Higher Rents: Section 8 allows landlords to annually reassess the rent charged to tenants, and increase the rent by as much as 8%. Over time, this means you could charge more rent with Section 8 tenants than private pay tenants.
- Example: If you rent your property for $800 per month, over 5 years you could raise the rent to $1,175.
- Tip: If the property is in excellent condition before a tenant moves in, the tenant does not have an excuse for excessive wear and tear. Also, the Section 8 program requires the tenant to maintain the property.
#5 Longer-Term Renters: Section 8 tenants are likely to stay for a longer time than private pay tenants, especially if they like the property and the management. As a result, the vacancy rate can be lower resulting in higher profits.
Disadvantages of Section 8 Real Estate Investments It’s great that people who need subsidized housing have the benefit of Section 8 housing. But the reality is that landlords have to deal with buying, rehabbing, renting, and maintaining these properties while working with the Section 8 bureaucracy.
Despite the advantages of Section investment property, there are some disadvantages. You should, therefore, consider all the potential problems before deciding to qualify a property for Section 8 housing.
Below are some of the challenges of Section 8 housing, which present an opportunity for some of the best real estate investors who can profit from the resulting higher comparable rents.
#1 Government Bureaucracy: One of the biggest disadvantages of Section 8 is dealing with government regulations and red tape. It’s costly to qualify and maintain a property for Section 8 housing, partially because of the government bureaucracy.
Making things worse, offices of the Department of Housing and Urban Development are often understaffed, resulting in slow and unreliable service that inevitably reduces the landlord’s profits.
#2 Delayed Payments: The Section 8 process can be slow and laborious, which in the end results in a delay in getting a tenant in the property. Then after a tenant moves in, the first government rent payment is not received for 30-60 days.
Though Section 8 housing can be very profitable for savvy landlords, investors must be prepared for dealing with inherent delays.
#3 Accounting Delays: Part of dealing with a government bureaucracy is dealing with accounting delays. Even when accounting issues are in your favor, the time and energy to deal with a Section 8 office to straighten out their error can be costly.
#4 Strict and Costly Inspections: Properties qualifying for Section 8 housing must pass strict inspections, often making it easier to rent properties to private pay tenants.
The rehab of Section 8 properties can be more expensive because of the strict standards, with the best rehabbers often failing the 1st inspection of a Section 8 property, which again makes the Section 8 program unappealing to investors.
- For example, a minor oversight by a rehabber to repair the smallest pinhole hidden in an obscure location can cause the property to fail a Section 8 inspection.
#5 Increased Wear and Tear: In some cases, Section 8 tenants cause more wear and tear to a property than a private pay tenant. Because their rent is subsidized and possibly completely free, a tenant may feel less invested in the property, which can result in irresponsible and careless behavior that increases wear, tear, and damage.
Section 8 properties can therefore be more costly to maintain than private pay properties, which must be built into the monthly rent.
#6 Little Recourse for Damages: Once a tenant damages a Section 8 investment property, the landlord has little effective recourse to recoup costs for damages.
Ultimately, this raises overall maintenance costs, and landlords must charge higher rent to recoup their costs.
#7 Delinquent Tenants: Though the majority of the Section 8 rent is paid by the government, the tenant is usually responsible for paying a portion of the monthly rent.
If the tenant doesn’t pay his portion of the rent, the landlord is forced to go through the Section 8 eviction process, settle for less profit, or possible even lose money after all maintenance and repair costs.
Sometimes, landlords are reluctant to report a tenant who is late on their rent payments. Reporting the tenant could lead to a long bureaucratic process to have the tenant removed. Then once the tenant is evicted, the landlord has to go through the Section 8 process of getting a new tenant.
Although landlords deal with both private pay and Section 8 delinquent tenants, Section 8 delinquencies are more costly due to bureaucratic regulations. Therefore, landlords should anticipate the non-payment of Section 8 tenants, and adjust the rent accordingly.
Well Rehabbed Properties in a Good Location Rent More Quickly to Private Pay Tenants If a rental property is in a good location and well rehabbed, you can generally rent it out to a private pay tenant more quickly than you can obtain a Section 8 voucher.
It’s often more profitable, therefore, to be more selective choosing investment properties and do a better job with the rehab, so you can more quickly rent to a private pay tenant.
Take Away: Is Section 8 Worth It? There are significant advantages to Section 8 housing that all real estate investors should consider. However, there are disadvantages and risks inherent in Section 8 investment properties.
If your property is in a good location and you do a great job with the rehab, you’ll probably make more money renting it to private individuals. But some of the best real estate investors take the negatives of Section 8 housing that warrant higher rents, and turn them into higher profits.
If you decide to invest in Section 8 housing, make sure you understand the advantages and disadvantages, and have a solid plan to make a profit.