Is Section 8 a Good Choice for Landlords?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Hannah in AR: Hi Brian, Two months ago I inherited three rental houses from my brother’s estate. He was a landlord for almost 30 years, but I have no experience with it. The houses are in two small towns near each other but about 45 miles from where I live. The houses are between 25 and 40 years old. Although they are a little old, my brother kept them in good repair and was picky about having tenants that took care of them. Two of them are two-bedroom houses and the other has three bedrooms.

My husband and I have been racking our brains about what to do with these houses. One is currently vacant and the other two have tenants with leases that expire over the next several months. After lots of discussion about selling them, we have finally decided to keep all three as rentals. However, because one has been vacant for several months, we are concerned if we can keep them rented out full time. My husband’s sister suggested that we look into the Section 8 program because there is always a waiting list of approved tenants. Do you think this is a good idea and where do we start? 

Answer: Hello Hannah. Most Landlords either love or hate the Section 8 program. They love it because they don’t have to worry about receiving most of their rent on time, every single month. They don’t need to worry about checks being “lost in the mail” and a million other excuses tenants use to not pay their rent on time. And they love it because they can charge a lot for their rent.

On the other hand, one of the reasons that some landlords don’t like Section 8 is the government regulations involved. They don’t want the government involved with their rental properties. The regulation includes a safety inspection when the tenant moves in and ongoing inspections once a year or every other year. After the inspection process, you’ll need to fix every item on their list before the tenant is approved for move-in. The inspection criteria are more stringent than most landlords expect, so the expense can be costly. Because Section 8 is a government housing program, you can expect the process to move slowly. 

Section 8 housing is a government-sponsored program with its roots in the United States Housing Act of 1937, which authorized housing assistance for low-income Americans, and access to safe and sanitary rental properties. Today, Section 8 housing is formally known as the Housing Choice Voucher Program. It provides financial assistance to nearly 5 million households across the country. If the Section 8 program didn’t have serious advantages, there wouldn’t be so many property owners offering units through the program.

One of the first things you should know is that there are two ways that section 8 works — Voucher-Based and Project Based. Tenants with voucher-based assistance may choose where they live, while project-based vouchers are attached to a specific unit. Therefore, if a project-based tenant moves, the rental assistance stays with the unit, and cannot be carried with them to another building. My understanding is that HUD stopped awarding new contracts for the Project Based program in the 1980s, so only already-participating landlords can renew their contracts today. 

Although Section 8 is a federal program, it is administered through what is known as your local public housing authority (PHA). You want to start by finding the PHA responsible for section 8 housing where your houses are located. The PHA should provide you details on the local process and the method for posting your vacant units. My suggestion is that after you talk with your local PHA and you want to go ahead with Section 8, you start with the house that is currently vacant but hold off on the other two until you have some real-life experience with the program in your area. 

Because the program is administered locally, some of this may vary but here is what you can generally expect;

• Fill out a Section 8 landlord application. This is going to require information about the house and some personal information. 
• Once the landlord application is approved, the PHA will schedule a property inspection. In general, they will analyze the property for general safety and livability, looking at overall building quality, including plumbing, electrical, HVAC, and that door/window locks are all in working order. Each PHA has slightly different standards, so you should check before your inspection to ensure your property is up to par. 
• The next step is usually negotiating rent with the PHA. The application should have asked how much you want for rent so this should not be too difficult. Section 8 allows you to charge the going market rate for similar houses in the area. The catch could be how the PHA determines the going rate.
• Next, you begin screening tenants. Because the PHA almost always has a waiting list, they will probably send prospective tenants your way. Although the PHA does a preliminary screening, it's only to qualify for the voucher program. You need to do additional screening based on your criteria as long as it complies with the Fair Housing Act and any local laws. 
• After you and the tenant sign a lease and you submit the signed lease to your local PHA, you will receive a housing assistance payments (HAPS) contract from the PHA to sign. Once the HAPS contract between you and the PHA is executed, you will begin to receive monthly HAPs from the PHA and the remainder of the rent payment from the tenant. Be forewarned that it can take a couple of months before the checks begin arriving, but you can expect to be paid any delinquent amounts. Also, you need to know that the PHA pays most of the rent but not all of it. Generally, the tenant pays 30% of their household income toward the rent, and Section 8 picks up the balance above that. If the tenant fails to pay their portion, you have the same rights to evict them as you would any other tenant.

Hannah, now that you have an overview, you should also consider the pros and cons.

Pros:

• Guaranteed payments for 70% of fair market rent.
• Decent annual rent increases (often 3% to 5%).
• Low vacancy rates.
• Fill vacancies fast.
• Good profit margins.
• Partially screened tenants.

Cons:

• Local PHA bureaucracy.
• Getting rental payments started.
• Annual inspections.
• Possible tenant issues that you try to screen for with your screening process.

Hannah, now that you have some basic information, the good, the bad, and the truth, go forth and choose well! The Section 8 Housing Voucher Program has its place and can be a viable option for many landlords. But before jumping in, make sure you know exactly what it is you’re getting into.

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