Section 8 housing is a unique niche of real estate investing – and also one that has unique benefits as well as disadvantages. It’s important that every investor considering this sector be fully aware of the issues involved. Here is a breakdown of the pros and cons.
Pros to Section 8 Housing
The Section 8 program has several advantages that make it attractive to investors. These include:
- Guaranteed Rent. Collections can often be a struggle in affordable housing – the sheer necessity of receiving timely rent is often a huge factor in management. With Section 8, you will always get the majority of the rent on time, every time, as it comes directly from the government. Since failure to pay the rent on time can cost these tenants their right to participate in the Section 8 program, they are often more reliable than many other types of tenants.
- Pre-Screening. All Section 8 program recipients are reviewed and approved by the housing authority before getting into the voucher system. The factors assessed can include both income and criminal backgrounds. It’s safe to say that this screening process is far more thorough than most landlords ever undertake. As a result, these tenants are typically more problem-free in this regard.
- Larger pool of potential tenants. Since Section 8 is a very large program with millions of voucher recipients, it allows you to cast an incredibly large net when trying to find a renter for your unit. In many cases, there are already waiting lists of those with vouchers. Clearly this extra boost of customers makes renting your unit much easier under the program. In addition – in some blighted areas – this may be the largest pool of potential users in the market.
- Free Advertising. The S. Department of Housing and Urban Development has its own website that tenants can use to find affordable housing to use their vouchers on. Many local housing authorities also maintain websites and similar lists of Section 8 opportunities. All of these services are provided free of charge to both tenants and landlords.
Cons to Section 8 Housing
Before you say “OK, Section 8 works for me” you need to also be aware of the potential cons of this program.
- Continual Inspections. A huge part of the Section 8 program is providing housing that meets the criteria of the housing authority. This requires not only an initial inspection, but continual inspections thereafter. Some owners do not like the periodic scrutiny and risk of additional renovations required.
- Rent Control. The Section 8 program is founded on the premise that all rents must be in-line with an index called “Fair Market Rent” (FMR). Although you are free to set your own pricing, you cannot participate in the program if you exceed this range. In some markets, the FMR is considered too low and some landlords feel that by being a part of the Section 8 program they are not getting rents as high as they otherwise could and are potentially being stuck in a rut by the government.
- Difficult Tenants. Because Section 8 residents have very little “skin in the game” by only paying a portion of the rent, they can often do extreme property damage out of lack of care, and this can cause unusually high repair costs – not including the fact that the housing authority is continually inspecting for these issues. In addition, many landlords worry that having low-income residents may scare off more affluent potential tenants.
- Not as easy as it looks. Many landlords believe that the Section 8 program will much simpler than it actually is. The housing authority will not help you find tenants, collect rent, make repairs, or make the residents follow the rules. They merely offer financial assistance. This disappoint some landlords who expected much more assistance.
The Section 8 program is not for everyone. Some landlords think it’s fantastic and others hate it with a passion. It definitely has strong benefits and disadvantages to consider. Another option is to test it out and see if it works for you on a limited basis and make your own decision based on actual experience.