[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
One question many new real estate investors grapple with is whether it’s a good idea to rent to Section 8 tenants. The Section 8 housing program, officially known as the Housing Choice Voucher Program, is a federal initiative that assists low-income families, the elderly, and the disabled to be able to afford safe and sanitary housing in the private market. Understanding how the program works and its potential benefits and challenges can help you decide if it’s a good fit for your investment strategy.
Overview of the Section 8 Program
The Section 8 program is administered by local Public Housing Agencies (PHAs) across the United States. These agencies receive federal funds from the U.S. Department of Housing and Urban Development (HUD) to provide housing vouchers to eligible individuals and families. Participants in the program can use these vouchers to rent apartments or houses from private landlords, who, in turn, receive rental payments directly from the PHA.
How Section 8 Works
Under the Section 8 program, the rental rates are typically tied to the number of bedrooms in the unit. This means that properties with more bedrooms generally command higher rent payments from the program. The exact rental rate, or Payment Standard, is determined by the PHA based on local market conditions. In some cases, the Payment Standard may actually be higher than the market rent for a similar property, providing a potential advantage for landlords.
When renting to a Section 8 tenant, the total rent may be divided into two parts: a tenant-paid portion and a portion paid by the Section 8 program. The tenant’s contribution is typically 30% of their adjusted gross income, while Section 8 covers the rest. This arrangement provides landlords with the security of knowing that a significant portion of the rent will be reliably paid by the government.
Increasing the Rental Rate Over Time
Landlords participating in the Section 8 program can request an increase in rent, but this process is regulated by the PHA. Typically, landlords must submit a request for a rent increase, which the PHA will review to ensure the new rate is reasonable and comparable to similar units in the area. The ability to increase rent over time varies by market, and the process may differ slightly depending on local PHA rules.
Market Differences in Section 8
It’s important to note that while the Section 8 program is federally funded, its implementation can vary significantly by area. Different PHAs may have different procedures, payment standards, and requirements, so it’s essential for landlords to familiarize themselves with the specific rules in their market. This variability can affect everything from the application process to how much rent you can charge and how you manage tenant relations. To learn about the rules in your area, the best and easiest thing to do is to call your local PHA for this information.
Screening Section 8 Tenants
A common misconception among landlords is that they cannot screen Section 8 tenants as rigorously as non-Section 8 tenants. In reality, landlords can apply the same screening criteria to Section 8 tenants as they do to others. This includes setting requirements for credit scores, rental history, and checking for prior evictions. By maintaining high standards, landlords can ensure they select tenants who are likely to pay rent on time and take good care of the property.
Our personal experience with Section 8 tenants has been positive. We’ve found that many Section 8 tenants are diligent about paying rent on time because they do not want to risk losing their housing voucher. If a Section 8 tenant is evicted for violating lease terms, they can indeed lose their voucher, which provides them with a strong incentive to comply with rental agreements.
A Strategy for Maximizing Section 8 Rental Income
One strategy that some investors in our community use involves purchasing properties with the potential to increase the number of bedrooms. For example, an investor might buy a 3-bedroom house with an unfinished basement, attic, or an oversized garage that could be converted into additional bedrooms. By converting the 3-bedroom home to a 5-bedroom, the investor can then rent it out through the Section 8 program at a much higher rental rate, as you can see from the table below. In this example from Oklahoma City, the payment rate for a 3 bedroom is $1,407 vs. $1,837 for a 5 bedroom. This approach can turn a property that would not have cash-flowed well as a 3-bedroom into a highly profitable investment as a 5-bedroom rental.
Key Takeaways
Renting to Section 8 tenants can be a great option for real estate investors, particularly those looking for a steady and reliable income stream. While there are some specific considerations and potential challenges, understanding the program and how to navigate it effectively can make it a valuable part of your investment strategy. Whether you’re looking to increase rental income by adding bedrooms or simply seeking a reliable tenant base, the Section 8 program offers opportunities that can be both profitable and rewarding.
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