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SHOW NOTES FOR EPISODE 348: WHY I DON’T DO SECTION 8 ANYMORE
Guaranteed rent. Above market rental rates. Pre-screened tenants. Free advertising. Sound too good to be true? Exactly! For many real estate investors with properties in low-income areas, the appeal of renting to Section 8 tenants is almost to tempting to resist. However, in today’s podcast episode, Bill explores some of the myths behind Section 8 landlording and suggests to over zealous investors that they look before they leap.
When I was struggling to get good tenants in some of my properties in Memphis. I had 6 months of vacancies and was very concerned. I fired two property managers because they couldn’t bring me tenants. I had almost given up hope until a property manager I was considering said that he could help.
And the way he could help? Bring me an unending stream of Section 8 tenants.
I didn’t know much about Section 8 so, he proceeded to explain.
The term “Section 8 tenants” refers to renters who qualify for the government’s Housing Choice Voucher Program. Under the Section 8 program, landlords are guaranteed at least a portion of the rent to be paid to you by the government – the U.S. Department of Housing and Urban Development (HUD), to be exact.
And then I only heard the “pros” or good stuff about the program:
- Tenants can be placed fast! There’s a shortage of qualified Section 8 landlords so there is a major demand! He did tons of Section 8 and could get me and my properties qualified quickly.
- Guaranteed rent! The government guarantees the rent will be paid ONTIME like clockwork.
- Rental rates are above market! My rents were already low because I was having difficulty tenants. He said I would be getting about 30% higher rent.
- Pre-Screened Tenants! Another benefit for landlords is that tenants are pre-screened by the housing authority. In addition to qualifying a tenants income, the housing authority also performs criminal background checks and drug testing for all household members that are 18 years of age and older. This screening process may provide extra protection for your rental, as tenants have to pass both your tenant screening process and the housing authority’s.
- There’s a waiting list to get in the program! Some people have to wait 3-4 years to get on the program so they will not risk being bad tenants and losing their status.
- Long-Term Tenants! And because it is hard to get on the program and it’s also had to switch properties, most people stay year-after-year
- Free Advertising! The U.S. Department of Housing and Urban Development has a website that prospective tenants can use to find qualifying low-income housing. Several local housing authorities also maintain websites or separate lists of landlords who accept housing vouchers in their areas. Both of these services are provided free of charge to tenants and landlords.
Of course, he had me at GUARANTEED RENT!
So, I signed up the new property manager was ready to move!
Sure, I had to make a few property improvements that were a bit costly but it was an investment I felt was well worth it – considering what I was getting.
And, sure enough, in a matter of weeks, I had all my properties filled and the government checks were flowing in just like he said… like clockwork!
For one year, I was overwhelmed with above market cashflow and no problems, that was… until I was told HUD has a mandatory inspection they have to do once a year. But, that sounded good to me. They could check on my tenants and make sure they’re taking care of the place.
1. Annual Inspection
Section 8 requires an annual inspection of every participating property. And every single year, the inspector will find five to 10 items to list.
Why? Because it’s their job to list something. It proves to their supervisors that they’re actually visiting and inspecting every property on their list.
This is all well and good for keeping the bureaucratic cogs turning, but that doesn’t make it any more fair to you as the property owner.
I had a property where I’d spend $2,000-$3,000 on inspection-related repairs like clockwork every single year. Occasionally the inspector would point out a useful property repair or update. Most of the repairs were invented as busywork.
That $2,000-$3,000/year? That was my profit margin. Gone, every single year. I never earned a profit on that particular property.
2. HUD Does Not Pay Security Deposits
HUD provides housing vouchers that pays toward the tenant’s monthly rent, public housing authority does not pay security deposits (which are typical for most rentals). If you wish to collect a security deposit, you’ll have to collect this directly from the tenant. This could be an issue because the tenant has already shown to have income problems.
3. Initial Renting Delays
Eviction isn’t the only thing that takes longer when you’re dealing with a bureaucratic machine like Section 8.
You can also expect a delay in renting to the tenant, due to Section 8’s initial inspection—during which they may issue mandatory repairs to you before allowing the tenant to move in.
Section 8 must approve the rental agreement and all other leasing paperwork. Even once they (eventually) give you and the renters the green light, you can still expect to wait up to 60 days for the first month’s rent check.
Nothing happens fast with Section 8.
4. Eviction Difficulties
Section 8 tenants are notoriously difficult to evict.
When they fail to pay their portion of the rent, or violate the lease in some other way, Section 8 requires extra steps from you to file and complete the eviction process. It varies by jurisdiction, but it could mean extra notice given, extra forms completed, an extra hearing, or an extra review.
I’ve had evictions take 11 months before. Meanwhile, the tenant laughed all the way to the bank with nearly a year of free rent.
5. Higher-Risk Tenants
Get indignant if you want. But it’s true: lower-income tenants tend to be higher-risk tenants.
That risk comes in several forms. One of them is the risk of rent defaults; even the Federal Reserve reluctantly concedes that there’s a correlation between income level and credit history. And beyond lower average credit scores, lower-income renters tend to have less in savings to weather emergencies, as well.
But defaulting on the rent isn’t the only risk. My experience has been that Section 8 renters tend to be harder on their homes than middle- and upper-income tenants. Less gentle, less respectful of the properties. And that goes doubly for Section 8 tenants, who have less of their own skin in the game.
6. May Scare Away Non-Section 8 Tenants
Full-paying tenants may be turned off by your property if you have Section 8 tenants because of the negative stereotype associated with low income tenants. They may assume the worst of these tenants and not want to be their neighbor.
You cannot change the way others feel, but you can make sure your property is well maintained and appealing. In addition, it would be wise to only accept vouchers from tenants with a good standing rent history.
7. Lower-End Neighborhoods Come with Other Risks, Too
The tenants themselves aren’t the only risk in lower-end neighborhoods.
I’ve had excellent low-income tenants living in a rough neighborhood, and do you know what they did? They moved out as soon as they could afford it. I don’t blame them.
They complained about crime, which I sympathized with but could do nothing about. It caused high turnover rates, and as experienced landlords know, turnovers are the most labor-intensive and expensive point in the tenancy cycle.
Higher turnovers mean more work and lower returns as a landlord.
And the renters weren’t the only victims of crime—my properties got vandalized, broken into, and stolen from regularly. The most common incident involved dismantling the central air conditioning condenser to steal the copper tubing inside. That was $3,000 down the proverbial drain, every single time, because insurance wouldn’t cover theft in these neighborhoods.
I then installed steel cages over the condensers. Local lowlifes sawed through them and stole the copper anyway. I eventually stopped bothering to install central air conditioning in those neighborhoods.
In the end, I stopped investing in them altogether.
8. Difficulty Selling Your Section 8 Property
It may be difficult to sell your property with Section 8 tenants later down the road. Potential buyers who are not interested in accepting housing vouchers may not want to deal with the hassle of ending leases to be able to rent to the free market again.
How to Find Good Tenants in Not So Great Neighborhoods Without Using Section 8
So what do you do if you have a property in a tough area but still want to succeed…
It’s possible to still find good tenants but it’ll take some work. Even rough neighborhoods have good responsible tenants. You just need to know where to find them and how to keep them.
- STEP #1 – Find Good Tenants
- Look for hard-working people who work nearby and offer them a nice home close to work.
- Maybe they work graveyard shifts and don’t want to drive a long distance.
- Medical personnel (GREAT tenants!)
- 24-hour factory workers
- Security guards
- First responders: cops, fire personnel
- Go to the company and/or personnel departments of some of these workers with a special offer for their employees
- Hard-working single moms, working 2-3 jobs
- Special Needs Tenants
- If you set-up the place to their specs, agencies who place (and often pay rents) for people with special needs or special situations
- Contact agencies and let them know you have a home for
- Handicapped
- Disabled Vets
- etc.
- STEP #2 – Once you have good tenants, go the extra mile to keep your tenants happy
- Special amenities
- Play area in backyard
- Free cable
- Other special amenities
- Great service response times
- Make them feel safe
- Security/safety features
- Video doorbell
- ADT service
- Special amenities
Conclusion
The quality of your renters determines the quality of your returns. In over 5 years of landlording, I’ve found that to be true time and time again. And while there are plenty of good Section 8 tenants out there, my experience has been that it’s not just the tenants but the whole system.
The hardest lessons I’ve learned as a real estate investor came from investing in hard neighborhoods. Many of those lessons I wish I’d known when I first started out—they would have saved me tens of thousands of dollars in losses.
I no longer invest in Section 8 rentals because of those lessons. However, like most anything else, I’m sure there are those people who have learned and mastered renting to Section 8 tenants. However, for me, I don’t recommend that you do either, unless you have the time and resources to learn the strange world of low-end real estate investing. It’s a unique niche, and one that most investors don’t do well.
The most important point is that you weigh it out carefully, protect yourself, your tenants and your investment.
This show was sponsored by SMARTMOVE
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