Pros & Cons of Being a Section 8 Landlord
The Section 8 program can be a solid investment, but what do landlords of Section 8 properties really have to deal with regularly?
Being a landlord is no easy matter. Landlords are the true heart of the multifamily industry, as properties simply can’t run without one. While any property can prove to be a challenge, it has been said that section 8 properties seem to stand out more than others as far as landlords are concerned.
While there are many reasons to invest in a section 8 multifamily property, there can be quite a few drawbacks as well. From what we’ve been able to dig up on the subject, here are a few of the advantages and disadvantages of being a section 8 landlord.
Advantages of Being a Section 8 Landlord
Regular Payments from HUD: A common drawback for landlords, especially those who own properties in lower-income areas, is the challenge of getting payments on time. Section 8 landlords, however, need not worry about this issue, considering 70% to 100% of a tenant’s rent (depending on their income level and the specific program) is paid for by the U.S. government. Furthermore, rents don’t remain static under the program-- in order to further incentivize landlords to keep participating in the program, HUD will typically provide a rent increase of between 5-8% each year.
Reduced Vacancy Issues: Landlords are able to access a verified waiting list of Section 8 tenants in their area after getting approved for the Section 8 program. Additionally, they can still list their property on websites-- which enables even more tenants to actually reach out to them in order to rent out their units. Interestingly, there is usually a long waitlist for Section 8 units, so landlords typically never have to worry about a lack of interest. As a landlord, this means that marketing expenses are virtually zero, which is undoubtedly a massive advantage, especially in today’s market. This is particularly true if there are a lot of vacancies in your area and market-rate apartment complexes are competing for tenants.
Reduced Capital Expenditures: While a Section 8 property must still be kept reasonably well-maintained while renting to tenants, landlords generally don’t need to make the more common large capital investments in upgrading the property’s aesthetic nature. Unnecessary things like fancy landscaping, brand-new appliances, and new flooring are incredibly expensive-- but, since the Section 8 program brings tenants to the property, landlords will not need to invest in these things in order to keep the units rented.
Disadvantages of Being a Section 8 Landlord
Bureaucracy and Red Tape: To apply for the Section 8 program, as well as to stay current, investors need to fill out a very substantial amount of paperwork. Additionally, unlike with renting out units privately, a single error could lead to a delay in the scheduled payment from HUD, or even worse, nonpayment. In many situations, initial Section 8 applications can take anywhere between 4 to 5 months, which many landlords/borrowers/investors may not find to be as flexible as they would want. Even after a landlord is granted final approval, it has been known to take several more months for them to receive their first payment.
Rent Limits: One of the most significant downsides to participating in the Section 8 program is the fact that rent must adhere to a prearranged amount set by HUD. These prearranged rent amounts are based on the Fair Market Rent (FMR) for the specific area in which a property is located. While it’s within the framework of the program that rents are generally given a 5-8% boost each year, if they start off substantially lower than what a landlord could get on the open market, this may not matter. In general, if an area is desirable, and rents are growing quickly, a landlord will often be able to earn significantly more profits outside the limitations of the Section 8 program.
Tenant Damages: Section 8 tenants often have a bad reputation of being “careless”, due to the fact that they are not generally responsible for paying for any damages they cause. Objectively speaking, this varies based on the individual tenants in a building-- if a landlord takes care to be particularly selective about the tenants they choose, this may not be much of a problem.
No Security Deposits: Security deposits are typically a standard for apartment landlords seeking to ensure that they aren’t left holding the bag if a tenant damages their property. However, security deposits are somewhat more elusive in the Section 8 program. The government will not provide them-- and, while a landlord is still within their rights to ask a tenant to pay a deposit, section 8 tenants often do not have enough money to pay for them.
Eviction Challenges: If a tenant will not pay rent, vandalizes your building, or engages in aggressive or disruptive behavior, it would be natural to evict them. However, evicting a Section 8 tenant can turn out to be a logistical nightmare, due to the fact that HUD’s Section 8 eviction rules are extremely strict. Even if a landlord does end up successfully evicting the tenant, the tenant can contest the eviction using a publicly-funded attorney, (or, at the very least, a partially subsidized one) meaning that the landlord could end up spending thousands of dollars and hours of time defending their decision against a single troublesome tenant.
Regardless of what you take from these points, the Section 8 program isn’t going anywhere any time soon. Should you choose to be a part of it, we hope that you will share your experiences with us!