Section 8 housing has been controversial with real estate investors since its inception in the 1930s as a response to the Great Depression. The program has evolved ever since, and today its main purpose is to provide low-income Americans with subsidized housing. There’s a lot to consider about the program in general, including the pros and cons for real estate investors.
Pro: Stable Rent Payments
This is perhaps the biggest advantage of the program. Landlords can count on getting 70%-100% of the rent from vouchers given by the government. There are, of course, glitches in the payment system at times, but while it can take time for these payments to come through, they do always come.
The real advantage here is the possibility of mitigating some of the risks in getting tenants who don’t pay reliably. The 2020 pandemic has also highlighted situations where it could be possible to have difficulty collecting rent from even the most reliable private tenants even after the most stringent background checks. Otherwise reliable tenants are being furloughed from their jobs unexpectedly, through no fault of their own, and state governments are even issuing regulations forbidding evictions during the pandemic or putting a halt to all public hearing evictions.
Pro: Incentives
Naturally, any investor is hoping (and actively looking) for tenants who will take care of their property, but the definition of “maintain” can be open to interpretation and vary from place to place. One of the advantages of getting a Sec. 8 tenant is that their obligations are laid out specifically in the law. Since violating these regulations means a tenant risks losing eligibility for the program, there’s at least some incentive against actively damaging a unit.
Pro: Long-Term Renters
This is a general rule and not a given, but renters under this program tend to stay longer than private pay tenants, and especially if they like the management or landlord and the property itself. This can mean lower vacancy rates.
Pro: Large Pool of Renters
As of the government’s latest accounting, there are 10.4 million people and 5.4 million households participating in the program. For properties in a geographic area with a smaller pool of private paying tenants, this can be a serious advantage.
For would-be investors, it’s always wise to look for properties in locations with lots of jobs and the kind of amenities that draw a good pool of responsible private renters. For property owners who are already stuck with a property in an area where it’s difficult to rent, Section 8 may be something to consider.
Con: Dealing With Bureaucracy
Perhaps the biggest disadvantage when dealing with any government program is the vast amount of red tape involved. It can be enormously costly to qualify your property and maintain it to the standard, and all the bureaucracy is one of the biggest reasons for this. There are inspections to arrange, lots of paperwork to fill out, and some stringent owner responsibilities that have to be followed at every step.
Con: Payment Delays
While payments are reliable, there can be delays, and there’s little you can do about this. When a tenant initially moves in, the first payment from the government won’t even show up for 30-60 days. This is not in itself an insurmountable issue, of course, as the prepared investor can work around this. It is very important to be aware of this, however, and to factor it into all calculations regarding cash flow and profitability.
Con: Constant Inspections
The inspection form and checklist from the Housing Choice Voucher Program is enough to highlight this disadvantage. Even some of the best rehabbers can fail their first inspection since HUD is notoriously strict. It’s often easier to rent property to private tenants for this reason alone.
Con: Increased Wear and Tear
While the Sec. 8 rules do have specific penalties that incentivize tenants against damaging property or appliances, it’s also more common to see higher wear and tear on a property with tenants from this program.
Some tenants clearly feel less invested in a property when they pay little or even none of the rent. Naturally, there are some very careful and responsible Sec. 8 tenants just as there are unreliable private tenants: but the general trend is for greater wear and tear on properties.
Con: Difficulty Dealing With Delinquent Tenants
The positive of renting under this program is that the majority of the rent is guaranteed by the government. The downside is the difficulty of going through the convoluted and lengthy eviction process should the tenant become delinquent on whatever portion of the rent they are responsible to pay.
In these cases, it’s not unheard of for landlords to simply settle for less profit rather than try to go through the bureaucratic process of getting the tenant removed, which is followed by another lengthy navigation of red tape to get a new tenant. Private renters can also be delinquent, of course, but the process of removing a private tenant is normally going to be less costly.
Con: Little Recourse for Damage
While incentives are there to prevent major damage, that’s not the whole story. The nature of the program means that most participants will not be financially able to pay for any damage they might cause to the property. Often the only real recourse is for the landlord to charge higher rent and attempt to recoup the losses that way.
The Upshot
Overall, HUD’s housing program is a risky venture for an investor, and for most, the cons will outweigh the pros. While there are some advantages, there are even more disadvantages and risks inherent to the program. For most property investors, choosing a good location and rehabbing it well means you’re likely to make more renting to private individuals.
This doesn’t mean it’s impossible to turn a profit with the Sec. 8 program, and some landlords have done very well. What it does mean is that it’s even more important than usual to know exactly what you’re getting into, do all your due diligence (and then maybe do it again), and seek advice from experts and local landlords before entering the program.
Tune in to The Creating Wealth Show podcast to learn more about the pros and cons of various types of rental investments and get expert advice you can count on.
