In the heart of the Great Depression, the United States Congress created the Federal Housing Administration. The goal was to make home ownership more affordable for those with lower income levels.
In 1937, the U. S. Housing Act addressed the needs of low income citizens through establishing public housing units. The intention was to reduce homelessness and alleviate the problems of substandard housing. These units once had a reputation of being poor quality, but through the years, HUD has worked hard to improve their quality and make them potential opportunities for private investors. Real estate investors have conflicting views on whether section 8 housing is a good investment. However, there are many reasons why Section 8 tenants may be more lucrative than private pay tenants.
Low Income Apartments for Rent
Of course, one of the first concerns as an investor is where the property is located and its condition. It used to be the case that most low income housing was located in areas that were referred to as “the projects”. However, this is not always the case anymore and there are many single-family homes in nicer neighborhoods to be picked up at a reasonable price.
HUD is working hard to break the stereotypes that were once associated with low income families and create worthwhile opportunities for investors. HUD is there to help investors offer a nice place to live to reduced income tenants. If you have non producing properties in your portfolio, this could be a great opportunity to turn them into an asset instead of a liability.
Opportunities for Savvy Investors
Renting Section 8 property means that you will receive consistent rent payments from the government. Government vouchers range between 70 and 100 percent of the monthly rent owed. Under Section 8, landlords can increase the rent by as much as 8 percent every year. This means that eventually you may receive more from section 8 tenants than you do from private ones. This is like getting an eight percent return on your investment yearly.
Section 8 also requires the tenant to take care of the rental property and maintain it. They are also more likely to turn into long-term tenants than private pay tenants, particularly if they like the apartment. This means a lower vacancy rate than with private pay tenants. Depending on where you live, Section 8 gives you a larger potential tenant base to draw from. In addition, the tenants are carefully screened and vetted before being provided a rent voucher and being allowed to look for an apartment. Even though you check references, this is not always a guarantee that private pay tenants will be long term good tenants.
The Downside of Section 8 Rental
Like every good thing, there is always a downside. The biggest downside is government bureaucracy in obtaining inspections, accounting, and payment. It often takes 30 to 60 days to receive a rent payment.
Another downside is that in order to rent the property through Section 8 housing vouchers, you must pass inspections that go above and beyond the usual city inspections. If you buy a rehab property, you may have to invest considerable time and effort to make it qualify for government housing assistance programs.
Damage to the property is another issue that often keeps investors from renting to low income tenants. Because they are not paying a majority of the rent themselves, they feel less obligated to care for the property. Unfortunately, once the damage has occurred, the investor has little recourse to recoup the costs.
There are other downside risks. For instance, even though the tenant often only has to pay a small portion of the rent, it is difficult for them to do so. However, because at least a portion or all of it is paid by the government, you will eventually receive at least part of the rent, so it will not be a total loss. Even though there are risks involved, many of them can be managed by designing a business plan that takes these risks into account.
There are many advantages to investing in Section 8 rental properties. Even though there are downsides, they are easily managed. The reliability of monthly payments and ability to find tenants quickly is the most lucrative advantage of this business model. It may be worth looking into properties that you already own to see which ones may qualify for Section 8. With a little effort, you can see higher returns using this as your investment model.