Urban landlord investing combines elements of crime, drugs, boarded up assets, and low income tenants. Within all this uncertainty comes a unique risk adjusted opportunity. This post is going to look at one major tenant type that you will come across: The Section 8 Tenant.
Section 8 ?
Section 8 is a Government housing voucher program that is managed by the Department of Housing and Urban Development. The goal of the Section 8 program is to help low-income, elderly, and disabled tenants afford decent and safe private rental housing.
Tenants have to apply and get approved by their local HUD, Housing Authority or Public Housing Agency office. Once approved, the tenants are provided a voucher that states that the municipal or state government will pay their rent in part or in full – depending on their income and household size. The voucher is a government guarantee that they will pay a portion of the tenants rental payment ranging from 80 to 100% of the monthly rental payment.
So, where does the money for Section 8 come from?
Section 8 “Housing Authority” (PHA) works under grants from the federal government to assist low income families, the elderly, and people with disabilities to afford clean, safe, and sanitary housing from owners of private property. Each year, every state receives a block grant from the federal government to cover housing assistance costs that gets divided throughout its municipalities or parishes. The Housing Authority uses this funding to cover the cost of the Section 8 program and to pay for a portion of the tenant’s rent and utility costs.
How to Become a Section 8 Landlord
Becoming a Section 8 landlord is accomplished by having rental units that tenant would want to live in.
Once a tenant has been approved for Section 8, it is their responsibility to find suitable housing. All participants in the program must search for a home to rent on their own. The rented unit can be a single family home, apartment, townhouse or mobile home. The participants can choose any location that meets both their needs and the requirements of the program. Hence it is important to have a vacant unit that appeals to the tenants as it is their decision as to which apartment they want to lease.
As a landlord, you can make potential Section 8 tenants aware of your unit by listing your property with the PHA office(s) that serve the community closest to the property. Once the unit is listed, the information will be provided to any voucher or certificate holder looking for a property of that particular size.
Once you find a tenant that wants to lease your unit then follow the Section 8 rental steps below:
- Have the tenant complete your rental application.
- Underwrite the tenant to your standards and utilize the voucher as a proxy for income and credit standards.
- If the tenant works within the underwriting above then you need to sign a lease and send it into the tenants case worker at the housing authority.
- As a landlord, you will need to complete an application and provide personal information to the housing authority. The housing authority will also review your lease and rental rates to ensure that they fall in line with rates for comparable dwellings in your area.
- Once the housing authority approves you as a landlord, an inspector will visit your rental property to make sure it meets all local building and safety codes. At the very least, you must have working locks on every window and door, the structure must be sound, no chipping paint, peep hole, smoke & carbon monoxide detectors.
- Once the inspector approves your property then the voucher is approved and you must provide the case worker your deposit instructions
- Then, once a month, the housing authority will mail you a portion of the rent and the tenant will pay you the rest.
Good & Bad of Section 8 Tenants
- Guaranteed Rent. With Section 8, you will always get the majority of the rent on time, every time. Typically, Section 8 tenants pay their portion on time as well. Since failure to live up to the lease can cost them their housing voucher, Section 8 tenants can be even more reliable than private tenants.
- Routine Inspections. To get into the Section 8 Housing Choice Voucher Program, your property will need to pass a safety inspection and annual routine inspections upon lease renewal.
- Rent Control. You will need to keep your rent within the median for your area. If you have an extremely well done or a rental in an improving neighborhood, you may lose out on rent you could have otherwise charged outside of the Section 8 program.
Use the section 8 program to your advantage if you are looking to invest within local urban markets such as Newark, Plainfield, Passaic, Paterson to name a few.