Have you ever wondered how low-income tenants manage to pay rent in expensive cities? Well, thanks to Section 8 of the Housing Act of 1937, that is possible.
Tenants who qualify for Section 8 of the Act have their rent and utilities covered in full or partially by the US Department of Housing and Urban Development. Section 8 financially assists 4 million homes by aiding tenants in paying landlords.
While this is a great program for low-income tenants, it’s a whole different story for property owners. For the owners of Section 8 real estate investments, the general consensus is that the negatives far outweigh the positives. Even though these owners are getting paid on a regular basis, Section 8 tenants limit the potential of their properties in so many ways.
Related: 4 Different Ways of Renting Out Your Property
How severe are the negatives that make Section 8 bad for real estate investors? To answer those questions, we need to analyze the pros and cons in detail.
Pros of Section 8 Real Estate Investments
- Consistent Rental Payments: Getting a rental payment on time is probably the biggest plus of Section 8 rentals. Since the government is responsible for depositing either full or at least 70% of the payment, then the owner will get rent steadily and continuously.
- No Risk of Vacancies: Section 8 real estate investments could be extremely beneficial if you are living in an area where vacancies are common. Section 8 has a long waiting list for tenants who benefit from it and this eliminates vacancies. If you are an owner who is paying a mortgage for the property and suffering from a vacancy, then renting to Section 8 tenants could be a solution.
Related: 7 Tips to Avoid a High Rental Vacancy Rate
Negatives of Section 8 Real Estate Investments
- Inspections of Section 8 Households: The fact that Section 8 tenants are funded by the government means regular inspections are required to make sure that the property meets housing standards. For investment property owners, they would have to deal with regular inspections that could uncover problems not caused by the owner. But the owners are requested to fix them on their own dime and then ask for a re-inspection.
- First Payment Delays: If an owner is looking for instant profit, they will find it is hard to get that through Section 8 rentals. These types of rentals are funded by the government, which means administration and procedural requirements take a long time. In some cases, Section 8 real estate investment owners don’t receive their first payment for months.
- No Security Deposits: Section 8 vouchers and payments exclude any form of security deposit for the owner of the property. If an owner wishes to collect a security deposit, they will have to do it by reaching an agreement with the tenants. This is of course almost impossible because a Section 8 tenant is already struggling financially. Not having a security deposit is a big risk for owners in case of damages and repairs for the property.
Related: How to Deal With Bad Income Property Tenants
- Section 8 Stereotype: Real estate investment owners who have had experience with Section 8 tenants are divided in opinion about the tenant’s responsibility toward their homes. The truth is, don’t listen to stereotypes, tenants can be good or bad, no matter their income. However, keep in mind, there are Section 8 tenants likely to be careless about the condition of an owner’s property because they have no financial obligations towards its damages.
- Rental Price Ceiling: The biggest disadvantage of Section 8 rentals, which is considered a deal breaker for most owners, is the price limitation. The amount of rent that is received is based on Fair Market Rents’ list produced by HUD for more than 2,500 areas nationwide. That means, the price to be paid by Section 8 has a maximum price that can’t be exceeded. This doesn’t appeal to owners at all because there is a chance to make more rental profit in areas where demand for housing is high.
Once you analyze the pros and cons of Section 8 real estate investments as an owner, you realize how damaging it might be to your finances and property. The fact that Section 8 offers no added incentives for property owners other than constant payment is a deal breaker. HUD has a massive job on their hands to turn the tide and make owners interested in renting to Section 8 tenants. For the time being, owners of properties are better off renting their homes traditionally or on Airbnb even if it means vacancies are a risk.