Investing In Section 8 Housing: The Complete Guide

Affordable housing is a highly debated topic that various governments have trouble defining and specifying.

For property managers, affordable housing and subsidized housing can serve as an exciting investment opportunity. Not only are they providing low income housing to low income families, but they are also benefiting from the various tax benefits that come with it.

However, this can all be pretty confusing, especially section 8 housing which is also known as the housing choice voucher program.

For this reason, we have put together a complete guide for property managers to fully understand the world of affordable housing and section 8 housing.

To begin, let's go over what affordable housing refers to and how it is defined by investors and the government.

What Is Affordable Housing?

Affordable housing is defined as public housing that is deemed affordable for families with a household income that is at or below the median income. This program is funded by the U.S. Department of Housing and Urban Development.

There are various housing programs that lower to middle income households can take advantage of to gain access to rental assistance as well as affordable rentals. These housing programs, mostly government programs, provide rental housing to these families and negotiate with property managers and property owners set their rent prices at or near the fair market rent of a unit.

Who Is Eligible?

The eligibility requirements for section 8 housing can get a little tricky. First, there are a few general requirements for those wishing to receive housing assistance. These can vary depending on state and local laws, but they typically include:

• Low-income distinction
• Clean criminal record
• History of being a good tenant

…and some more specific requirements.

In the United States, a low-income household is typically defined as a household that earns below 80% of the median income.

For example, in Florida, the median household income is $57,000. This means that a household would have to earn less than 80% of that income, which is around $45,600, to be classified as low-income.

However, not every family who earns this much or less will receive affordable housing benefits. It is estimated that only around 1 in 4 families who meet the requirements and apply actually receive benefits.

Now that we know what section 8 housing, let's find out about some of the pros and cons of renting out to section 8 tenants.

Pros & Cons Of Section 8 Investments

In this section, we will be discussing the various pros and cons of investing in section 8 housing as well as some of the things that you should expect.

Pros Of Section 8 Housing

Some of the benefits of investing in section 8 housing include:

Consistent Rent Payments

Once the Local Housing Authority inspects the property and clears the tenant for the rental assistance program, the landlord can expect to consistently collect monthly rent.

This can be much more reliable than any other tenants because the housing authorities are government agencies and will make sure that the rental units are paid for. However, sometimes the housing vouchers do not cover the complete cost of the rental unit.

In those cases, the tenant is responsible for paying the other portion of the rent. And, since local public housing agencies have strong guidelines for section 8 tenants on not violating the lease agreement, they are heavily incentivized to pay their rent and follow other rules.

Pre-Screened Tenants

Another great benefit of investing in section 8 housing is that the tenants are already screened. This is because, in order to qualify for the housing vouchers, the tenants must meet certain requirements.

So, the local Public Housing Authority will conduct thorough background checks on every tenant to make sure that they meet all the requirements. If they uncover something, such as a criminal history, they will not be granted a voucher.

Tax Credits

The first, and possible the most beneficial, pro of investing in subsidized housing includes access to tax credits.

The Low-Income Housing Tax Credit (LIHTC) is now responsible for funding approximately 90% of all subsidized housing developments in the United States. Through this same program, investors can get between 30% and 70% in subsidies through the LIHTC.

This specific benefit can be very useful for real estate investors to create a lot more value for the money that they spent on the investment. Thus, it incentivizes investors to invest money into cheaper properties to be able to convert them into affordable housing.

So, now that we know all about the benefits of investing in section 8 housing, let's go over some of the disadvantages.

Cons of Section 8 Housing

Although there are many benefits to investing in section 8 housing, it is also important to consider the many drawbacks.

In this section we're going over some of the cons if investing in section 8 housing, like:

Dealing With the Government

As most people know, anything that has to do with the government can become frustrating. This is especially true with section 8 housing.

This is due to the sheer number of HUD offices that are understaffed in the United States. These offices take in tons of requests every day and it may take a lot of time to get to any specific one.

Because of this, many landlords end up unsatisfied with the service they are receiving. And, when this happens, landlords may develop a negative feeling towards their section 8 tenants.

Strict Inspections

One of the drawbacks of investing in affordable housing is that the government conducts very strict inspections of the property before allowing the tenant to move in.

These inspections often require higher property specifications than any other regular inspection. The government will also go back to the property to conduct yearly inspections to ensure that the property is still within accordance.

Tenants Not Financially Qualified

Now, although many tenants who apply for affordable housing can be very good tenants, that does not mean that they are necessarily financially qualified for one of your rental units.

Since these tenants typically have a lower income, it is possible that they do not mean the minimum income or credit score to be a typical tenant.

So, now that we know everything about section 8 housing, there is only one thing left to learn about - the actual process.

In the next section, we're going to briefly outline the process of investing in section 8 housing.

The Section 8 Rental Process

Before getting a section 8 tenant in the property and being able to collect rent, there are a few steps to take. Below, we have outlined and explained these main steps.

1. Section 8 Tenant Finds You

The first thing that needs to happen is that a section 8 voucher holder finds your rental property. This can be done by seeing it on a PHA listing site or a landlord's own rental listing site.

After finding a suitable rental property, the housing voucher is shown to the landlord and the landlord can move on to the next steps.

2. Request for Tenancy Approval Form

After a tenant approaches the landlord, the landlord must fill out a request for tenancy approval form (RTA/RFTA Form).

This form details various characteristics of the rental property, including:

• The security deposit
• Monthly rent
• Utility costs
• Address

…and anything else that the form asks for.

After the form is filled out and accepted, the landlord has the option of performing their typical tenant screening.

Although the landlord can reject the section 8 tenant, the only rule is that it cannot be because of their financial situation or because they are a section 8 tenant.

3. Schedule An Inspection

As mentioned before, one of the more frustrating parts of renting to section 8 tenants is that there are strict inspections involved. These inspections are conducted by any local public housing agency, and each one may have different requests or requirements.

The point of these inspections is to make sure that the rental property meets all of the requirements of the HUD before a lease is signed. Apart from conducting the inspection, the agency also needs to approve the rent that was offered to the tenant.

4. Sign The Lease

The final part of the process is to finally get the lease signed. This step of the process still involves the PHA and the landlord is required to sign an additional document - the Housing Assistance Payments Contract.

From here, it is just a matter of keeping an eye on the tenant and on the rental property.

5. Manage The Property

It's important to remember that the PHA is very strict on their rules for the tenants. This is why it is important to keep an eye on the tenants to make sure everything is going smoothly.

However, many landlords consider the economic situation of these tenants and choose to be more lenient. This is because, if the tenant is kicked out of the property, they may have a hard time finding another property.

Bottom Line

Although investing in section 8 developments may sound like a risky endeavor, it can actually be a very stable and lucrative one if done correctly. Not only is the investor benefiting from some of the tax credits, but they are helping struggling families find reliable housing to help them get back on their feet.