Real estate investing is relatively easy and increasingly popular as a way to diversify your portfolio. Several types of real estate investment opportunities allow you to decide how involved you want to be in your investment, from commercial real estate to multi-family units and everything in between. One option to consider is investing in Section 8 housing, especially as the demand for low-cost housing is growing.
What Is Section 8 Housing?
The Housing and Community Development Act of 1974 created Section 8 housing to create a way to assist low-income renters. The Department of Housing and Urban Development oversees the program, which is administered by local public housing agencies in all 50 states. Qualification requirements will vary from state to state, but they are based on family size and income. When a renter is approved, they may receive a rent voucher for up to 70% of their monthly rent and utilities.
How Does Section 8 Real Estate Work?
There are two types of Section 8 assistance:
- Tenant-based. These Section 8 vouchers will move with the renter, regardless of address. These are very hard to get, with renters often waiting years for approval. Renters also have to follow stringent rules or risk losing their voucher or being forced to reapply.
- Project-based. Section 8 vouchers are attached to a specific property, so when one renter moves out, the property remains Section 8 for the next renter.
How Do Renters Qualify for Section 8?
While each state creates its own criteria for qualifying for Section 8 housing, there are some general guidelines:
- Total family income cannot exceed 50% of the median income for the area they live. Most public housing agencies are required to provide 75% of their vouchers to renters who don’t exceed 30% of the area’s median income.
- Must provide the public housing agency with proof of income, any assets, and proof of the number, relationship, and age of family members in the home.
Once approved for Section 8, the renter and their family may be placed on a waiting list for an available Section 8 property. The renter will be informed of the amount of housing assistance they will receive once they’re moved into Section 8 housing.
What Are the Advantages to Investing in Section 8 Housing?
As a potential real estate investor looking at Section 8 housing, you should consider several of the advantages that this type of real estate investment offers, such as:
- Convenient, on-time payments. Rent will be paid directly from the Department of Housing and Urban Development on time each month, either by direct deposit or check.
- Protection from non-payment. If a tenant experiences financial hardship that interferes with their ability to pay their rent, you won’t be affected by that because HUD will still pay you.
- Access to potential renters. HUD has a verified waiting list of Section 8 renters that you can view online to find potential tenants. You can also let Section 8 tenants find you by listing your Section 8 housing online. On some sites, you can even review a potential renter’s profile for a small fee.
- Higher rent. You can often collect a higher rent on Section 8 housing than a typical property located in an unfavorable neighborhood.
- Short vacancies. Waiting lists for Section 8 housing can be very lengthy in many areas, meaning filling a vacancy is a quick process.
What Are the Disadvantages to Investing in Section 8 Housing?
As with any investment, you need to weigh the advantages against the disadvantages to determine whether it’s the right type of investment for you. Disadvantages of investing in Section 8 housing include:
- Government bureaucracy. The government has plenty of regulations and red tape when it comes to Section 8 housing. When the Department of Housing and Urban Development is understaffed, you can expect slow and unreliable services.
- Delay of payments. Because the entire Section 8 process is slow, it may take up to 60 days to get the first month’s rent after a Section 8 tenant moves into your property. The upside is that you should expect a double payment when that first payment arrives to cover the first and second month’s rent.
- Strict inspections. The Department of Housing and Urban Development requires numerous inspections of your property to qualify as Section 8 housing.
- Damages. Any damages caused by a Section 8 tenant will not be reimbursed to you by the government. Likewise, it’ll be difficult to recover those damages from the tenant as they have low income.
Knowing the advantages and disadvantages of investing in Section 8 housing allows you to determine if the process to become qualified as a Section 8 property is worth it. Perhaps you may find it easier to rent to private-paying tenants.
Tips for Investing in Section 8 Housing
If you’ve decided that you want to invest in Section 8 housing, here are a few tips to follow:
- Remove screen doors, garbage disposals, storage areas, and ceiling fans. None of these items are required by the public housing agency, and while they may provide you with a higher rent rate with private-paying tenants, they are an added expense in a Section 8 property.
- Inspect the property monthly. Visit the property to inspect it every month to check visually for damages. Water leaks can cost up to $75 per month, so repairing them sooner will save you money over the years.
- Train the tenant. Provide rules to your tenants and enforce them without getting emotionally involved with your renters. Use a firm hand to enforce the rules, so they know you mean business.
- Offer fair market rent. Compare your property against other Section 8 housing options in your area online and offer a comparable rent to tenants.
It’s also important to know when not to invest in Section 8 housing. If your property is in a good neighborhood and decent condition, you may be further ahead to rent to private-paying tenants, often at higher rates.
If you’d like to learn more about Section 8 housing, including financing options to purchase such properties, reach out to the knowledgeable team at Titan Funding. You can reach us at 855-912-8313 or via our secure online messaging system. A team member will be happy to answer any questions or provide you with a broker referral.