Investing in Section 8 housing: Free landlord guide

Investing in Section 8 housing might seem like easy money. You agree to house low-income tenants and the government covers the bulk of their rent, guaranteed. What could go wrong?

Well, while there are definitely advantages to investing in Section 8 housing, it’s by no means a free lunch. I dug through the myriad of stipulations to help you determine whether this type of real estate investing is worth your consideration.

Investing in Section 8 housing: A quick primer

In America, the cost of housing has risen dramatically over the past several decades. Within the same timeframe, average wages have barely moved, leaving some low-income families unable to afford rent on their own, even in modest neighborhoods. Many such people have turned to Section 8 of the Housing Act of 1937 for assistance.

Section 8 has been around since 1974 when Congress devised it as a response to concerns about the stability of existing public housing initiatives, which at that point consisted largely of clustered residences (aka the infamous “projects”) that had become segregated, crime-ridden ghettos. In addition to being inhospitable, these projects were increasingly unattractive to investors, who got stuck with the rising costs of utilities and taxes.

Section 8 (which has been amended numerous times since its introduction) attempts to solve these issues using a “free market” approach. Qualifying tenants can choose where they’d like to live. As long as the property is Section 8-approved, roughly 70% of the rent will be covered by the government.

In an ideal world, this initiative pairs thoroughly-vetted private landlords and tenants, providing the former reliable income and the latter cheap housing.

Tenant-based vs. project-based Section 8

There are two basic implementations of the Section 8 initiative. Here’s what each option means for you as a landlord. I skim through the approval process here but don’t worry; you’ll find a very detailed walkthrough in the next section.

What is tenant-based Section 8?

Under tenant-based Section 8, the government issues vouchers to qualifying low-income tenants. If someone wants to use their voucher at your property, you’ll have a chance to screen them and (if you like what you see) negotiate lease terms. The tenant will then submit a notice to their local public housing authority (PHA), initiating an approval process during which authorities will inspect your property.

If everything checks out, you’ll receive roughly 70% of the tenant’s rent directly from the government each month. Note that the tenant initiates the process here. When they move, the voucher will follow and you won’t be a Section 8 landlord until you find another voucher-holder who wants to rent your property.

How does project-based Section 8 work?

Project-based Section 8 (also known as project-based vouchers, or PBV) involves you as a landlord contacting your local PHA and expressing interest in renting to low-income tenants. The government will then evaluate your property and (if they approve) get you to fill out some paperwork, including a W-9 and a contract acknowledging your obligation to offer affordable housing for a set period.

There are a few important things to note as a property owner under project-based Section 8. Firstly, the government places the onus for vetting tenants on you. You have to create a selection process and make it publicly available, per HUD rules. Secondly, the voucher’s benefits are tied to your property for the duration of your contract with the PHA. This makes project-based Section 8 popular among landlords seeking stable long-term income.

How to become a Section 8 landlord

Here’s a breakdown of the steps you need to take before operating a Section 8 rental property. These instructions pertain to the project-based implementation since it requires more legwork on your part than the tenant-based option.

First things first: Where to find Section 8 properties to buy

Of course, before you even begin going through the application process, you need to have a property you can rent out. If you’ve already got this covered, skip ahead to Step 1. Otherwise, here are some ideas and resources.

MLS websites

Whenever you’re in the market for any type of property, multiple listing service (MLS) websites are a great place to start. Popular options nationwide include:

• Zillow
• MLS.com
• Redfin
• Realtor.com

You can zero in on affordable housing by doing a search for “Section 8” on those sites. That’s not a flawless method, though, since some Section 8 properties won’t declare themselves as such. You’ll still likely find a few good options. If not, try the next trick.

Section 8-specific listing sites

Many public housing authorities throughout America list properties for rent on a site called GoSection8. While the platform is geared towards helping tenants, you can use it to your advantage as an investor. Search for available properties in your area and make note of any that interest you. From there, you can contact the landlords to see if they’d be willing to sell. You can also grab a property’s address and go back to a traditional MLS to see if there are similar properties for sale nearby.

HUD homes

HUD Homes are properties that have been repossessed by the government as a result of the owner defaulting on a federally-insured mortgage. The big draw with buying HUD Homes is that the government often sells them for below market price to recoup its losses as quickly as possible.

Local authorities frequently purchase these properties to turn them into affordable housing units. You can do the same thing! Visit this website to search for available HUD Homes near you. Keep in mind that these properties will often need some work before they’re ready to be rented out, which leads nicely into Step 1.

Step 1: Prepare your property for inspection

While your local PHA will have the final say on whether your property qualifies, you can save yourself a lot of time and energy by ensuring it’s at least within the ballpark of eligibility.

What do they look for in a Section 8 inspection?

This checklist should give you an idea of what officials will look at during their inspection. In a nutshell, expect them to evaluate your Section 8 housing investment property for hazards such as:

• Subpar infrastructure (plumbing, electrical, HVAC, etc)
• Lead-based paint
• Security flaws (i.e. windows with no locks)
• Structural issues (walls, ceilings, etc)

Officials will also inspect your property’s exterior components, such as its:

• Foundation
• Stairs, porches, and rails
• Chimney
• Roof and gutters

The inspector will give you one of three ratings for each item:

• Pass: Everything looks good!
• Inconclusive: The inspector needs some more information before giving you a pass or fail. They’ll follow up with the necessary party, whether that be you or someone else.
• Fail: You have some work to do.

If you suspect your property may fall short of these and other qualification requirements, consider addressing the concerns before you apply. Also, ensure you’re capable of maintaining these standards for the foreseeable future. The government will conduct inspections on a yearly basis for the duration of your contract to confirm your ongoing eligibility as a Section 8 landlord.

Beyond ensuring your property’s quality and safety, make sure you’re comfortable accepting the payment standard for your area. These values are assessed by local authorities annually based on HUD fair market rents data (click here to see the latest numbers) along with factors such as demand. Note that they don’t always align with what you’d receive for your property as a traditional renter. As such, you’ll have to consider whether you might be able to secure a more valuable lease agreement outside of the Section 8 program and whether that would be enough to sway you in light of the other benefits to renting with the government.

Step 2: Contact your local PHA to apply

While HUD oversees legislation concerning the Section 8 program, you’ll actually need to work with your local PHA to participate. Visit this webpage to see a list of PHAs by state, then do a Command + F (or Control + F on Windows) to find the option for your city. As part of the application process, you’ll have to submit some basic information about yourself and your property to this office.

If there aren’t any glaring issues with your paperwork, the PHA will subsequently inspect your property based on the checklist I mentioned in Step 1. Note that inspectors usually take this process very seriously. Depending on where you live, they may even require that you install appliances like heaters and central air conditioning to bring your property up to par. If you fail your inspection, you’ll need to address the relevant issues before your application can proceed.

Step 3: Create a tenant selection plan

Once your property passes inspection, you’ll need to create a formal selection plan and make it publicly available. You’ll have to use this document to evaluate tenants that come your way.

According to HUD rules, your tenant selection plan must outline the various factors you’ll take into consideration when processing applicants. What follows are a few of the specific items HUD expects you to address.

• How you intend to verify the applicant’s status as an immigrant or citizen.
• Your process for verifying an applicant’s Social Security Number (SSN).
• Any preferences you have that may influence how prospective tenants are ranked in terms of desirability on your waiting list. Note: In keeping with Section 504 of the Rehabilitation Act of 1973, you’re not allowed to discriminate based on factors like race, religion, sex, and disability. While you’re allowed to have preferences, they need to be in keeping with these regulations.
• Your policy concerning opening and closing your waiting list.
• What steps you’re taking towards ensuring confidentiality when housing victims of domestic violence.

This is truly just the tip of the iceberg. Check out this document for a full list of rules concerning tenant selection plans. Keep in mind that you’ll also need to have a process for notifying the public of changes to your plan.

Mandatory HUD requirements for tenants

In addition to the variables you can filter applicants for based on your selection plan, HUD has some basic requirements that will dictate whether a tenant qualifies to rent your Section 8 property. That includes the following, as per this document:

• Legal status in the United States.
• Income that falls within HUD’s limits for the Section 8 program. The nominal values change yearly but fall into one of three categories.
  • Extremely Low Income: 30% of the area’s median wages.
  • Very Low Income: 50% of the area’s median wages.
  • Low Income: 80% of the area’s median income level.
• Familial status. Section 8 is designed to help families. However, the term ‘family’ is defined a bit more loosely than what you might think. Single people aren’t automatically excluded.
• Background. Tenants who have previously been evicted due to drug-related criminality are precluded. The government particularly mentions methamphetamine production so Jesse Pinkman would not qualify, for example. Criminal history not related to eviction can be a major stumbling block, too, but it’s not necessarily insurmountable.

Step 4: Find and manage your tenants

Once you’ve done the legwork of creating a tenant selection plan and familiarizing yourself with HUD rules, you’ll be free to start accepting applicants. Depending on where you live, finding a qualified tenant may not be very difficult. In many cities, PHAs keep waiting lists of prospects that landlords can sort through.

Once you find a tenant and reach an amicable lease agreement, the government will cover the agreed-upon portion of their rent every month. The tenant will pay the leftover amount to you directly. Typically, you’ll receive 70% from the government and the remaining 30% from your tenant.

It’s important to note that becoming a Section 8 landlord doesn’t mean you escape the day-to-day tenant management that comes with owning a traditional rental property. Sure, the government provides some support in terms of dealing with lease violators. However, you’re still on the hook for managing things like repairs and collecting the tenant’s portion of the rent.

As you can probably tell by now, investing in Section 8 housing is a bit more arduous than becoming a conventional landlord. There’s plenty of bureaucracy to work through, which takes time, money, and patience. Next, we’ll analyze the pros and cons of being a Section 8 landlord to help you understand why some investors decide to take the plunge anyway.

Pros of investing in Section 8 housing

You’ll receive the rent on time

Tenants and landlords alike uncover many examples of government inefficiencies while navigating the Section 8 pipeline (more on that in the cons section). However, the government is very good about delivering its portion of the rent (which is usually around 70%) on time once you’ve completed all the necessary paperwork. Tenants are also usually pretty good about paying their portion on time. After all, they can be kicked out of Section 8 altogether for failing to comply with lease terms.

It’s hard to overstate how advantageous this is; collecting rent can be a major challenge for traditional landlords. Knowing the government will deliver its 70% on time can be a major source of relief during tight economic times.

The government pre-screens tenants

Under tenant-based Section 8, the process of obtaining a voucher is fairly strenuous. The government performs income and background checks to discourage abuse of the program. Even under project-based Section 8, there’s still a degree of government vetting involved.

Once tenants are in the program, they have to abide by the rules and check-in with their caseworker at the PHA regularly. Failure to do so can get them kicked out, which would mean literal homelessness for some people.

While this government vetting doesn’t completely eliminate bad apples, many landlords find it helpful.

Large tenant pool

Investing in Section 8 housing exposes you to a very large potential tenant base. In some cities, demand is so high that PHAs aren’t even adding new names to their lists. While this is unfortunate for people in dire need of affordable shelter, it means your property likely won’t stay vacant for very long.

Free advertising

PHAs are tasked with, among many things, helping low-income families find affordable housing. As such, they typically keep lists of vacant Section 8 properties in the area and publish them online. You’d typically have to pay for and manage your own online listings as a traditional landlord.

Discounts on property management services and education

Depending on where you live, investing in Section 8 housing may come with discounts on property management-related products and educational programs. Contact your local PHA to find out whether they offer these perks.

Cons of investing in Section 8 housing

This all sounds pretty good so far, right? So why do some landlords avoid Section 8 tenants like the plague? The following points may shed some light.

Strict regulations

Even being a traditional landlord isn’t exactly a walk in the park as far as government regulation goes. Section 8 takes that a step further, implementing strict measures such as the following.

Rent restrictions

Local authorities determine the maximum amount of rent you can charge. In many cases, this will simply be whatever they determined the payment standard to be. While you are allowed to charge more than this amount in some circumstances, there are two caveats.

1. The tenant will have to pay the excess rent and the combined total rent cannot exceed 40% of their annual income.
2. If a tenant has other properties in the area to choose from, it may not make sense for them to pay more for yours.

Before investing in Section 8 housing, it’s important to consider whether your property could earn more outside of the program.

Rigorous inspections

At the very least, you can expect your local PHA to conduct inspections on a yearly basis. They can also check in at other times they deem fit, such as when a tenant complains. If one of these reviews uncovers even a single issue that you subsequently fail to address satisfactorily, authorities will take that as a breach of your contract and give the tenant an opportunity to relocate.

To avoid this situation, you’ll want to regularly inspect and maintain the property on your own. This can be difficult if you’re a smaller landlord with insufficient resources. As such, some argue that investing in Section 8 housing is best left to large, experienced property management companies.

Limitations on vouchers

While receiving rent directly from the government undoubtedly has its advantages, there are still some stipulations you need to know about.

First and foremost, Section 8 vouchers do not cover security deposits, which are a standard component of any lease. You’ll have to work directly with the tenant on this, which may be difficult if they’re really strapped for cash. If you accept too small a deposit (or none at all) and the tenant ultimately does damage your property, you may have a hard time seeking recourse.

Vouchers also come with limitations concerning what properties they’re good for. One notable example is the number of bedrooms. If your residence has more bedrooms than are typically covered by vouchers in your area, you may have a harder time finding tenants.

Evictions are generally more difficult than usual

Evicting tenants is difficult as a traditional landlord. In some states, it’s even harder under Section 8. You may have to seek approval from the local PHA before filing an unlawful detainer. If you don’t receive this approval but still want to proceed, you’ll have to name the PHA as a co-defendant when the case progresses to court. Speaking of which, keep in mind that judges tend to give Section 8 tenants special consideration, which may stop your eviction in its tracks (or simply delay it as the court grants tenants time to find new housing before vacating yours).

This is just the abridged version of events, mind you. There are many variables that can make evicting Section 8 tenants a very long and costly affair in states like New York.

Ever-shifting policies

There are many rules to keep track of when investing in Section 8 housing – and they’re always changing in ways that directly affect your bottom line.

For example, a change implemented in 2018 expands the area in which tenants can find housing. The change, known as Small Area Fair Market Rents, came in response to concerns that Section 8 had resulted in “segregation” of low-income tenants within impoverished parts of cities like New York. This expansion may jeopardize the income of Section 8 landlords based in those areas.

The federal government has also occasionally floated changes that would reduce the number of eligible tenants. For example, HUD has proposed raising the tenant’s portion of rent from 30% of their gross income to 35%. This would make participation difficult for some struggling families. By extension, landlords who previously relied on those families would have to find new tenants.

You also have to worry about potential budget cuts to public housing. Every federal administration has its own priorities that may not always align with yours as a Section 8 landlord. Regardless of how you feel about those priorities politically, they will affect your income.

Renting in low-income areas can be challenging

While Small Area Fair Market Rents should theoretically reduce the clustering of low-income tenants, change (if it indeed happens) won’t come overnight. As it stands, some of the most lucrative areas for Section 8 landlords in cities like New York and Chicago aren’t the most glamorous. With that comes several disadvantages, including:

• higher crime
• less involvement from authorities in improving the community and its infrastructure
• increased potential for problematic tenants
• possible declines in property valuations

These and other challenges of investing in Section 8 housing are so infamous that some colloquially refer to the practice as “investing in the ghetto.” It’s not something you should take lightly. Rather, carefully consider whether you really have the stomach for it.

Renting or selling your property later on may prove challenging

The stigma surrounding Section 8 housing may prove prohibitive if you intend on renting your property out to non-voucher-holders later on. Even if it’s not in a rough part of town, higher-income tenants may shy away simply due to the property’s history.

You may run into similar issues when you sell your house. Not every investor will want to inherit the obligations that come with owning a Section 8 property. Even if you terminate the property’s Section 8 affiliation prior to selling, buyers may simply not want to deal with the stigma.

It’s unfortunate and you could certainly make a number of arguments related to the social ramifications of this stigma. However, as an investor, you have to think pragmatically about these very real factors and whether they align with your financial goals.

Section 8 tenants can be difficult

Let’s preface this by saying that there are many, many great Section 8 tenants out there. They’ll pay their portion of the rent on time, treat your property with respect, and are just generally pleasant.

However, there’s no denying the existence of Section 8 tenants that are a downright pain to deal with. This may be the result of unfortunate circumstances like disabilities that prevent your tenant from maintaining steady work or performing basic day-to-day cleaning of your dwelling. It can also be the result of malicious intent in the case of tenants who have a knack for abusing the system.

Whatever the reason, troublesome tenants can sap your time, energy, and especially money in the case of tenants who cause property damage. Your options for financial recourse are limited so you’ll either have to absorb the losses or raise rent.

What this means is that investing in Section 8 housing requires a particular set of qualities, including patience, good communication skills, assertiveness, and thick skin. You also need to have very good judgment in choosing who you rent to. Decent savings to fall back on won’t hurt either.

Real estate investing as a whole has its risks

So far, we’ve discussed the downsides of investing in Section 8 housing. Truth be told, however, all types of real estate investments involve potentially substantial risk. Here’s a quick rundown.

Leverage: Real estate investing’s double-edged sword

Unless you have enough money to buy properties outright, you’re going to need a mortgage. That exposes you to leverage, which is a double-edged sword. While investing with the bank’s money can lead to magnified returns, it can also end in catastrophic losses (namely, owing more money than your property is worth). That’s an abridged version of what happened to many real estate investors during the 2008 crisis.

Real estate is illiquid

Cashing yourself out of a real estate investment can take weeks or even months. It’s not like stocks where you can sell all of your holdings within a few mouse clicks. If you’re the type of person who has trouble committing to ventures, this puts you at a significant disadvantage. You have to be mentally and financially capable of keeping yourself afloat while you wait for a buyer.

Owning real estate can be resource-intensive

Owning an investment property takes work. You have to maintain it, which can often mean spending lots of time and reaching deep into your pockets. Occasionally, you’ll have to chase down non-paying tenants while finding ways to cover your expenses until they get it together. And that’s after you’ve purchased your property, which is a process within itself. First, you have to do market research, which means taking the time to inspect residences until you find the right one and securing insurance and a mortgage. All of this underscores the importance of patience when investing in real estate.

Real estate also comes with expenses people often fail to take into account. With a mortgage, you’ll spend substantial amounts on interest and origination fees. Some properties require you to pay maintenance and homeowner association costs. All of these (and any other expenses you may incur) factor into what’s known as “opportunity cost,” or how much your money could earn if you invested it in assets like stocks rather than real estate. While properties tend to rise in value on average, growth may not be substantial enough to warrant the opportunity cost.

Is investing in Section 8 housing right for you?

Investing in Section 8 housing can be very financially rewarding but, as you can see, there are also many potential downsides to consider. If you’re relatively new to investing, you’d be wise to at least learn about some of the other options out there. Check out this post for a detailed look at assets like stocks, mutual funds, and real estate investment trusts. This article, meanwhile, dives into the various types of goal-oriented investment accounts in the United States. If you’re looking to invest in Section 8 housing as part of your retirement savings, jump ahead to the “Self-Directed IRA” section.

Should you ultimately decide to try your hand at investing in Section 8 housing, fantastic! I trust that this guide has proven useful in helping you identify the steps you’ll need to take. Being a Section 8 landlord can be very financially rewarding as long as you follow the rules and approach it with a level head. Good luck out there!

Frequently asked questions