A hot topic in the world of Real Estate Investing right now, is whether or not Landlords should accept Section 8.
Or rather, if they have to accept Section 8.
Many municipalities across the country are opting to make “source of income” a protected class.
What does this mean for property Owners?
Basically, it makes your decision for you.
This increasingly popular trend ensures no Tenant is turned away due to being on a housing assistance program. In essence, you’re required to accept Section 8 vouchers.
So far, the state of Indiana has yet to implement this new protected class, but I’m sure it’s only a matter of time.
For now though, if you own rental properties in Indianapolis, you still have a choice.
So, let’s dive a little deeper into the world of Section 8 to:
- Help you determine whether or not you want to accept it for your properties.
- Educate you so that you’re prepared in the event you have to start accepting it.
What is the Housing Choice Voucher Program?
The Housing Choice Voucher Program, more commonly known as Section 8, is a program administered by the federal government to “assist very low-income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market.”
Participants are free to choose any housing that meets the requirements of the program, not only subsidized housing projects.
The actual vouchers are provided by local public housing agencies (PHA) who receive federal funds from the U.S. Department of Housing and Urban Development (HUD).
The subsidy is paid directly to the Landlord by the PHA on behalf of the participant, who then pays the difference between the actual rent charged by the Owner and the amount subsidized by the program.
Indianapolis Landlord benefits of accepting Section 8
The Section 8 program has a relatively negative connotation in the rental property industry, and not without warrant.
The system is far from perfect and there is no shortage of horror stories out there, but then again, there’s no shortage of Tenant horror stories period. Section 8 or not.
For some Landlords, accepting Section 8 vouchers can be very beneficial and there are some definite perks, so you shouldn’t automatically rule it out.
- Guaranteed, on-time, monthly rent - Notably one of the biggest advantages of accepting Section 8, is that a substantial amount of what you are owed will show up reliably and on time each and every month.
Even if the Tenant slips into late payments, you’re guaranteed at least a large percentage of the rent rate.
- Larger pool of applicants - Accepting Tenants with section 8 vouchers opens up your market significantly.
According to 2016 statistics, there were over 89,000 households using some form of housing assistance in the state of Indiana.
Allowing prospective Renters who wouldn’t otherwise be able to afford unsubsidized housing can give you a competitive advantage over other Landlords in your area.
- Higher rental rates for certain properties - In some cases, depending on the property and its location, fair market rent may be higher than what you would be able to get for it normally.
The HUD offers a breakdown of FMR by county which can help you determine if accepting Section 8 would be in your benefit or not.
On the opposite end of that spectrum, if you own higher end properties in affluent neighborhoods, it probably wouldn’t be in your best interest to accept Section 8 vouchers.
The rents you can get from those paying on their own on these properties will be higher than what the government will allow you to charge in order to be approved as a Section 8 housing provider.
- Less frequent turnover - Let's face it, it's sometimes difficult for Section 8 Tenants to find quality housing. And, it's also very difficult to move. So, if you provide quality housing, and you take good care of the Tenants, you will likely see very high renewal rates.
Cons of accepting Section 8 for Indianapolis rental properties
- Slow processing times - As I mentioned before, one of the pros of accepting Section 8 is that you’re guaranteed a good portion of the rent on time every month.
However, as with many government institutions, it can take a painfully long time to get all of the necessary paperwork processed.
Which means you could potentially not see any money for weeks to months.
- Tenant’s may lack accountability - Another thing to keep in mind, is that Section 8 Tenants are not as financially invested in the home as their unsubsidized counterparts would be.
I’m not by any means suggesting that all Renters on housing assistance are going to wreck your home. In fact, there are many stories to contrary,
- Detailed government inspections - One of the largest complaints property Owners have about the Section 8 process, are the required inspections of the home.
In order for a property to be eligible for Section 8 vouchers, an inspector must pass it using a rigorous checklist.
These inspectors have been known to be extremely nit-picky and to fail homes for the smallest of flaws such as a spot of chipped paint on a window sill.
This can force owners to conduct extra work and spend money unnecessarily.
You don’t have to accept every Section 8 Tenant
As a Section 8 accepting property Owner, you have to remember that you don’t have to accept just any applicant, and you shouldn’t.
You need to screen these Renters using the same standards and criteria you would any other applicant (minus income).
Following your rental requirements for every potential Tenant not only helps ensure that you find a good one, but it’s also important from a Fair Housing standpoint. You need to treat everyone the same, regardless of whether their using housing assistance or not.
Tenant responsibilities under Section 8
Just because they’re getting some government assistance, doesn’t mean they get a free pass in other aspects of the rental agreement.
Section 8 Tenants are required to:
- Pay the security deposit - Section 8 vouchers do not include the amount for a security deposit, therefore, the Tenant is solely responsible for providing this money to the Landlord.
As we’ve said in previous blogs, you should ALWAYS charge a security deposit and it should never be less than one month’s rent.
- Pay their portion of the rent - If the Tenant’s voucher doesn’t cover the entire rent amount, then they are responsible for paying the difference.
As long as your lease agreement allows for it, the Tenant is required to pay their portion on time every month. Failure to do so could result in the discontinuation of their housing assistance and gives you grounds for eviction
- Follow the lease agreement - Section 8 Tenants are expected to follow all rules set forth in the lease agreement.
They can be evicted for breaching any of the terms including not paying their portion of rent, damaging the property, participating in criminal activity, etc.
Note: As the Landlord, you are responsible for attaching the Tenancy Addendum, provided by the HUD, to your lease.
How to become Section 8 certified
There are several steps that must be completed before you can begin accepting Tenants with Section 8 vouchers.
- Set rental rates according to FMR - The first thing you need to do to start the process, is research the current fair market rent rates and price your property accordingly.
This will save any back and forth with the HUD for having an over priced rental.
- Submit request for approval - You cannot house Section 8 Tenants until you are approved by the HUD.
You’ll need to submit a Request for Tenant Approval.
- Pass inspections - Once your request has been approved, you’ll have to pass a Housing Quality Inspection which will determine if your unit meets the minimum housing standards.
The property will have to undergo and pass annual inspections as well to maintain its Section 8 eligibility.
If you would like more information on becoming a Section 8 certified Landlord, visit the Indianapolis Housing Agency’s website.
T&H Realty's Experience
We manage very few Section 8 properties. They make up less than 1% of our portfolio.
But, our experience with Section 8 has been, overall, fairly positive.
Early in our investing careers, we purchased some small duplexes that we marketed to Section 8 Tenants. We went through the process getting the Tenants moved in (which is, indeed a process) and, in some cases, these Tenants still reside in the properties.
Yes, we've had Section 8 Tenants for more than 15 years.
Now, each year, we are subjected to the inspections. And, as noted above, the results of some of these inspections can be frustrating. However, in some cases, they point out very valid issues that we're happy to address.
How Property Management companies handle Section 8 for Owners
If you decide to hire a Property Manager to handle your real estate investments, then they would handle all aspects of the Section 8 process.
For instance, we would file all of the necessary paperwork, arrange the inspection and conduct any additional work necessary to meet the HUD's housing requirements, as well as screen and place the Tenant based on our strict standards.
Hiring a PM makes this a pretty hands off process for you as the Owner, so it's something else to consider.
As you can see, there’s quite a bit to think about when it comes to Section 8.
Luckily, you still have a choice in the matter unlike many Landlords across the nation, but that could change in the not so distant future.
Even if you’re 100% sure you’re not going to start accepting Section 8 any time soon, it doesn’t hurt to be familiar with the process and understand the ins and outs in case your situation changes.