You cannot compete in real estate today without investing in quality niches. A good niche typically offers a combination of pricing, advantages, financing, advantages, protection from competition, and sometimes even tax benefits.
In the case of section 8 housing, you have the ability to receive all of the above real estate investing has been increasing and expanding for decades.
More and more people are investing because they know the amazing benefits of real estate and the strategies to best take advantage of it. But that also means more competition on a deal-by-deal basis, which actually drives up the competition. Therefore driving up the price and driving down returns, becoming a master of a niche-like section 8 allows you to narrow your focus and become a top-tier operator in a sector where others will not be able to compete with you in.
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How does section eight work?
So each year, every state in the country receives a grant from the federal government to cover housing assistance costs for a wide variety of uses in the state. When they receive that grant it uses the money to cover all the different programs they have for housing, including section 8, which is used to pay for tenants, rent, and utilities for lower-income earners, as well as a few other stipulations to apply.
Typically section 8 the program will cover up to 70% to 90% of the tenant’s costs for them to rent a location. Another way to think of this is, if you’re on the landlord`s side, that the government is personally covering a majority of your tenant’s rent payment. Look for me as a landlord, if you gave me the ability to have up to 70% to 90% of my tenant’s rent covered by the credit of the United States government, I would take that deal in a heartbeat and just remember the alternative is your rent is covered by the credit of somebody just off the street that applies to you.
So, having the government cover the majority of your tenants and rent is nice, but…
Why else do people care about section 8 and why would a landlord do this?
The first reason that landlords love section 8 is that it typically equals low vacancy rates and long-term tendencies. This is because as a government program, typically things take a long time and turnaround times can be very slow from the section 8 approval process. So what that means is once your tenants are typically in, they’re more than likely going to continue to renew their lease for more than the average tenant would, because if they want to go somewhere else, they gotta go through a full process with a section 8 office, which can be severely delayed and put the tenant in a tough position of not having that approval with this the added difficulty for the tenant to move.
It creates more tenant stability for the landlord. Also in many markets, there are often more section 8 tenants looking than there are landlords offerings, section 8 easing.
So tenant turnarounds and landlord releasing efforts are often quicker than you would expect on the open market because, with that waiting list of people wanting to get into that space and that space being pre-approved by section 8, it’s a faster turnaround to get a tenant directly into your space. Not only that there are often specific websites, message boards, and government post boards, where you can post specifically your available section 8 approved housing, meaning these tenants know exactly where to go to find these locations so they can go there quickly. They can contact you quickly and the process can turn around more quickly, where you have someone in your location paying rent fast, and with the small number of these websites and posting boards, it actually also decreases the landlord’s marketing expense, cause they don’t have to go out and pay for other listing services or signage, etc.
As mentioned before, there are often more tenants looking for section 8 benefits than there are landlords offering section 8 benefits. So this market dynamic actually has a further benefit.
The government agency known as HUD or Housing Urban Development will typically allow landlords to lease rates that are on the higher end of the average. So if there’s a range of rents in an area, landlords can typically go towards the higher end of the spectrum and receive rents that are higher than they would actually get in many cases.
Additionally, on a broader scale, section 8 is actually good for local economies with the help of the section 8 program people and families with smaller incomes can use that same amount of income, and constructs their dollars further with the government, essentially subsidizing lower-income families while also allowing those lower income families to enjoy living in a place they normally would not be able to afford that boosts the local economy on both sides, cause now local businesses have the workforce that they need and the lower income workers benefit from an environment with many pluses as well.
Many of the children in section 8 programs have the advantage of going to better schools and growing up in an area with a better educational background and growing up in an area with better educational resources and then a better job opportunity in their future as well as at the end of the day with the tenant, getting their rental expenses covered up to 70% to 90% of their rental billing. This is a great situation for the landlord to have an almost guaranteed rent and for the tenant to have a huge opportunity to have their expenses helped by the government.
So the question is…
How does this work in the real world? How many landlords actually use section eight? and what does it look like on the broader scale of multiple properties?
Say my first experience with section 8 was with a close friend of mine during 2008 great recession that was many years ago.
Now during those market conditions, the problem was not finding good deals. or tons markets were selling at below replacement costs, meaning if it cost $200 a foot to build that home, it was selling for maybe half the price of what it would cost to rebuild that property so the deals were insane.
The problem was at that time financing was extremely difficult to get from banks. The process to even get approved for the loan was so strict and so difficult with all these banks just trying to survive at the time that there were a ton of deals, but no money to go buy them. So the individuals that had some cash saved, or some dry powder were going into the market and made deals that would benefit them for decades to come because they had that money ready to buy at that moment. But there was another issue in the wake of 2008 and it was having tenants that could actually pay their bills.
So, a close friend of mine had a lot of cash and he knew he wanted to be in real estate. So he moved into the market. But with the concern of whether or not tenants would pay, he wanted some kind of guarantee and some stability of rent. So what did he do?
He moved forward with his game plan of buying multiple properties, but he went this section 8 route, knowing that the government was gonna be paying the lion’s share of his rent every month and the tenant would be insane not to pay the small remainder. This individual bought over a dozen homes and he kept them for nearly a decade, by the time he sold, it was an astronomical return on a percentage basis, but he also collected rent the entire time. So it was a massive win all around and that’s when it occurred to me the value of section 8.
If you set it up correctly, you jump through the government’s hoops and you know, and take advantage of the benefits that are already there for you that said it’s not all rosy and there are some serious considerations when moving forward with the section 8 programs.
As a landlord, here are some concerns and considerations that you should think through before moving forward with section 8. As part of your niche game plan. The first item is one of the most obvious and that’s that you’re dealing with the government, okay?
That means all the inefficiencies, all the problems, all the paperwork, all the red tape, all the bureaucracy you’re dealing with. All of this because of this, there can be situations where you’re scratching your head over the accountability of the agency in certain areas, as well as finding it a little frustrating that things might be taking a long time or are wildly inefficient at times.
It is not uncommon at all in many markets to deal with things like lost paperwork, a huge backlog of inspections, and even at times delayed payments to landlords. That could be a big deal for you as a landlord. If you’re requiring that money to make payments like mortgages or project your cash flow on a longer basis, the most honest answer might be well, the government’s involved. What did you expect?
The truth is the best and most effective answer is to plan accordingly and have your expectations set for the possibilities ahead of the government agency. Not always being the best operator along with the discussion of section 8. Also, come concerns about the impacts on a community. Now as great as the program is, it does not come without its critics. Those who are against section 8 will make the claim that developing a mixed-income community, which is supported by section 8.
A government agency actually ends up bringing down property values in the area and increasing crime. Some will say that poverty has not actually been solved by section 8, but instead, it’s just moved from the projects or from low-income areas into higher-income areas.
Instead, now let’s transition and talk about the worst-case scenario, which is a tenant who does not pay you. They default on their lease obligation and you must evict them. Now moving through this process with a section 8 tenant can be a little bit more difficult and cumbersome for the landlord that is also not receiving rent. This extra complication stems from HUD’s 29-page guidelines that landlords must follow to effectively evict a section 8 tenant. These procedures are required and you must be compliant with them during that process. So it’s a lot to deal with on the landlord’s side.
However, to understand the full picture, you must understand that the tenants are extremely disincentivized to not pay their rent. Frankly, the incentive is for them to pay the rent on time every single month, because if they’re too difficult or have an eviction from section 8, they can be removed from section 8 for the entirety of their lifetime and if you want to think about it from an attendance perspective and the government’s gonna pay up to 70% to 90% of your monthly rent expenses, then how can you afford to mess this amazing opportunity up?
You want to pay your rent on time and you want to make sure you’re a good tenant in the section 8 program because it’s such amazing savings for you circling back to compliance. Let’s go over a list of the steps to take as a landlord to become a section 8 landlord to become compliant and approved by section 8 first and foremost, the property must pass inspection and maintain compliance with the expectations of HUD and section eight throughout the entirety of the tenant, leasing there as part of these expectations, the owner must sign an agreement with the state’s PHA, the public housing authority.
It outlines specifically what the expectations are of the tenant and the landlord. As part of that process, the public housing authority will evaluate the rates as well, which again are typically on the higher side of the market to the benefit of the landlord, but they do verify that the rates are within the expected range and you are compliant pro tip on this item, the rates being approved are often public information and you can find them on a Google search.
So if you’re looking to invest in a section in a specific county, you can look online and find what the upper limits of those rates are. So, you know, if the investments are worth it to you and also the most that you could expect for your monthly rent.
The next major step is going to be finding your tenant after you’ve marketed on all the public channels and even the government channels of places where the section 8 tenants are going to look, you will get leads coming in.
So it’s your job as the landlord moves through a normal tenant screening process, doing things like checking their credit, their rental history, etc. From there, once you have found and selected your tenant and you guys have entered into an agreement, you can then finalize with the public housing authority and you are good to go. The number one thing is to keep in touch with section 8 and the public housing authority to see if there are any changes in expectations, rental rates, etc, government programs and they’re not always the best at circulating those updates to you.
The person that would be very impacted by it. The reality is there is a ton of opportunity with niches like section 8, and there are a ton more details that we could dive into forever.
But if you’re interested in learning more about section 8 and other niches that you could successfully pursue as well, check out saint.investment.com/resources. This is our library of tons of amazing information for investors to take a look at and learn more about things in the real estate space and if you’re interested in my all-time, number one real estate investment strategy that I recommend, then click watch my video in my youtube channel about income funds, we go over the ins and outs of income funds, the strategies in which to use income funds, and the amazing ways that you as an investor can take advantage of this niche to have amazing flexibility, amazing cash flow, and still get your money back when you need it. At the time that’s the most strategic mixing, investing an income fund into my portfolio, completely changed my strategy and boosted my return significantly.
See you guys!
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.