Monday, October 19, 2015

Charlotte Section 8 Leases: Should I Renew Them?




“Enjoy Free Rent!”
(Former advertisement to entice landlords to put their houses in the Charlotte Section 8 program)

Q: My Section 8 tenant’s lease is set to expire next month.  Should I offer to renew it?

A: Maybe…

As a Charlotte-based property manager and real estate investor, I’m a huge proponent of renewing leases.  I think it makes unbelievable financial sense; there is no missed rent from vacancies, no fix-up and holding costs, no management costs for landing new tenants, and it provides the ability to raise rents to stay around market rate.  And it also saves everyone a lot of work.  Whew!!

It really takes a lot of chronic tenant wrongs for me not to recommend renewing a lease.  Besides situations where an owner wants to move into their property or sell it, I can count on one hand the number the tenants I’ve not recommended renewing.  If a tenant wants to renew at market price, I’m asking where I should send the new lease.  It’s typically a done deal.

So when I was asked the other day whether I’d recommend offering to renew a client’s Section 8 lease, my fingers naturally wandered to the “Y”, “E”, and “S” keys on my laptop.  Then they stopped and I felt my stomach cramp up.  Can I really recommend this for this property?  The issues:

1.  The rent is not close to market rate even after filling out the moderately arduous Section 8 paperwork for an increase every year.  The Section 8 paperwork says we can ask for a maximum 5% increase a year; we’ve only been getting approved at 2% increases ($800.00 rent turns into $816.00- woo-hoo!).  And this is after increases were frozen a year or two ago, while private market rents (aka non-Section 8) have been going up by 10-20% for the past few years. 

2.  Annual Section 8 inspections are a hassle and seem to always result in a “fail” for trivial issues.  A true example of a recent “fail”: “paint is peeling on the ceiling.”  In a non-Section 8 world, if peeling paint on a ceiling was bothering a tenant, they would be told they were free to grab the extra paint can in their garage and touch it up.  In a Section 8 world, that is a “landlord responsibility” and a handyman must be sent out or rent payments will go into “abatement”.  Abatement is a very bad place to be as no rent comes in and past payments are clawed back (which would never happen in the private sector).

Unfortunately, landlords and property managers have figured out that:

Less Money + More Expenses + Government Regulations/Paperwork = Bad Deal

It’s not just Charlotte.  In Austin, Texas, there was a law made (that was later repealed) that required landlords to accept Section 8 tenants.  A study the city commissioned said that 90% of Austin landlords would not accept Section 8.  Due to the fact that most landlords are investing in real estate to maximize their financial return, this is not surprising.

So as property managers whose job it is to maximize our clients’ ROI, we stopped recommending Section 8 as a source of new tenants several years ago.  As discussed, the financial numbers didn’t add up.  However, we did allow Section 8 tenants who wanted to stay to continue to renew their leases if they chose to.

But should we continue to recommend allowing renewals?  It really comes down to whether the owner wants to expend the funds to fix-up the property and take the hit of vacancy until a new, non-Section 8 tenant comes on board.  Some, including me, have continued to renew the Section 8 leases until the tenant decided to not renew and vacate;  and then, once vacant, go exclusively to the private market going forward.  But if the rent differential continues to grow between Section 8 and market rate rent, the auto-renewal policy will need to be revisited if the Section 8 tenants still want to extend their leases.    

It’s tough to disrupt rental continuity and I don’t usually recommend it, but it may ultimately pay to take a closer look at the numbers before rubber-stamping your Section 8 lease renewal!


Brett Furniss is the head property manager of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords & Home of $100 Flat Fee Property Management.   BDF Realty utilizes their innovative Pod System for exceptional customer service in residential property management, home repairs, and home sales for single-family homes, Uptown condos, and town homes in the Charlotte-Metro Area.  Contact Us Today!

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