“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 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
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