Section 8 Program Worth Revisiting? A Definite Maybe

No one really liked Janie.  And there were a lot of reasons why.  For a teenager, she was pretty much a know-at-all.  Stubbornly obnoxious.  She would not let you get a word in edgewise.  Always right.  Rude.  Cocky.  Maladjusted.  And that was just her award-losing personality.  And physically?  Her scrawny frame, big glasses, and overflowing braces (often full of food scraps) made her equally unappealing.

 

Now fast forward 5 years in the life of Janie.  After years of dejection, she has softened a bit.  Instead of looking completely past you before beginning her monologue on her life’s recent happenings, she’ll toss a few platitudes your way that make you feel a small connection.  “How are you doing?”  “How’s your brother?  “You get that mole taken off your back yet?”  She’ll still take the last doughnut off the plate in front of both of you, but now she’ll pause and feign a glance your way for approval.  She still texts constantly when you talk, but now raises her head for momentary eye contact when you bring up your mother’s cancer treatments.  And her scrawny body has filled out, she started wearing contact lenses, and has a nice straight smile now; some may say she isn’t bad to look at, relatively attractive even.

 

But Janie’s not for everyone.  Maybe not for most people.  But some people “get her” and even go out of their way to be around her.  Some of your friends have even dated her.   

 

Ever know anyone like that?

 

The Section 8 program is like Janie in a way.  Several years ago, I wrote how we needed to get our landlords out of the Section 8 business because it was impossible to get a good ROI for our owner clients.  As a Charlotte property manager, we couldn’t cost justify the lower rents, costly repair items, poor communication, and overall effort needed to recommend the program.  And I still get a little queasy thinking about it.

 

As a footnote, we do have clients that have kept their homes in the Section 8 program.  The owners allowed the tenants to keep renewing their leases (most at significantly below market rates) and the Section 8 tenants chose to do so.  The advantages to our owners are continued rental payments and not having to fix-up their properties to get them market-ready for new tenants.  The negatives are that as Charlotte rental rates have been going up 5-10% annually, Section 8 has capped their permitted rental increases (if approved) to 2% annually (in real numbers: $900 monthly rent = $18.00 rent increase- not much to get excited about).  Section 8 also conducts annual inspections which almost always lead to an owner repair bill; some of the items would never have to be repaired if the house didn’t have to meet many government regulations (re: peeling paint on ceiling, etc.).

 

However, in the past 6 months, Section 8 has enacted 2 changes that I thought were very landlord friendly:

 

1. Locking a tenant into a property if they have lived there for 18 months.  The owner has the option of not renewing the lease, but the tenant does not have the option of moving if they want to stay in the Section 8 program.
2. Changing house inspections from annually to biannually.  So, now the repairs only have to be made every 2 years (which is a huge deal for landlords who have gone through the nightmare of rent abatement for multiple inspection failures).

 

This still doesn’t make Section 8 work for everyone, but it might start making sense for some people.  And as responsible property managers, it is something we will need to consider recommending again for certain owners (risk averse) and certain properties (difficult to fill, long term investment holds, areas of historically low rent appreciation).  While the private rental market might be compared to the stock market (higher yields, more volatility), the Section 8 market might now be compared to the bond market (lower yields, steadier income).

 

So… your best buddy saw Janie the other day and said she was looking good and they had a nice chat.  He said she asked about you.  Your stomach still churns when thinking about your past dealings with her, but since she’s interested, maybe she’s worth meeting up for coffee?  Maybe she’s changed?

 

Anyway, it’s something to think about- a definite maybe.  Happy landlording! 

 

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!

Section 8 Offers “Free Rent”? 5 Reasons Many Landlords Still Choose Not To Participate

I saw an ad for a Section 8 speaker touting their government-sponsored rental assistance program as “Free Rent” for landlords.  I had to laugh.  As we’ve been told our whole lives, nothing worthwhile is free.  And the Section 8 program is not an exception to the rule.

For the uninitiated, the Section 8 housing program allows people who earn under a certain income to receive a housing voucher to partially subsidize or pay for their rent in full.  This seems like a boon for landlords.

The process looks like this: For the tenants, they need to scour rental home ads and find landlords who are willing to accept Section 8 vouchers.  For the landlords, they need to willingly accept them.  The problem is that many landlords choose not to accept them, which seems strange.  The landlords do not want government-guaranteed “free rent”??  Well, maybe free isn’t always so free…

A big misconception is that the tenants are the reason landlords hesitate to accept Section 8 vouchers.  To me, this is patently false.  Some of our nicest and best tenants use Section 8.  Really, on our rental applications for Section 8 tenants, we run them the way we typically do, but deemphasize income and credit score requirements as Section 8 has them partially backstopped. 

So, if the tenants are good, why not accept Section 8?  The 5 main reasons many landlords choose not to accept Section 8 vouchers:

1.  Too much paperwork.  It’s not easy for landlords, especially non-real estate professionals, to navigate the process.

2.  The governmental standards for housing are really high and your house will fail the inspection.  Slum lords (ex: the type of people who ask if tenants really need clean, running water) are not the only people that fail; almost everyone fails the inspections.  I can speak from personal experience, anecdotal evidence, and conversations with the inspectors.  I asked one inspector what percentage of homes passed their first time and he laughed.  “Seriously?  Zero percent.  I’m not kidding.”  He went on to say that his own house wouldn’t pass a Section 8 inspection.  Our latest fail report had paint splatter on a strike plate and a loose electrical outlet as reasons it failed.  When there are hundreds of items that the inspectors are looking for, you are behind the eight ball.

3.  Customer service is typically unresponsive.  I don’t really blame the employees.  The workload that is saddled on them is immense.  I asked an inspector the other day a question about a failed item on the inspection report and she exhaustedly told me she couldn’t remember- she conducts 15 different home inspections every day!  So, bottom line, getting anything accomplished with them takes a lot of time, energy, and follow-up.  

4.  Waiting is the hardest part.  We had a house that took 5 weeks to get an initial inspection.  So, for 5 weeks, we ate the rent and utilities as the house stood vacant.  There was no “free rent” or sympathy.  After the home inevitably failed, there was another 2 week wait for a reinspection.  The combined 7 weeks of non-recoupable utility and mortgage payments hurt.  So did the vandalism that occurred as the house sat empty. 

5.  Re-inspection failures and rent abatement really hurt.  So, let’s say you pass the initial inspection and the tenant moves in.  At the ten-month mark of the tenancy, there is a reinspection where the Section 8 inspectors look for housing violations.  We used to occasionally pass these, but that hasn’t happened in the past few years due to stricter regulations.  The inspectors will find new things that happened during the tenancy; sometimes they find things they missed on the first inspection.  Our latest fail was partially for a loose banister.

The problem with failing reinspections is that you are given one chance to fix the items.  They provide a punch list so it should be as simple as giving it to a handyman to fix, right?  Well, the descriptions detailing what is wrong are nebulous and getting the inspectors on the phone to ask them to remember your home and a specific issue is not likely.  The handyman does the best he can, but when it fails, you enter into the unfriendly world of rent abatement.

Rent abatement is how property managers get fired and cash flow becomes difficult.  It starts with the failed second inspection.  This letter comes a week after the inspection letting you know what items you failed.  You are instructed to fix the outstanding items and then schedule a final reinspection.  During this time, not only is rent deducted for the abated period while waiting for the final inspection (your bank account is debited the following month on the 1^st when payments are made), there is no rent paid for the coming month.  For example:

Your rent due is $900/month and your abated 2-week period costs you ($450).

On the first of the month after abatement, not only do you not receive the $900 due (and the tenant is still living in your rental home and the bank wants your mortgage payment), you are clawed back $450 (payable immediately).  This essentially puts you in the hole $1,350 (not counting the funds for the repairs on the home).  Cash flow becomes a big issue.  This is when “free rent” becomes “free rent” for the government.  You’re a great citizen to do this, but you don’t feel so great when this happens. 

If you pass on your final reinspection, you will get the $900 back the following month (the $450 is gone forever).  If you fail, your contract with Section 8 is terminated and the tenant is free to leave.   This presents a much bigger problem as the tenant usually doesn’t have money to pay rent, Section 8 is not paying you, and the tenant needs to enter the arduous, time-consuming process of finding a new Section 8-eligible home (while living rent-free in yours).

In closing, Section 8 can be a good program if you know it well and have repair people very familiar with their changing requirements.  However, “free rent” for landlords is a gigantic misnomer and is about as far away from the truth as you can get.  It can be intelligently argued that Section 8 vouchers are much more risky than working with non-subsidized tenants.  “Nothing is free” is the true mantra!  

Brett Furniss is President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords, managing single-family homes, condos, and town homes in the Charlotte-Metro Area.   BDF Realty’s services include property management, home fix-ups, and home sales, including Rent-To-Sell (“When You Need a New Solution to Sell Your Home”).  His newest book is A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!) which is available on-line now.  

Charlotte Property Management Weekly: Is the Section 8 Program Good for Landlords?

I was signing a lease with a Charlotte Section 8 tenant (the government subsidized rental program) a year or two ago and asked her if she liked the Section 8 program. She smiled and said, “Yeah, it’s a pretty good deal.” I laughed; when the government is willing to pay some (or all) of your rent, I guess it would be tough to answer any other way!




So, it’s a good deal for tenants. But is it a good deal for landlords?



I only have limited space, but here are the most pertinent and succinct pieces of advice I can offer to landlords to determine whether allowing Section 8 tenants to rent your properties is a good deal:



1. If your house is higher-end, Section 8 has limits on how much they are willing to pay based on the amount of bedrooms and whether utilities are included. This leads into point #2.

2. The rental rates aren’t that high. To see if allowing Section 8 tenants to rent your home makes sense, the cash-flow needs to be computed on a property-by-property basis. On some properties, the cash flow is good and should be recommended as a viable rental source. On others, it just doesn’t make sense.

3. The house will need to meet many government requirements and will be inspected to make sure it is up to snuff. If the house is newer and kept up, it will usually pass. If it is older, there are usually costs incurred to meeting these requirements; the question is if incurring these costs is worth it.

4. It’s a government program which always means two things: it isn’t fast and features many, many documents to sign.

5. Payment is guaranteed, but when mistakes are made (aka missing or incorrect payments), getting them corrected is usually arduous. See point #4.



And as a bonus, here is an answer to our most FAQ by far:



Q: If I allow Section 8 tenants to rent my house, am I just asking for my property to be torn up?



A: I haven’t seen this be the case. There is actually additional protection against a Section 8 tenant tearing up the home, when compared to a regular tenant. Let me explain. The Section 8 program has a huge tenant waiting list (no surprise there!). If a Section 8 tenant tears up the home (or does anything that violates the lease), there is an implied understanding that they can be reported to Section 8 and be removed from the program. The tenant cannot afford for this to happen!



Section 8 can be a great option for the right house. Use it wisely and selectively!



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)