The Section 8 Housing Program provides safe, affordable housing for qualified low-income renters. At the same time, it provides strong return potential for investors.
This article provides an introduction to Section 8 for real estate investors. You’ll learn:
- What Section 8 means,
- How Section 8 works,
- The pros and cons of investing in Section 8 housing, and
- How to start investing in Section 8 right away.
What is Section 8 Housing?
Section 8 (S8) is a government-sponsored affordable housing program, designed to help low-income renters, including veterans, senior citizens, struggling families, and the differently-abled, cover their rent expenses each month.
The largest program of its kind in the US, S8 currently provides financial assistance to nearly five million households nationwide.
S8 has strict requirements and long wait lists for those who apply. But those who qualify can have a large portion of their rent and utility costs subsidized by the government. This means Section 8 landlords can collect market-rate rents while providing affordable housing solutions to those in need.
How Section 8 Works
Low-income renters can apply to receive Section 8 rent vouchers, which will pay up to 70% of their monthly rent and utility costs. These vouchers allow renters to keep their housing costs at a reasonable rate, compared to their income.
The program is managed by a local public housing agency (PHA) and supervised by the Department of Housing and Urban Development (HUD). In Los Angeles County, for example, the LA County Development Authority (LACDA) is the local public housing agency that administers the program. HUD, as the supervisor, ensures that local PHAs are compliant with the program’s rules. HUD also distributes funding to the local PHAs, which use these funds to pay the appropriate renter subsidies to landlords and utility companies.
There are two different programs for Section 8:
- Tenant-Based. With tenant-based S8, the housing vouchers move with the tenants. This allows renters to choose their units from any landlord willing to accept their vouchers, rather than staying exclusively in specific S8 developments.
- Project-Based. With project-based S8, vouchers stay with the units. This means the entire development must be rented to Section 8 participants, and renters cannot use their vouchers to relocate to new units.
The Section 8 program enforces strict eligibility criteria to ensure that vouchers are provided only to those who truly require assistance. The application process is difficult and lengthy, with many applicants waiting years to secure their vouchers. Applicants who have been awarded vouchers may wait months or years longer, looking for an available unit with a landlord willing to accept their vouchers.
Furthermore, the S8 program requires that tenants strictly adhere to their lease agreements. Violations of lease terms and/or community rules can result in forfeiture of the waiver, requiring the applicant to start the application process again from the beginning.
This extensive application process and wait time can produce reliable, long-term renters who are unwilling to jeopardize their rental status by ignoring the terms of their lease.
The Pros and Cons of Investing in Section 8 Housing
As with any real estate investing strategy, there are pros and cons to consider before investing in S8 housing.
The Benefits of Investing in Section 8 Housing
Section 8 investments provide many of the same advantages as traditional rental properties, including:
- Passive rental income potential. Owning Section 8 rental units is one option for earning passive income from real estate.
- Long-term appreciation. Because real estate grows in value over time, your net worth increases as you hold the asset.
- Tax breaks. There are several tax benefits of real estate investing. In most cases, investors can deduct operating expenses from their taxable income, pay lower capital gains tax rates on the sale of the property, and claim annual rental property depreciation for the life of the property.
Additionally, there are several advantages that pertain specifically to Section 8 investments, including:
- High demand. There are many Section 8 participants, just waiting for new units to become available.
- Short lease-up periods. The high demand means that new S8 developments can be filled quickly with qualified renters.
- Reliable rent payments. S8 renters are likely to pay their portion of rent on time to avoid risking their vouchers. The federally subsidized portion of the rent is paid directly by the local PHA. This combination creates stable cash flows for investors.
- Reduced vacancy losses. Section 8 renters are highly likely to renew their leases year after year to avoid any potential complications with their current vouchers.
- Strong rental rates. Because there is a shortage of properties available to Section 8 tenants, HUD often allows property owners to set rental rates at the higher end of the fair market range.
- Increasing the availability of affordable units. Section 8 investors can feel good about creating more affordable housing units for those in need.
The Potential Drawbacks of Investing in Section 8 Housing
In addition to the many benefits of investing in Section 8 housing, there are a few potential downsides to consider, including:
- Beaurocratic red tape. Complying with HUD and PHA property requirements can require extra time, energy, and expense. You will need to register to accept Section 8 vouchers, and there will be property inspections to ensure that the property is safe and sanitary.
- Payment delays for new tenants. Because the local PHA needs time to process a new tenant, it can take up to 60 days to receive the portion of the first month’s rent that is covered by the PHA.
- High upfront expenses. Whether you purchase a rental property to offer as Section 8 housing or develop a new project from the ground up, the upfront financial commitment is substantial.
- Ongoing property management. As with all rental properties, you will need to account for the ongoing day-to-day management of the property. This could mean allocating time and energy to manage the property yourself or budgeting to hire a professional property manager with S8 experience.
How to Become a Section 8 Landlord
If you want to become a Section 8 landlord, you’ll need to follow these five steps:
- Purchase or build a property that meets S8 requirements. Alternatively, if you already have a suitable property in your real estate portfolio, you could convert this property to S8 affordable housing.
- Apply with your local PHA to list your property as a Section 8 option.
- Have the property inspected by an S8 inspector, who will confirm that the property meets HUD’s guidelines, including local building and safety codes.
- Market the property for rent. Because the property will be added to the PHA’s list of Section 8 properties, you may have immediate inquiries from S8 participants who have been watching for new units.
- Screen applicants, sign the lease, and complete the S8-required documents. Your PHA will have a list of forms, addenda, and disclosures for you to submit for new Section 8 tenants.
How to Invest in Section 8 Housing Without the Hassle
If you are interested in gaining the benefits of investing in Section 8 properties, without the expense and hassle typically required, consider investing in a crowdfunded S8 real estate development. Crowdfunding pools capital from multiple investors, which enables you to buy into a deal for just a fraction of what you would pay to finance a build yourself. And it places the burden of overseeing construction, meeting S8 requirements, and managing the completed property on the project’s sponsor, leaving you free from worry!
The new Section 8 investment model by Gatsby Investment is a prime example of investing in Section 8 through crowdfunding. This unique investment opportunity combines the advantages of investing in a ground-up new development with the advantages of investing in Section 8 rentals. You get to buy into the deal before construction begins, allowing you to build immediate equity. Then, as your investment automatically carries over into the rental phase, capital gains taxes on the build are deferred while you earn passive rental income and appreciation over time.
Investing in Section 8 housing doesn’t need to be difficult, time-consuming, or expensive. When you partner with Gatsby Investment, all the hard work is done for you!