Ep. #10 -Should Landlords Avoid Section 8 Tenants? Or Can Accepting Section 8 Vouchers Grow Your Rental Business?

There's no escaping that Section 8 has a stigma among Landlords. "Section 8" is one of my keyword alerts on the Real Estate Investor Forum at BiggerPockets.com - so I get text alerts whenever Section 8 is being discussed on the site. I try to engage in as many of those conversations as I can - and it would be an understatement to say that most of the comments are negative towards the program and those who are on it.

Landlords tend to be rather conservative in both their financial and political outlook. Many invest in Real Estate as a means to avoid high taxes. So a tax payer funded assistance program (of any kind, housing or otherwise) is considered to be a "government handout", which is then seen as the cause of the high taxes they seek to avoid in the first place. For that reason (and others), Section 8 is thus rejected outright by many (if not most) Landlords.

And to make matters worse, Section 8 tenants have gotten a reputation (deserved or not) as being problematic, including often being in violation of leases, abusive to neighbors and Landlords, as well as, destructive to their properties. So should Landlords avoid Section 8 tenants? Or can accepting Section 8 vouchers grow your rental business? I'll seek to answer these questions in this show (from my prospective anyway).

Intro...

Welcome to Episode #10! - I've reached double digits, and counting! I've got some more topics I wish to discuss solo, but I'll also have guests on soon - so look out!

Section 8 - is a government assistance / rent subsidy program for certain individuals and families with very low income, allowing participants to secure private housing of their choice where the rent is then fully or partially paid by the program. While in some locations Landlord participation in the Section 8 program is mandated by law - Landlords in most locations choose to participate in the program (or not). This show relates to those locations where Landlords have a choice - and then, which choice you may want to make.

So I wish to start by providing a few quotes from Matthew Desmond, author of the book "Evicted: Poverty and Profit in the American City". I've not read this book yet, but I will soon. I understand that its rather harsh towards Landlords, but I wish to read and judge that for myself. But even if so, the following quotes from the author should help to set the stage as to why I participate in the Section 8 program...

"I think that we value fairness in this country. We value equal opportunity. Without a stable home, those ideals really fall apart."
Another...
 
"Housing is absolutely essential to human flourishing. Without stable shelter, it all falls apart."
And another...
 
"We can start with housing, the sturdiest of footholds for economic mobility. A national affordable housing program would be an anti-poverty effort, human capital investment, community improvement plan, and public health initiative all rolled into one."
 
And one more...
 
"The poor don't want some small life. They don't want to game the system. They want to contribute, and they want to thrive. But poverty reduces people born for better things."

Four quotes, by Matthew Desmond.

Now I'm a pretty conservative guy, and I've voted for both Democrats and Republicans throughout my voting life at all levels of government. And you would be hard pressed to find someone who hates high taxes more than me. But I also feel that now in the 21st Century here in the United States of America - we as a society have to find viable solutions for certain basic essentials of human life and dignity, like food, clothing, shelter, healthcare, education and jobs.

As a Landlord, I can't do anything about most of those, but I do aid in providing shelter / housing for over a dozen families. And as an Entrepreneur, I also employ (at least part-time) dozens of people, who can then use that pay to help obtain those necessities on their own. I take pride in these roles of doing my small part to help provide housing and jobs.

And now, not to go religious on you, but Jesus says in the Bible at John 12:8 a statement to the effect of "The poor you will always have with you". Many people mistakenly take this scripture to mean it is a waste of our time trying to aid the poor or end poverty; but a more in depth study of this and other statements from Jesus actually reveals the requirement to be of aid to those who are in need. Now if you question that and you want to have a religious discussion with me, by all means - bring it on. But I warn you, I'm not ignorant of the Bible. I've spent more time studying the Bible than I have learning Real Estate.

So I see the need for individuals and society as a whole to play a role in being of aid to those who are in need. And while certainly not perfect, I see the Section 8 program as an attempt (flawed though it may be) to provide housing to families with low income. I therefore see it as my duty as a person of Faith and a Landlord with the means to do so, to participate in the program as best I'm able (but I'll give you a possible exception to that statement later). And please forgive me if I like getting paid by the government each month in the process of participating in the Section 8 program... It feels like I'm getting my tax money back. And I paid a LOT in taxes before I got into Real Estate.

So despite the negative reputation and stereotypes, I started accepting Section 8 as of my 4th property. And now, a few years later, exactly 1 less than half my properties are rented to person's with Section 8 vouchers - and I'm happy to participate in the program, plus I benefit from doing so.

But should you consider accepting Section 8?
In my City of Durham, North Carolina - Section 8 (called the Housing Choice Voucher Program) pays market rents, and sometimes ABOVE market rents. So whenever I obtain another rental home, I look to make it available to someone on Section 8, as long as I'm able to do so at or reasonably near market rent for a tenant who passes all of my various qualifications and screening criteria.

To give you an example of how I work to make my units available to Section 8 voucher holders... I recently had a 3BR Townhouse listed for rent at $1,320/mo. A person with a Section 8 voucher toured and then applied for the home, and all qualification and screening criteria were well met by the person, with the exception of income (which needs to be 3x rent). But in the case of a voucher holder, the income qualification can potentially be covered by the voucher (and I'll speak more on that shortly).

In Durham, Section 8 (the Housing Choice Voucher Program) is administered by Durham Housing Authority (DHA), and they will initially pay up to $1,356/mo for a 3BR. But the actual approved rent depends on the property location, included amenities, plus the income and other factors of the prospective tenant, such as their income, family size, etc... In the case of this Townhouse listing at $1,320/mo, the person was approved by DHA for only $1,287/mo - which is $33/mo LESS than I was seeking.

But despite the $33/mo shortfall, I accepted this tenant at $1,287/mo, because that amount is still profitable for me. Also, I have a non-Section 8 tenant in an almost identical unit at the same location at $1,260/mo, so I'm still getting more from Section 8. Yes, I could have held out for the $1,320/mo that I was originally seeking (and would have likely gotten it), but maybe only after an additional month of vacancy. Further, I can almost certainly get it increased in the 2nd year. So I'll take a 1st year hit of $396, but as it would happen, this tenant was ready to move-in within a shorter period of time than others who applied. So I actually make more for the year at the lower rent than I would have with another tenant who needed an additional month or more to move-in - thereby saving me a month of vacancy loss. I lose over 3 times as much from a month of vacancy than I do from discounting the rent.

I mentioned another example in last week's episode, of where I deliberately set the rent ask at $1,512/mo for one of my better single family 4BR homes - instead of $1,525/mo that I could have gotten. Because $1,512 is the maximum DHA will pay for a 4 bedroom under Section 8. Thus, by setting this rent, I opened my rental listing up to all those in Durham with Section 8 vouchers; and I was able to list the house for rent on GoSection8.com - resulting in many additional inquires.

As I mentioned last week... I contacted the Director of Durham Housing Authority's - Housing Choice Voucher Program. She informed me that there were 2,742 participants on the HCV program. And approximately 65 families with vouchers were searching for housing in Durham. With over 1,500 additional families on the waiting list - just to get a voucher to then begin their housing search.

So I seek to make my rental homes available to Section 8 voucher holders, as listing on GoSection8.com not only gets the attention of those those 65 families in Durham now searching (who only have 90 to 120 days to find a home); but I also potentially get those 2,742 existing participants looking at my property, as they are often seeking to improve upon where they live now - that they likely selected out of desperation before their 90 to 120 days expired when they first received their voucher.

But not only that... I've found that with proper tenant screening, consistent policies and procedures, clear communication, setting of expectations in advance, plus treating people with respect as valued customers - I've had very little in the way of problems with my Section 8 tenants. And with two exceptions that I'll relate in a moment, I've yet to have a Section 8 tenant leave one of my properties. In other words, they've been great long-term tenants. And on the other hand, my non-Section 8 tenants are always subject to leave, as they simply have more options.

But you give a person a great home in a peaceful location where they and their children can feel safe and make it clear what is required of them to keep that home - it would take a special person (and I use the word "special" in a negative sense) to mess up that ideal situation.

But there are ways this ideal situation can go wrong...

And that is among the many things that Landlords fear about participating in the Section 8 program - things can go wrong. Remember I mentioned two exceptions to never having a Section 8 tenant leave one of my properties... It has happened twice so far.

As I've mentioned before, I started my Real Estate Investing career in 2015; and I accepted my first Section 8 tenant with property #4 in 2016. That tenant is still with me today... No problems! But I also put a Section 8 tenant into my 5th property, and it did not go well. To date, I've had two problem tenants, and both were on Section 8. Thankfully, I've still not had to evict anyone; and I've been able to return at least a portion of everyone's security deposit - including those two.

But for those two Section 8 tenants who caused problems for me, it was actually a failure on my part that allowed them to become tenants in the first place. As it would happen, I actually owe them both a debt of gratitude, as they helped me to become a better Landlord. These two tenants are responsible for most of my tenant screening rules and additional lease provisions. I may not be confident enough today in my skills as a Landlord to take on third party property management as I have, if not for those two tenants. And so I have them to thank for Blue Chariot Management, where I now manage properties for others, because they made me raise my game.

In both cases, after suffering through repeated communication lapses and frustrations, I just refused to renew their leases and gave them notices to vacate. Each moved out peacefully and their security deposits were sufficient to remedy any damages, with the remainders refunded. But I learned a ton about proper tenant screening in the process (things I could have done better); and I improved my lease and processes greatly. And so while anything is possible - it is far less likely that this will happen again anytime soon. Although it is inevitable that I'll get another problem tenant again eventually (Section 8 or not) - as good tenants can go bad for any number of reasons.

A major concern of Landlords who accept Section 8 tenants...

You fear that the tenant will someday lose their voucher and then be unable to afford the rent. For example, I have a Section 8 tenant who pays less than $20/mo tenant share, against nearly $1,200/mo in rent. If this tenant ever lost the voucher, it is next to impossible to expect they'd be able to cover the rent on their own. And I'd be faced with having to evict the family if they failed to leave voluntarily. Because as much as I'd feel compelled to be of aid, it is a business - and I feel that I was of aid by having made the home available to Section 8 to begin with.

So if the person loses their voucher for ANY reason, they'd have to realize that I'm running a business. And that rent has to be paid in full so that I can pay the mortgage and other expenses associated with the property, such as: taxes; and insurance; and there might be HOA dues; and property management, and repairs and maintenance; and vacancy; and capital expenditures. Owning rental property is not free, its not even cheap - and if the rent isn't being paid, all of those expenses (and more) has to come out of the landlord's pocket. And no business can lose money and stay in business for long. And so then it becomes unfair even to the other tenants who are paying their rent in full and on time. So even if there was no mortgage on the property, all of those other expenses still have to be paid. And what if the Landlord is retired and living on that rental income. The Landlord is under no obligation to take a hit on the rent that is owed - and should NOT do so.

But this risk of voucher loss may rise to the level of unacceptability in certain cities. I'm fortunate here in Durham, North Carolina - that not only is the Section 8 program administrated effectively by Durham Housing Authority; but North Carolina Landlord / Tenant Law is such that it doesn't usually take more than a month or so to get someone out of a home if they are behind on rent.

Here in North Carolina, I could literally file for eviction on the 17th of June, after having sent a 10-Day Pay or Vacate Notice on the 6th. And if hitting all the dates with courts processing normally, and advertising the coming vacancy during the process, I could have a new tenant in that home by August 1st (if no significant damage was done) - and if so, certainly by September 1st. So a worst case eviction scenario here is 3 months of missed rent, and it can be as little as 2.

Now 2 or 3 months is certainly a lot to lose in rent, but at least it not like some places where its 6 months or a year or more. I've even heard of some places where it can be years (multiple) - just to get someone out of a home who's not paying a dime.

So because tenants here know the eviction process moves quickly in comparison, and they know it will be highly unlikely to get approved for another rental anytime soon with an eviction on their record - most would not push it that far, and just leave on their own. Also, since I try to maintain excellent communication and respectful relationships with my tenants, most people (being decent) would not want to create a hostile situation with me over an issue that I didn't cause. Especially based upon how I've treated them during their tenancy, making repairs and doing things as necessary - and also that I made the home available to them in the first place.

Even those two tenant I had problems with, avoided creating a hostile situation with me... Why?

A Section 8 voucher creates an additional incentive for the tenant to avoid conflict with the Landlord...

Here in Durham, if a person with a Section 8 voucher wants to use their voucher elsewhere, they must be in good standing with their prior landlord (like ME). They cannot trash my property or leave owning me money, and then just move their voucher over to the next Landlord's property. Having the voucher in place actually creates a major incentive to act right - something I don't have as leverage against my non-Section 8 voucher tenants.

Combine this factor of leverage that the voucher creates along with my highly desirable homes - and it is very unlikely that a Section 8 tenant would cause conflict with me. As previously stated, there are over 1,500 families waiting to get vouchers in Durham, with 65 families currently looking for homes - who are under a 90 to 120 day time-limit to find one.

For myself, having gotten a reputation in Durham as a Landlord who provides nice homes on Section 8 - I get calls and emails weekly from person's wanting to know if I have any homes available or coming. I also make it abundantly clear during the first rental inquiry contact and at each step along the way to tenancy - that I am extremely serious and adamant about tenant screening and following my lease to the letter. These things combined with scheduled inspection, effective communication and respectful valued customer (tenant) treatment - I fully expect my Section 8 tenants to remain with me for years.

And I especially like it when their going to school, working to improve their credit and when DHA lowers their payment portion - because that means the person has gotten a new job with better pay. Helping to provide a great home for a family that creates a sense of safety and security, while they work to improve their overall situation - is extremely satisfying.

Especially when considering that most of my homes were uninhabitable when I bought them, and I rehabbed them into excellent places to live. That doesn't just benefit me, but it benefits that tenant and it benefits the community that house is in, that it was previously a blight on the neighborhood. It benefits the City, the State. And most of all it provides a great home for children to learn and grow up to become productive adults, which benefits the Country and everyone.

This is why, despite being a person who hates high taxes, I also support programs like Section 8, as the alternative is so much worse. Its hard for a person to improve their situation in life when they cannot even lay their head down at night and think about how to do so. So, I take pride in helping to make that possible, and hey... I benefit myself financially in the process! What's better than that!?

But does Section 8 work like this where your properties are located?

From my engagement with Landlords in other locations on BiggerPockets.com - I'm well aware that what I've stated here does not necessarily apply everywhere. There are certainly cities where the Section 8 program is a joke of inefficiencies, ridiculously policies and frustrations at every turn - where a Landlord must laugh to avoid crying. Combine a poorly run County Section 8 program with a State's and/or City's Landlord / Tenant Laws that are grossly shewed towards the tenant - and you've got a recipe for disaster that every Landlord would be well advised to AVOID.

So ultimately you need to educate yourself on your City and State Landlord / Tenant Laws. If it is likely you'll miss more than 3 months of rent trying to evict someone, then you might want to avoid even owning rental property in that State. I'm aware (like I said) of some States where it can take 6 months or more to evict someone (even years). Why bother being a Landlord in those places!?

Then for those locations that evictions can happen within a reasonable amount of time, further education yourself on how the Section 8 program is administered in those Counties. Learn how inspections are handled. Learn how tenant caused property damage is treated. Learn if tenants can move elsewhere without being in good standing with you as their current or prior Landlord. Learn how payments are handled, rent increases, etc... And when everything aligns well (as it does thankfully for me in Durham, North Carolina) - any failure to do well with Section 8 at that point is almost certainly YOUR FAULT. As it was my fault that I ended up with those two problem tenants. It was NOT the fault of the Section 8 program or Durham Housing Authority.

So PLEASE don't let the Landlord Horror Stories of others keep you from participating in the Section 8 program, as I wouldn't have ANY rental right now, if I had listened to others about all the horrible things tenants were going to do to my homes - while also not paying their rent.

Now just because Section 8 is for families with low income, that doesn't mean your properties have to be of low quality...

What is the rent range of  your homes? Do you have properties that rent for less than $500/mo? If so, you may wish to disregard ALL that I've said in this show, as it does not likely apply to your properties. I don't have any properties that rent for less than $900/mo for a 2BR for example. My properties are all in desirable locations where a person would actually WANT to live. Most have granite counters, vinyl plank and tile flooring, stainless steel appliances and other such upgrades that make them both durable and highly desirable. These are critical elements, as a desirable home in an ideal location will attract the best applicants - because with or without vouchers, bad properties attract bad tenants. Because that bad tenant knows that you probably can't rent your P.O.S. property to anyone better than them.

But if you have a great property, bad tenants know you have a choice in who you're going to rent it to, so most don't even bother applying once confronted with your professional handling and pre-screening methods. On the other hand, good tenants (including those with vouchers) will be attracted to your great property and they'll line up to be the one who gets it. And if a person with a voucher is fortunate enough to be that one, they will not want to mess around and risk losing it by violating the lease or creating conflict with the landlord or neighbors.

Further, I collect a substantial security deposit. North Carolina law allows for up to 2x rent, and I advertise my rentals at 1.5x rent. I'll then lower it to 1x rent for extremely well qualified applicants; or increase it to 2x rent for those with greater challenges than average. But the average applicant for one of my rentals can expect to pay 1-1/2 times rent for their security deposit. Just the amount of the security deposit rules out many seeking my homes, but it is a further protection for me in that a person will not want to risk losing their $1,800 security deposit when their tenancy comes to an end. They'll need that to move into their next home, so doing damage to my property is certainly not in their best interest. And a lot of times those security deposit funds were borrowed from a family member or friends who did not want them to miss out on having this great home. And that is further pressure to act right.

And for those who are unable to come up with the security deposit, Durham has a few programs, including one for homelessness prevention, that will pay the security deposit on behalf of the tenant - who then gets that money refunded directly back to them when they move elsewhere without having done any damage or owing any back rent or other such funds. Since use of such programs are limited, it may be critical for that person to get the full security deposit refunded. And I help them in that regard by conducting quarterly inspection during which I point out anything that they need to address or actions they need to alter that could impact their security deposit. I WANT them to get the full security deposit refunded, as it means my property has not been damaged beyond normal and reasonable wear-and-tear, and that they have no outstanding balance owed. That is great for me and gives them the funds they need to continue elsewhere. But even that is rare, because as I said, they tend to stay!

But if you are renting homes that are $450/mo for a 2BR and you are charging one month's rent as your security deposit, the person who wants that home is far more likely to be a problem tenant than someone paying twice that amount at $900 for a much better home and location. People who rent those homes are doing so for a reason, and you don't want their reason to become your problem. Plus, a $450 security deposit is not enough money to have an impact on behavior, nor is it enough to really fix anything that has been damaged.

And even for those good people who are forced to rent that $450/mo home because they cannot find anything better within the 90 to 120 window given - since far to few Landlords participate in the Section 8 program, and even fewer with nicer properties. That family is going to treat the property for what its worth and how it makes them feel. If they come home to a location and home that they don't like, they are going to treat it poorly (its just human nature). And likewise, if they come home to a location and home they love, they are far more likely to treat it with the prideful care reflected by the pride they feel in having this as their home (again, its just human nature).

That is why bad properties tend to get worse, and good properties tend to stay good or even get better. Its also the concept behind Home Owner's Associations to enforce a neighborhood standard of expectations, rules and standards. The average person will tend to live up or down to what's present and allowed around them. If you accidentally drop some trash on the ground and it lands atop other trash already there, you are far less likely to pick it up than if what you had dropped was now the only trash present. So have nice properties and set high expectations, and enforce your rules to keep them that way.

So my conclusion on the Section 8 / Housing Choice Voucher Program for Landlords is...

That you get out what you put in. You will be successfully if you have a superior product (your ideally located home where people actually WANT to live with nice upgraded amenities), and strict adherence to proper policies and procedures for tenant screening, following your lease and generally how you run your rental business - with a focus on customer (tenant) service and communication.

These are the keys... As a Landlord, you can be of immense aid to those in need of a safe and secure home while benefiting yourself financially in the process. Again, what is better than that!? OR, you can ignorantly state that ALL people on ANY form of public assistance are bad, and they have only themselves to blame for their situation. You can claim that their entitlement mentality will result in your property being destroyed, ending in a costly eviction - and for those contrived reasons, refuse to participate in the program to the harm of those you could have aided and to your own financial harm.

If you try and fail at Section 8 rentals, look at yourself and improve your process; or hire Blue Chariot Management to handle it all for you. But I will put one asterisks on it... If you live in one of those areas where tenants rule in the Landlord / Tenant Law - and it takes something like 6 months or more to evict a person - then screw that market. Take your ball and go to a market where Landlords are actually seen as a solution to the housing problem, and not the problem themselves.

Those markets can have their rent control and tenants living months and longer for free. I won't be the person buying homes there, and we'll see where people live when no one has any incentive to buy and rehab distressed houses into rentals. But that's my conservative side coming out again.

State and local governments need to realize that you get more of what you reward and less of what you punish. So if you reward Landlords for working to create more affordable rental housing, and create a system that makes it logical for them to do so - you will naturally get more affordable housing. But if you punish Landlords, for example by making it take forever to get non-paying tenants out of a property, or by imposing rent control - how can you be so stupid to not realize you'll get LESS of what you claim to want?

Thankfully, here in Durham North Carolina (at least for now), the Section 8 program appears to be administered well by Durham Housing Authority (not perfect, but well). And there is no rent control and it does not take an unreasonable amount of time to evict a non-paying tenant. So I would say this is a great location to be a Landlord and it is well worth the effort to participate in the Section 8 program here. Others will differ from my opinion on this, but they are likely in a market that is more harsh towards Landlords and/or the Section 8 program is not well run in their area. Also, they have likely not put in the work to make their product desirable and to have policies and procedures that place the ideal tenants.

Ok, I'm done for now...

But I am certain to speak more on the subject of Section 8 rentals later; and I'll let you know if I encounter any Landlord Horror stories related to a Section 8 tenant or otherwise.

- Exit / Outro...

- Disclaimer