Real Estate Investor's Insight: Section 8 Housing - Landlord’s Gold, or Fool’s Gold for Real Estate Investors? Part I of Two

Section 8 Housing: Landlord’s Gold, or Fool’s Gold for Real Estate Investors?Part One of Two

Is the HUD Section 8 program a helpful tool - here are the answers about Section 8 from an experienced real estate investor.

This article does not refer to the Section 8 discharge that Corporal Max Klinger so fervently sought to obtain in order to get out the US Army during the Korean Conflict, in the popular 1970's television program "M**H."

For the purpose of this article "Section 8," refers to the housing assistance voucher program which is funded at the federal level by the U.S. Department of Housing and Urban Development (HUD). This US government program was created to provide a special housing voucher program for those who need financial assistance in securing quality low-income housing assistance. The amount of monthly subsidy a household will receive is determined by the Section 8 Housing Authority. The subsidy a household is eligible for is based on several factors including:
Annual income
Family size
The amount of deductions your family qualifies for and
Other criteria.

The Section 8 Housing Assistance subsidy is calculated so that a low income family , renting an average unit, will pay 30% of the applicant's adjusted family income towards rent and utilities. Section 8 housing assistance can be used by tenants for housing in single family dwellings, condos, duplexes, apartments, or even mobile homes.

The Section 8 applicant family has the option to rent an above-average unit (or a larger unit) and pay the difference in rent. While the Section 8 program rules permit the leasing of a larger unit, the rules include a cap of 70% of a family’s adjusted gross income. Therefore, a tenant's portion of the rent and utilities will Always be a minimum of 30% of the household's adjusted gross income. The Housing Authority makes monthly housing assistance payments directly to the Landlord on behalf of the Section 8 eligible family. The amount of the local Public Housing Authorities “Housing Assistance Payment” is the difference between the tenant’s portion and the publish Fair Market Rent.The family negotiates directly with the landlord to secure rental accommodations that best suit their needs. The property in question must meet HUD Housing Quality Standards and pass a local Public Housing Authority inspection before a contract is executed between the Housing Authority and Landlord.

Reminder of key advantages of investing in multifamily properties:

• Multifamily properties, by their very nature, have the advantage of lower vacancy risk, especially with the local public housing authority paying the rents. The risk is much smaller with apartments than with owning and renting single-family homes (with the exception renting out single family homes, condos, or duplexes out to Section 8 tenants, which is an option in the Section 8 program). Multifamily properties are a safer risk than commercial properties as well, because finding a new tenant for an apartment is easier that finding a commercial tenant to lease the newly vacant 10,000 SF an office building. Commercial properties, such as office or retail buildings, are especially vulnerable to outside economic factors.

• Another advantage of multifamily real estate is less competition from other investors who are not comfortable investing in larger properties, because they don’t understand how to do it. Paradoxically, the owners of multifamily properties are usually more flexible sellers, because they are not as emotional about the property. The sale of most multifamily properties is a business decision.

• Investors who hold onto multifamily properties receive a significant tax shelter through depreciation while the tenants, including Section 8 Tenants and the Local Housing Authority, effectively make the mortgage payment and build the landlord’s equity.

• Owning multifamily properties gives landlords the benefit of tenants, including Section 8 tenants, paying the building’s operating expenses and mortgage payments, which results in the owner having a nice equity buildup over time.

• These properties maintain solid economic value, because most existing apartments can be purchased for less than replacement cost or the cost to build new.

• Like most real estate, multifamily properties enjoy financial leverage with long-term institutional debt and the possibility of seller-financing or partial seller-financing.

• Holding onto multifamily properties over the long term will provide the investor with a capital appreciation through a combination of higher rents over time and the overall market appreciation of the properties.
So, there are good reasons for investing in multifamily properties — but you have to know what you are doing. Utilizing the Section 8 housing program may assist you in keeping your properties rented.

What are the Advantages to the Landlord for participating in the Section 8 Housing program?

Local Fair Market Rental [locally determined under HUD guidelines]
Local Fair Market Rental are available at www.HUD.gov webiste
Regular payment for the majority of the rent from the local Public Housing
Authority (PHA)
Local PHA's are funded by the US Federal Government - under HUD
Public Housing Authority checks continue even during an tenant eviction
process
Most Section 8 tenants will avoid doing anything which will jeopardize
their eligibility for Section 8 program, because tenants who cause major
damage to a unit risk losing their Section 8 eligibility forever (a good
motivator to treat the unit well)
The local Public Housing Authority will pay up to 2 1/2 months rent to
cover the repairs to a unit unreasonable damaged or abuse to the property
by a Section 8 tenant. The Section 8 tenant may lose their Section 8
privilege for life, if they unreasonably damaged or abuse to the rental
property. This new rule is a great incentive for them to treat the
Landlords property with respect and care.
Contracts with the local Public Housing Authority will commit tenants for
at least one full year

What are the Disadvantages to the Landlord for participating in the Section 8 Housing program?

Contracts with the local Public Housing Authority will commit landlord's for at least 1 full year
Annual Inspections of each unit, or SFD property, by the local Public Housing Authority
Dealing with the bureaucratic rules and paperwork of HUD and the local Public Housing Authority
Some tenants with low income may not be as responsible as those tenants with higher incomes
The Landlord still has to do all their normal tenant pre-screening, that is not done at all by the local Public Housing Authority
The Landlord will have to use the standard HUD approved lease, not their own lease

According to HUD - Who is helped by Section 8 Housing Vouchers?

Families with Children 61%
Elderly 16%
Disabled 15%
Other 8%

Part I of Two Parts.Copyright © 2007, 2008, 2009, 2010 Dr Howard E. Haller