Bonus Operations is a series hosted by apartment owner/operator and Best Ever Show host, Slocomb Reed. In each five- to ten-minute episode, Slocomb provides his top takes for executing your business plan and maintaining cash flow.
In this episode, Slocomb breaks down the Section 8 program as it relates to landlords and property owners. He shares his own experience with Section 8 in Cincinnati, common misconceptions he’s seen firsthand, and what landlords can expect from working with tenants and their local voucher vendors.
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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and this is another Bonus Operations episode. In these episodes I bring you topics and the Best Ever advice from my experience as an apartment operator here in Cincinnati, Ohio. This is not going to be a tips or advice episode as much as it is -- I want to help you understand a certain component of apartment investing, and that is what is most often referred to as Section 8, or Section 8 housing.
I have no interest in telling you whether or not you should invest in deals that involve taking quote unquote Section 8 tenants or not, or Section 8 apartment buildings, but I want you to be better informed about what Section 8 means, what the process looks like, and what it is that you're signing up for when you accept a Section 8 tenant, or you invest in a deal that is planning to use the Housing Choice Voucher Program in its business strategy. So let's start there.
The Department of Housing and Urban Development - Section 8 refers to their Housing Choice Voucher program, which is effectively their income-based rental assistance program. Prospective recipients apply to receive a voucher, and that voucher will qualify for them to receive rental assistance for an apartment or a housing unit with a certain number of bedrooms. The value of that voucher is dependent upon the voucher vendor in that market, and the voucher rates, to keep it simple, that are set for that market, for that year, by the voucher vendor.
There is a wide range of opinions when it comes to Section 8, and there's a wide range of experience levels backing up those opinions... So I want to talk about how the process actually works, so that you have a better understanding of what it is that you are either agreeing to or investing in.
In a market or non-subsidized landlord-tenant relationship, there are two parties, the landlord and the tenant, and there is one agreement between the two. When you accept a Section 8 tenant, you are introducing a third party into the mix, and that is the voucher vendor. My experience here is with the city of Cincinnati, and the voucher vendor here is the Cincinnati Metropolitan Housing Authority or CMHA for short. I'm going to use them as a placeholder for the voucher vendor in your market, because it's just simply to say CMHA.
When you introduce a third party into the mix, in order to have agreements between all three parties, you now need to have three agreements, and this is how Section 8 works. You still have a lease agreement between landlord and tenant, and both parties are required to abide by that lease agreement as if it were any other lease agreement between any two parties. Also, the tenant has an agreement with the voucher vendor called the Home Rental Assistance Contract, that stipulates what support will be provided by the voucher vendor in exchange for what terms of that contract need to be met by the voucher recipient tenant. Things about their employment, about their conduct, about keeping updated records with their voucher vendor.
The third agreement is between voucher vendor and the landlord, and that is the HAP contract, the Housing Assistance Payments contract. The HAP contract is established by the Department of Housing and Urban Development. It's this same countrywide, and it establishes the terms for the relationship between the voucher vendor, HUD effectively, and the landlord, in order for the landlord to receive rental assistance payments.
So the first thing to point out here is that as the landlord you're going under contract with two separate parties; you are setting a lease with a tenant, and you still have the ability to vet tenants the same way you would under any other circumstance. They have to go through your vetting process, your application, your review, be approved by you, and then you sign a lease with them after they have met all of your qualifications and had their application approved before the voucher vendor gets involved in the process. There is no requirement that you accept tenants who do not meet your qualifications, assuming that your qualifications meet federal fair housing and local, regional and state fair housing guidelines in your market.
The voucher vendor is an entirely separate entity with which you as the landlord will be going under contract, so I encourage you to look into the reputation that your local voucher vendor or the vendor local to your apartments has with the real estate investing community in that space. How quickly do you get paid? How easy are they to communicate with? How similar are their appartment inspections from inspector to inspector?
Slocomb Reed: The HAP contract will require that both the appartment building and the property meet HUD housing guidelines for conditions, and there will be regularly scheduled inspections that you should be aware of in advance, likely having received notice in writing that they are happening, and your property and the apartment and will have to pass those inspections or pass a follow-up inspection before future rent payments will be disbursed to you.
And of course, you need to make sure you have a tenant who is going to abide by the terms of their contract with the voucher vendor as well, so that they can continue to receive the rental assistance they need in order to be able to afford the rent at your apartment.
The other major consideration in whether to or not to Section 8 is of course how much rent will be paid. And this of course goes market by market. You should consider the market rent that you're expecting to get for your apartments and compare it to the voucher vendors published rent rates for housing units with the same bedroom count as your apartments for that market, for that calendar year. If the housing voucher is going to be based on less rent than you expect to get "on market", what you think the fair market rent is, that's going to have some impact on your decision. And if a voucher basis for rent for the same bedroom count as yours is significantly higher than you believe you will get for your apartments, that should be a factor as well. Of course, make sure you see whether or not that published rent rate includes any utilities in it, so that you have an apples to apples comparison to the rents that you're expecting. Because if Section 8 tenants between their portion and the voucher are going to pay significantly higher rent to you than what you can get on market by yourself, and you have the ability to properly vet prospective Section 8 tenants before you sign leases with them and before they move into your properties, it could be that you will see a significant increase to your NOI by renting to those tenants.
That being said, do not expect that the voucher vendor is automatically going to approve the top threshold of the rent that they'll pay for a unit with the same bedroom count as yours for your property. The vendor will have a process that they go through to calculate what they think the fair market rent is for your unit. That said, at least you'll know based on their published rates whether or not their basis is going to be higher or lower, or the same as your expectation for fair market rent for your property.
So that's it; the two biggest things to keep in consideration when deciding whether or not to go with Section 8 tenants for your apartments are whether or not the rent rates you can receive from accepting Section 8 tenants are higher or lower than what you expect to get on market, and how you expect the relationship between yourself or your management company and the voucher vendor in your market to play out. Is it going to go smoothly? Is it going to add a little bit of complication that is justified by increased rents? Or is it going to cause delays and other concerns that make renting to Section 8 tenants less viable?
Best Ever listeners, thank you for tuning in today. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend who you know is considering whether or not to rent to Section 8 tenants. Thank you, and have a Best Ever day.
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