If you’re looking to invest in rental property, you may have heard that Section 8 can be a great way to maximize your return on investment. But what is a Section 8 investment? And how can you make sure you’re getting the most out of your rental property?
If you have a property that you’re considering as a Section 8 investment, there are a few things you need to know before participating in the program.
Section 8 Investment: A Fund to Help Families with Rent Payments
Section 8 is a government-funded program that provides housing assistance for low-income families and individuals who are struggling to pay their rent.
The goal of the fund is to help families keep their homes and avoid eviction.
What makes the Section 8 program so appealing is the government’s guarantee to pay you for most of your tenant’s monthly rent, the yearly increase in your rental income, and the large pool of applicants.
By following the advice in this article, you’ll learn how to maximize the profits from this program while reducing any risks or hassles that come with it.
The Federal Housing Authority (FHA) was created in 1934 to help Americans struggling during the Depression.
The U.S. government started subsidizing housing in the 1960s and 1970s. This helped increase the production of affordable and safe homes and made finding them easier for families.
In 1974, the Department of Housing and Urban Development (HUD) created Section 8, a rental subsidy program for low-income households. Renters usually contribute 30% of their income toward their rent.
Your monthly rent payment will be deposited into your bank account either via checks or direct deposit.
One of the downsides of qualifying for and maintaining a rental property for Section 8 is dealing with the regulations of the federal government.
The HUD is notorious for being understaffed, which can result in long wait times, or in some cases, no help at all.
The lengthy process of finding and screening tenants can delay the renting out of a property. Even after you find a good tenant, it can take 60 days before you receive the first rental check.
The only benefit is that in 60 days, you’ll receive twice the payout, as it’s been 60 business days.
Qualifying for Section 8 often means passing a lot of inspections that are time-consuming. This can make renting to a private tenant easier.
If you’re not planning on earning higher rents from your property, there’s no need to keep up with unnecessary maintenance costs. Section 8 doesn’t care about these features, so you might as well get rid of them and save yourself some money.
Visit your property often to make sure it is being taken care of.
A leaking sink or shower can waste up to $20 per month, and a toilet that leaks can drain your wallet at $75 every month. This can add up over time, so it’s important to check for these common household problems.
My all-time favorite tenants were a family that rented from me on Section 8. They were very tidy, took care of the place, and always made their payments.
My tenant screening system is very thorough and unbiased and ensures that only the most qualified applicants are approved to rent my properties. This system has been developed over many years of experience, and I believe it to be the best available.
The Tenant Score system eliminates all emotion from the process. Even if a highly qualified applicant has an amazing story, if they aren’t getting enough points, they are denied.
If an applicant has 70% of the required number of points, they are approved. If they do not have 70% of the necessary amount of qualifying factors, they are denied.
Our point-based system allows our property managers to weed out bad tenants, which has decreased our number of evictions by 70%.
How to Determine if a Tenant is Approved
We assign a point value to each credit tier from excellent to poor.
The score is based on their debt-to-credit ratio.
After carefully reviewing each section of their application, I tally up the total number of possible points and compare it to the predetermined threshold for approving tenants. If their score is below the cutoff, I require a security deposit twice as large as normal.
If an applicant’s credit score is below 2 points, they will not be approved for the apartment. This makes it easy for landlords and real estate agents to quickly make decisions.
How About Cash Tenants?
The quality (or lack thereof) of your tenants will determine your profits.
In my 15 years of being a landlord, I’ve found that to be true time and time again.
It can be hard to find responsible, high-credibility, low-hassle, and respectful renters in low-income areas. But, there are definitely still some good, trustworthy, and respectable Section 8 residents out there. Just keep searching and you’ll find the perfect renter for your rental!
To many people, the idea of putting their own money into low-income housing developments is absurd. To them, I have one simple response: “Put your money where your mouth is”.
The hardest thing to learn as a real estate investor is to avoid investing in a bad area. If I knew this from the start, I could have avoided losing thousands in investment.
Landlords used to enjoy renting to tenants on government assistance because the government often pays higher rent than the market rate.
You can’t always count on higher rents in some districts, even though that has changed in recent years.
When you’re calculating your cash flows, don’t forget to account for the possibility that you’ll rent out your property to a tenant who pays the market rate. That way, you’ll be prepared for any scenario.
In higher-risk areas, you need to screen your applicants more carefully.
Verify that the landlord is, indeed, the one listed on the application.
Applicants have tried to get a friend to pretend to be their landlord before, and this tactic is most common in low-income areas.
It’s crucial to inspect a tenant’s current home as little time in advance as you can. This allows you to see how they live their lives on a day-to-day basis and how well their home is kept on a normal basis.
Because that’s how they will treat your rental property.
How to Avoid Getting Scammed by Tenants
You want your property to be as indestructible as possible to avoid any damage that your tenants may do.
Make every effort to tenant-proof your property, from installing indestructible vinyl floors to painting your walls with easy-to-clean gloss.
No matter how well you’ve prepared your home, there’s always a chance of damage.
Collect as much of your deposit as you can to protect yourself and your property.
If the renters do violate the terms of the lease agreement, send them an Eviction Notice right away.
This reinforces the message that your rentals should always be the top priority and that they should not neglect their rental payments.
The eviction process can take quite some time when it comes to Section 8 tenants. However, they will have plenty of chances to make rent payments current or fix any violations before the final eviction date.
By doing this, you as the landlord can maintain a good relationship with your tenant and keep them respectful of your boundaries.
What is the Most a Section 8 Investment Will Pay?
The most that Section 8 will pay is the “fair market rent.” Fair market rent is determined by the HUD and is based on the median rent for similar homes in the area. The amount of rent assistance that a family receives is based on their income and the fair market rent for their area.
If you’re thinking about investing in rental property, Section 8 can be a great way to maximize your return on investment. With a little research and planning, you can make sure that your Section 8 investment brings great returns.