Guaranteed income and low vacancies: How to invest in Section 8 real estate

Marisa, a public school teacher living in the high-cost San Francisco Bay Area, teaches a majority of students whose families depend on Section 8 housing for a place to live.

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She found herself wanting to give back to this community and thought she could be successful by providing affordable housing options herself.

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She hoped the additional income would also provide enough passive income and financial security for her to pursue her ultimate goal of teaching underserved communities abroad.

After doing some research, she put a modest inheritance and savings into buying two Section 8 properties in Alabama and Chicago.

Now, not only does she provide much-needed housing to low-income households, but she also receives a steady, reliable income from her properties. In three years, Marisa hopes to reduce her teaching hours to part-time so she can begin exploring teaching overseas.

If this appeals to you whether you have a personal cause or not, then read on to learn how to become a Section 8 property investor.

What is Section 8 housing?

Section 8 is part of the Housing and Community Development Act of 1974, which was created to help low-income renters, families, the elderly, and the disabled, so they could afford housing.

Under the program, families receive a voucher for the federal government to cover 70% of their monthly rent and utilities as long as they live in properties that are part of the program.

6 benefits of investing in Section 8 housing

Section 8 was primarily designed to help low-income renters.

Some investors (like Marisa) believe in the cause of affordable housing and like the idea of helping others while expanding their real estate investing strategies.

But helping low-income families is just one of the perks of investing in Section 8 housing. Here are six other benefits for investors:

1. Guaranteed income

Investors receive the majority of their rental income directly from the government, on time and in full on the first day of every month.

This can give investors peace of mind over tracking down rent payments. And, because there are often shortages of Section 8 properties, with the government paying for a portion of the rent, owners are able to obtain competitive rental rates while still offering affordable housing for those who qualify.

2. Short vacancies, high demand

In some cities, there simply aren’t enough Section 8 units to house all the families with vouchers. This is such the case in California, Marisa’s home state, according to a KQED report on data from rental website Zumper.com. A recent search found just one unit in Oakland, which belonged to a mere 1% of 16,500 rental listings across San Diego, San Francisco, Los Angeles, and Fresno that would accept Section 8 housing vouchers.

This means, if a tenant moves out, another quickly takes the rental. In fact, there are often waiting lists of Section 8 tenants looking for a home to rent.

3. Tenant accountability

Tenants know if they don’t pay their portion of the rent, they’ll lose their voucher. This is an incentive for them to stay current with their obligations. For investors, this means payments can usually be expected on time.

4. National scope

The Section 8 program operates nation-wide, and there are no restrictions on out-of-state investments. Investors looking to take advantage of opportunities in other areas of the country can do so.

5. Protections against property damage

Tenants who damage their homes can lose their vouchers. This helps encourage occupants to keep properties clean and well-maintained.

6. Social impact and providing affordable housing

Investing in Section 8 housing enables investors to make a difference in people’s lives. Stable housing has been proven to contribute to health, educational attainment and financial security.

The Section 8 housing program is overseen by the Department of Housing and Urban Development (HUD) and is administered by the local public housing agency (PHA) in all 50 states.

This system of checks and balances ensures property owners and tenants are held to a specific set of standards.

Property owners are required to provide decent, safe, and sanitary housing to tenants. And tenants are required to meet and follow certain guidelines in order to retain their voucher.

Some of the standards established through the program that help protect the property and renters include:

  • Pre-screenings for all tenants: Local PHAs perform criminal background checks, income verification and drug testing before approving families for vouchers.
  • Regular inspections: Local authorities perform annual inspections on all properties, keeping an eye on your investments and alerting you to any necessary repairs. This helps preserve the value of your investment, which is especially beneficial if you’re not able to visit your rental properties in person.
  • Federal oversight: Although each housing authority operates independently, they must report to the Department of Housing and Urban Development. That means all Section 8 housing facilities must meet a standardized set of rules and requirements across geographic locations.

Section 8 and the COVID-19 pandemic

As millions of Americans lost their jobs due to lockdown restrictions and the ensuing economic fallout, many renters have been unable to make their rent payments.

According to a survey by Apartment List, nearly one-third (32%) of U.S. households had not yet made their full rent payments as of the first week of July. Meanwhile, the CARES Act prohibits landlords from evicting tenants from federally-backed housing until July 24, 2020 — and after that, they must provide at least 30 days of notice.

Many states have their own eviction protection rules, with particularly strong regulations in Massachusetts, Connecticut, Minnesota and Nevada. Your state’s housing authority should be able to provide you with details about the rules in your locality.

The good news is that for Section 8 investors, the partial rent payments are continuing. Even if renters don’t pay, the federal government still does.

Another perk for current investors during Covid-19 has been the 360-day reprieve offered on mortgage payments, as long as the loans are backed by Fannie Mae or Freddie Mac. This benefit comes with no additional fees, penalties or additional interest beyond scheduled amounts.

However, economic uncertainty means credit has tightened dramatically, as lenders look to reduce their exposure to default risk. Borrowers with low-to-mid credit will have more difficulty than usual in qualifying for investment property loans.

How to get started with Section 8 housing

If you’re interested in starting your Section 8 investment journey, now may be the best time to do so, as mortgage rates are historically low. This presents investors with the ability to finance new properties at exceptionally low costs.

In order to rent to Section 8 tenants, you will first have to register as a Section 8 landlord.

Some property management companies specialize in leasing and managing Section 8 rental properties for investors, so they’re already familiar with the steps required to get your rental approved.

Once you’re accepted, you’ll be placed on a list that allows potential tenants to contact you.

Just like in any other rental relationship, you should qualify the tenant, confirming that they have the income to pay rent and a clean arrest record.

When tenants are ready to rent your property, they will need to schedule an inspection with the Section 8 office.

During this inspection, you’ll find out whether you need to make any repairs before renting to Section 8 tenants. Once your property is approved, you’ll negotiate the rent with the Section 8 office and finalize the lease.

This process can be lengthy, especially if you need to make repairs to get approval.

And there’s one more potential delay you should know about.

HUD can take up to 60 days after you sign the lease to make its first rent payment. During this period, your only cash flow will be from the tenants’ payments, so make sure you have enough liquidity to get through it.

An easier way to invest in Section 8 housing

Ready to get started in Section 8 housing? The first step is finding a property.

Online investment property marketplaces, such as Roofstock, make it easy to access real estate information from all over the country.

They also provide valuable data on property taxes, repairs and local government regulations. Some can also connect you with local experts in lending, repairs and property management, which can make investing across the country an easier feat.

“For me, the highlight was all the data they made available,” says Marisa. “The estimated taxes part was huge. They made all that information accessible, in a pretty simple-to-read spreadsheet. They also helped me find property managers that help me manage my units.”

For more information about the pros and cons of Section 8 real estate or for a list of properties in the areas you’re targeting, visit Roofstock today.