What is Section 8 Housing?
Section 8 Housing Explained
The Housing Act of 1937 established the Housing Choice Voucher Program under Section 8 of the law, which is where Section 8 housing gets its name. It is a “tenant-based” program, which means the aid is attached to the renter, not the landlord or the property. A qualified tenant can take his housing voucher to any landlord that accepts the program.
Landlords are not required to participate in Section 8, although some jurisdictions have laws barring discrimination based on sources of income.
Local public housing agencies (PHAs) administer the Section 8 housing program. While the majority of vouchers are tenant-based, local PHAs have the authority to withhold up to 20% of their Section 8 housing vouchers for use only with specific housing projects or properties.
Applicants must pass an income and means test to qualify for Section 8 housing. Qualified applicants typically pay 30% of their income toward rent with the PHA making up the difference between the renter’s payment and fair market rent.
How is Fair Market Rent Determined for Section 8 Housing?
The Department of Housing and Urban Development calculates Fair Market Rents (FMRs) for metropolitan areas. FMRs are calculated based on five-year rent data contained in the American Community Survey. HUD adds in a recent-mover adjustment and a rent trend factor adjustment. FMRs are also pegged to the Consumer Price Index.
Major utilities (gas, water, electric) are included in Section 8 housing Fair Market Rents, regardless of whether the tenant or the landlord pays these fees. Landlords can check FMRs in their area using the HUD Fair Market Rents documentation system. Landlords can opt to have the tenant pay the utilities, which is often preferred by landlords. The caseworker would be able to subtract the utility amounts and provide market rent without utilities included.
Landlords who agree to accept Section 8 housing vouchers must consider them as payment in full. They are not allowed to accept money from either the tenant or another source once they enter into a Section 8 housing lease agreement.
How Does Section 8 Housing Work?
Section 8 housing can either be tenant-based or project-based. Individuals must apply for tenant-based vouchers through HUD; there is usually a long waiting list for vouchers. Once they find Section 8 housing, they must sign a one-year lease that can either be renewed or rolled over to a month-to-month lease.
If the tenant decides to move at the end of the lease, the Section 8 housing voucher moves with them and can be used with any other property that accepts Section 8.
Project-based vouchers stay with the unit. Once the tenant moves out, the Section 8 benefits remain with the property for the next occupant of the home. The landlord, not the tenant, qualifies with HUD for project-based vouchers, and the landlord then qualifies his own tenants (the renter doesn’t apply with HUD). Section 8 housing units also tend to have very long waitlists.
There are four parties to a Section 8 housing arrangement:
- The tenant finds a suitable home and submits the lease to the PHA for approval. If approved, the tenant is bound to all terms of the lease, including a security deposit if required, and any requirements for maintaining the property.
- The landlord must submit to a PHA property inspection and commit to keeping the property in a safe condition and the appliances in good working order. If the lease includes any services such as lawn care, these must be provided in a timely manner.
- The PHA qualifies the tenant and ensures the property and lease agreement are to program standards. If the landlord fails to adhere to the terms of the lease, the PHA can terminate voucher payments.
- HUD oversees the local PHAs and provides funding for the Section 8 housing program.
Pros and Cons of Renting to Section 8 Tenants
Most landlords with single-family housing units will likely be asked if they accept Section 8 housing vouchers at some point.
It’s a decision each investor will have to make based on the property, investment strategy, and business goals, as there are some advantages and disadvantages to landlords who are considering Section 8 housing.
Pros of Renting to Section 8 Tenants
- With Section 8 housing, landlords can expect stable, on-time rent payments guaranteed by the government. The government portion is typically paid by direct deposit. In addition, tenants tend to be conscientious about their share because they don’t want to lose their voucher.
- Even if the tenant loses their job, the government will continue to pay its share of the rent, typically 70% of fair market rent.
- The PHA performs tenant screening including a criminal background check and drug testing for all tenants age 18 and over. This does not preclude the landlord from performing his own tenant screening in addition to the PHA procedures.
- Section 8 housing tends to have a very low vacancy rate because tenants will renew their lease year after year rather than risk losing their voucher. Also, the long waiting list for Section 8 housing means that there will be qualified tenants ready to move in right away whenever a tenant moves out.
- Because there is often a shortage of Section 8 housing, PHAs often allow landlords to set their rent at the high end of fair market rent.
- Landlords don’t have as many administrative costs with Section 8 housing because they don’t need to market their properties. HUD maintains lists of Section 8 properties for qualified tenants at no cost to landlords.
Cons of Renting to Section 8 Tenants
- Rents are controlled by the government. If the fair market rent for a three-bedroom home is $1,400 in a particular community, the landlord cannot charge more than that amount, regardless of the quality of the property.
- Landlords must comply with multiple government regulations including an annual property inspection. In addition, the Section 8 housing approval process can take months, during which time the landlord derives no income from the property.
- Any issues identified in the property inspection must be fixed within the prescribed timeframe and confirmed with a follow-up inspection. The Section 8 housing inspection includes 13 different safety categories and it isn’t uncommon for landlords to fail in one or more each year according to statistics maintained by HUD.
- Those who qualify for Section 8 housing may be difficult tenants. For example, many who qualify for vouchers are physically or mentally disabled and unable to hold a job. They may have difficulty maintaining the property adequately or require safety accommodations in the property. Some landlords report difficulty collecting the tenant’s portion of the rent.
- In addition to complying with all local eviction laws and regulations, the landlord needs to notify the PHA as well. In some states, the landlord needs the PHA’s permission to proceed with the eviction.
How to Qualify as a Section 8 Landlord
Real estate investors can find lists of Section 8 properties that are both rented and for sale. Buying a previously qualified property or property with Section 8 tenants is a fairly straightforward process. Once the sale is complete, the buyer and the seller complete a landlord exchange on a W-9 form.
Investors interested in renting to Section 8 housing tenants should start by contacting their local public housing agency (PHA). The PHA will conduct an initial property inspection and explain any specific requirements in the local market.
If the property passes the PHA inspection and approval process, the owner signs a W-9 and other appropriate paperwork, and the property can be placed on the Section 8 housing lists. Once a tenant signs a lease, the PHA begins paying its share of the rent. Note that the PHA doesn’t cover security deposits and it may take up to 60 days for the first subsidy payment to be deposited into the landlord’s account.