If you’re a property investor and you’re looking to get into Section 8 properties, there are plenty of gurus online who will happily tell you to RUN! Section 8 tenants are too unreliable, too desperate, too disrespectful, too, well, poor to be good tenants.
In the most respectful way possible, we’d like to tell those gurus to take a short walk over a long cliff. One of the Metro Detroit cities we do business in, the City of Detroit itself, is one of the most desperate urban areas of America, and we almost have to accept Section 8 there to find tenants. After dealing with Section 8 for almost 20 years, we can attest that it’s not nearly as bad as the gurus make it out to be.
The Bad News
Section 8 requires a lot of work—specifically, you have to deal with Section 8 applicants who never seem to understand the program, even after being on it for years. Also, housing counselors who are overworked and underpaid (and almost absurdly hard to get ahold of) must be constantly nudged to move their process forward. Then there’s annual property inspections and, oh yes, even more paperwork to get the rent payments coming in.
If you can handle the paperwork and have a good followup reminder system, the extra time and effort can pay off, with government payments coming in like clockwork. If you screen the applicants correctly, you can also avoid some of the pitfalls associated with Section 8. Let’s go over some of those pitfalls we listed a bit more closely, so you have a better understanding of them.
How Much Will Section 8 Cover?
The problems start when they call on your ad for a 3-bedroom you’re asking $1,000 a month for. You need to ask how much their voucher is for—and understand they really don’t know or care what it is! They’ll tell you with complete confidence that their voucher will cover the rent amount when it really doesn’t. YOU have to understand the Section 8 program so YOU can ask the right questions!
For the record, the (most important) “right question” is, “What is the HUD-determined Fair Market Rent (FMR) for a unit with ‘X’ bedrooms in my area?” The answers are available here—if the applicant wants to pay more than the FMR, they’ll have to make up the difference, and either way, they’ll pay 30% of their monthly income as rent, with Section 8 paying the difference between that amount and the FMR.
But! There’s a hitch. Because FMR isn’t intended to cover “rent,” it’s intended to cover “total costs of housing (TCH),” which includes electricity, gas, water, sewer, garbage, and recycling costs. So if the FMR for a 2-bedroom is, say, $911 (which it is in the Metro Detroit area for 2017), and the tenant has $281 in utility bills and is paying $750 in actual rent, the TCH for them comes to $1,031. But because Section 8 only covers 70% of the TCH up to $911, the most it can contribute is $638, meaning that regardless of their income, the tenant must pay the remaining $393. Of course, because your tenant is virtually guaranteed not to understand that, it’s up to you to either explain it to them up front or risk having the tenant vanish on you when…