The Pros & Cons of Section 8 for Rental Property Investors
Last updated: 2024
If you’re a rental property investor, or thinking about becoming one, you probably have questions about Section 8. In fact, these are some of the most common questions I get from my coaching clients:
How does Section 8 work?
What are the implications of renting to Section 8 tenants?
Is Section 8 a good thing, or something I should avoid?
In this article, I will cover all the pros and cons of Section 8, so that you can make an informed decision about whether Section 8 should be part of your rental property investing strategy.
But first…
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OK, let’s get into it! To start, let’s cover the basics of the Section 8 program and how it works.
What is Section 8?
In the midst of the Great Depression, Congress passed two major pieces of legislation to support Americans in the area of housing. The first was the National Housing Act of 1934, which established the Federal Housing Administration (FHA); this agency was later rolled into the Department of Housing & Urban Development (HUD) when it was created as a cabinet-level department in 1965. The second law was the Housing Act of 1937 — Section 8 of that legislation established the Housing Choice Voucher Program, which provided for subsidies to be paid from the U.S. government to local housing agencies to help local residents establish and maintain adequate housing that they would not otherwise be able to afford.
Therefore, one of the key things to understand about Section 8 is that it is federally funded but locally administered. For example, in Memphis where I invest, the program is administered by the Memphis Housing Authority (MHA), using funds provided by the federal government.
The program currently funds housing choice vouchers for over 2 million American households. To receive a voucher, applicants must meet a set of qualification requirements, including demonstrating income below the program’s limits set by HUD. Because the program is designed to help low-income people afford housing, priority is given to applicants with the lowest income.
Each voucher guarantees to its holder that a certain portion of the rent will be subsidized in an appropriately-sized dwelling based on the size of the household — i.e. a three-bedroom home for a family of five. From a landlord’s point of view, then, the tenant will typically pay a portion of the rent each month, and the balance will be paid directly by the local housing authority, either to you or to your property manager.
The tenant is free to move and take their voucher with them — that’s the “choice” in the Housing Choice Voucher Program. This is the second key thing to understand about the program: Section 8 applies to particular tenants, not particular properties. Over time, you may rent the same property to both Section 8 tenants and non-Section 8 tenants.
However, while a property is occupied by a Section 8 tenant, it is subject to governmental oversight to ensure that minimum living standards are maintained. In practice, this means that each house will be inspected by the local housing authority at least annually, and any issues or defects found must be corrected by the landlord.
Now, let’s discuss the benefits and risks of Section 8 for rental property owners.
The Pros of Section 8 for Rental Property Investors
1 Guaranteed Rent
The first benefit of Section 8 is pretty obvious: a portion — sometimes a significant portion — of the monthly rent is guaranteed to be paid by the government. Nonpayment is always one of the biggest threats to the financial success of rental properties, so guaranteed rent is a pretty big deal.
The portion of the rent paid by the tenant is reviewed periodically by the local housing authority, and is determined by a formula that takes into consideration the tenant’s income. Based on this, the tenant might pay nearly half the rent, or almost nothing. Note that if the tenant fails to pay their portion of the rent, they would still be subject to eviction, just like any other tenant.
2 Longer Tenancy
Another benefit of Section 8 is longer average tenancy. This is another very meaningful benefit, given that turnovers between tenants can be the most costly part of maintaining your rental portfolio. (Check out my Annual Portfolio Reports to see how turn costs figured into my properties’ overall financials over the last several years.)
There are several reasons why Section 8 tenants tend to stay longer in their homes. First, because Section 8 tenants have lower incomes, they may not have the means to move or upgrade their living space every few years, as more affluent tenants may do. Second, moving is a bit more complicated for Section 8 tenants, because they have to find a landlord that will rent to Section 8 tenants — some do not, as I’ll discuss at the end of the article — and that new residence must be inspected and confirmed by the local housing authority to meet the program’s livability standards, and to not exceed the size permitted by that specific voucher. For these reasons, Section 8 tenants are more likely to stay put for a longer period.
3 Incentive to Keep Their Voucher
Because funding for the program is finite and set by the federal government, each local housing authority has limited ability to grant new vouchers. This has created a situation in which new vouchers are very hard to get: it’s common for waiting lists in many localities to run 5 years or more, and some have even closed their program to new applicants altogether.
Section 8 also provides a mechanism to revoke vouchers for various reasons, including violations of lease terms, failure to care for the property, or failure to pay their portion of the rent.
Therefore, there is a STRONG incentive for Section 8 tenants to keep their vouchers, because if they lose the voucher, it will take many years to get another one, if they ever can. The vouchers are like gold — which means Section 8 tenants will usually make an extra effort to abide by the terms of the lease, take care of the property, and pay their portion of the rent. Those are all good things for landlords.
4 Chance for Above-Market Rent
To determine the monetary value of each Section 8 voucher, HUD starts by calculating the Fair Market Rent for the area where the tenant lives. They revise these Fair Market Rents annually, using 2-bedroom properties as the standard, and then indexing that amount for smaller and larger properties. You can look up HUD’s current Fair Market Rents online for any U.S. market.
From a landlord’s perspective, this can actually be a big benefit. If your home is in a neighborhood where rents are BELOW the averages for the larger market in which you invest (and for which HUD calculates their Fair Market Rents), that can mean the possibility that you’ll receive higher rent with a Section 8 tenant than you could otherwise get on the open market.
In the last few years, several prominent online gurus/contrepreneurs have been promising outsized returns on rental properties, using the ability to get above-market rents through Section 8 as their “secret sauce”. You should be skeptical of anyone claiming this is easy to achieve. As I outline below, working with the local housing agency is not always easy — in fact, it can be a huge pain. And if you think about it, the local housing agency has an incentive NOT to pay above market value for a property. Overpaying means they’ll be less able to provide assistance to additional residents, since the funds they are appropriated from the federal government are fixed.
This phenomenon can cut both ways, of course: if your property could fetch a higher rent on the open market as compared to the HUD’s Fair Market Rent, then a Section 8 tenant may actually limit your rent potential for that property.
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The Cons of Section 8 for Rental Property Investors
1 Required Inspections
As mentioned earlier, the local Section 8 administrator is charged with ensuring minimum standards of habitability for all Section 8 tenants, which they enforce through annual inspections of each property. If the inspector finds any issues, the landlord is required to correct those issues, and then schedule another inspection to show that the issues were remedied.
The inspections are free to the landlord, and if you have a property manager, all the coordination and scheduling will be handled by them. However, the cost of any necessary repairs are yours to bear. Some investors don’t like this aspect of Section 8, because it requires them to spend money on certain repairs that they might otherwise choose to defer. In my experience, however, if you’re keeping your property at a reasonable standard anyway, the Section 8 inspection isn’t likely to turn up much, so the inspections have not proven to be much of a burden to me.
2 Initial Delays in Rent Payment
Typically, a new tenant will make an advance payment of one month’s rent before moving in. This is not the case with Section 8 tenants, however — and in fact, depending on the efficiency of the local housing authority, your initial subsidized payments may be delayed by weeks or even months.
Of course, you’ll eventually get everything you’re owed — that rent is guaranteed to you — so unless you’re in a cash-strapped situation where you can’t float the rent for a few months, the delay is little more than a nuisance.
3 Security Deposits Not Included
While Section 8 provides vouchers that pay a portion of the tenant’s rent, there is no provision within the Section 8 program for security deposits. Therefore, it’s up to you as a landlord (or your property manager, if you have one) to collect an appropriate security deposit from the Section 8 tenant — which can be difficult for a tenant who has limited assets.
You might figure that a security deposit is less important with a Section 8 tenant because a large portion of the rent is subsidized. But if the tenant stops paying their portion of the rent, you may still have to evict them, which is expensive and time-consuming — so it’s still critical that you collect a security deposit from every tenant, including Section 8 tenants.
4 Less Control Over Rent Increases
For a typical tenant, my property manager handles lease renewals, and is usually successful at raising the rent ~4% at each renewal. This is quite important for the long-term financial success of my portfolio — I know that costs such as maintenance, taxes, and insurance will go up over time, so it’s important that rent keeps pace with those cost increases.
With a Section 8 tenant, however, rent increases must be approved by the local housing authority. In one of my Section 8 properties, it has been a struggle to raise the rent at all. I’ve been able to achieve two $50 rent increases in nearly 4 years, and the property is now well below market rent. I’ll keep trying, though, and hopefully the local housing authority will approve further increases going forward. Needless to say, the loss of control over rent increases is a definite drawback of Section 8.
Conclusion
Considering all the pros and cons, then, should you embrace Section 8 in your portfolio, or avoid it?
In a few markets, local laws designed to protect tenants from discrimination include protections based on form of payment — in other words, they prevent landlords from choosing not to rent to Section 8 tenants. However, in nearly all places, this is at the discretion of each landlord.
For me, the benefits of Section 8 tenants outweigh the risks, and I am therefore very open to Section 8 in my portfolio. I have several Section 8 tenants, and I’ve had absolutely no complaints about them, or the program. It can actually be somewhat difficult to place Section 8 tenants in vacancies, even if you wanted to, because the pool of applicants is limited — there are only so many vouchers, and many Section 8 tenants don’t move that frequently.
Finally, here’s a handy-dandy summary of all the key points discussed in this article, organized in my patented One-Pager format:
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
