Real estate investors tend to either love or hate Section 8.
Proponents such as Dr. Joe Asamoah claim it provides a way to earn reliable cash flow while providing quality housing to less fortunate renters. Opponents argue that Section 8’s rigid bureaucracy makes it too expensive and can be difficult to deal with tenants.
If you’re open to the idea but haven’t worked with Section 8 before, make sure you understand how the process works when buying a home with existing Section 8 tenants.
Being a landlord can be fun – if you do it right
No matter how good you are at finding good leases, you can lose everything if you don’t manage your properties properly. Being a landlord doesn’t have to mean midnight calls, expensive evictions, or daily frustrations with ungrateful tenants.
Sale subject to existing leases
Real estate sales are subject to existing leases. This means that if you buy a home with a tenant who still has ten months’ rent, you are legally obliged to comply with that lease. Assuming they don’t violate the lease in the meantime.
This rule applies to both market tenants and Article 8 tenants.
Keep in mind that you cannot renew tenants with a month-to-month lease. You still need to properly notify them in writing, usually with a minimum of 30 days’ notice.
Registering Change of Ownership
The local housing authority (funded by the federal government) pays the bulk of the rent for most Section 8 tenants. This means that investors must not only let the tenants know when they buy the property, but also the local housing authority.
Otherwise, they will continue to send rental checks to the old owner.
Before purchasing a property with existing Section 8 tenants, contact the Public Housing Authority and inquire about the process of changing ownership information. They will provide you with a transfer of ownership package to complete and return, including documents proving the transfer.
Expect the process to take 30-60 days. After all, you work with bureaucrats.
This delay means that you must also make an arrangement with the seller to ensure that they pass on any rent received to you in the meantime. Please ensure that you negotiate the terms of this arrangement before reaching an agreement. Consider asking the title company to keep money in escrow if you don’t trust the seller to forward the payment.
One of the biggest reasons to avoid Section 8 tenants is the annual inspection requirement.
Every year, the local housing authority sends an inspector to the property. In my personal experience as a Section 8 landlord, I had written down about half a dozen problems each year.
When you buy a property with an existing Section 8 tenant, you can expect annual inspections to run smoothly. And you should set aside money for them accordingly, regardless of the condition of your property.
Increase the rent
You cannot increase the rent midway through a lease term because the lease survives the sale.
Landlords who wish to increase the rent if the lease is renewed must submit a request to the local housing authority. Again, contact them to request the correct forms and procedures. Be prepared to provide evidence and rent compositions to support your request. Do some basic market research using free tools like Rentometer, Zillow, and Craigslist.
Don’t be surprised if Section 8 turns you down. Their main consideration is affordability.
Finally, beware of local limits on rent increases, especially in tenant-friendly jurisdictions. Also, keep an eye on rent control laws.
Remove Section 8 Tenants
Not every landlord likes what they see when they get started with Section 8.
Again, you can’t evict tenants halfway through the lease unless they’ve breached the lease. Even then, expect to jump through more hoops than usual and file extra paperwork with the housing authority.
When the lease has to be renewed, landlords can usually not renew it. However, they must do this in writing in advance, both to the tenant and to the local housing authority. Some cities and states are making this process difficult, rebranding non-renewals as “no-fault evictions.”
Should You Buy a Property with Section 8 Tenants?
Section 8 comes with a host of pros and cons.
On the plus side, you’re guaranteed to get on-time rent every month, at least for the government portion. You also tend to see longer-term tenants who are less likely to upset the apple cart by moving. That means less potential revenue, and all experienced landlords know that revenue causes the most costs and problems.
These more stable leases with lower rents also offer some protection against recessions.
But the downsides include expensive annual inspection punchout repairs, which can cost thousands of dollars each year. And the red tape and bureaucracy can lead to denial of rent increases, lengthy evictions and other problems for landlords accepting Section 8 tenants.
In tenant-friendly states like Oregon, landlords have no choice and must accept Section 8 vouchers, but investing in tenant-friendly states and cities is a choice in itself. Make your own decision whether you think the pros outweigh the cons.
More about section 8 of Pyjama People