Pros and Cons of Section 8 From an Actual Landlord

I talk to a lot of real estate investors every week and, as you can imagine, certain topics tend to come up frequently. Section 8 is one that is most prevalent. I find myself constantly talking about the pros and cons of section 8 rentals.

So it only makes sense that I formalize my thoughts in a blog post. While there is a lot of generic information out there about section 8, not much of it comes from actual landlords.

And the other day I actually caught myself talking about a drawback of section 8 that I always thought about but never actually shared with anyone.

An Overview of Section 8 Pros and Cons

I’m going to get into all the details on the pros and cons of section 8 rentals but let’s do a quick overview of how I view things.

The Good Parts of Section 8

Chances are you already know the biggest benefit of renting to section 8 tenants: guaranteed rental payments. But not all payments are created equal and that can be both a good thing and bad thing.

Section 8 rentals are also in high demand. Usually, there is more demand than there is supply. And depending on how lopsided this imbalance is, and local government priorities, this can translate to higher market rents than you might fetch from “cash paying” tenants.

The Drawbacks of Section 8

But, of course, like anything in life, there are tradeoffs. Renting to section 8 tenants is no different.

Generally speaking you are marketing to a lower quality tenant. That has several drawbacks, all of which I’ll detail below.

There’s also more paperwork, red tape, and annual inspections that you’ll have to handle.

That’s the 30,000 foot view of the pros and cons of section 8 so let’s dive into the details and really understand how to evaluate it as a landlord.

Why People Love Section 8

I’ve already noted most of the pros of section 8 but we’ll detail each of the following benefits below:

• Guaranteed rental payments
• High demand
• Long term tenants
• Potentially higher rents

There are also some sub-benefits to some of these broad topics, and I’ll detail those toward the end of this section.

Section 8 Vouchers Are Guaranteed

Doesn’t that have a sweet ring to it?

There’s something about automatic ACH payments from the government hitting your bank account every month that is just insanely appealing.

And this is by far the most alluring perk of the section 8 program. It’s what sucks us landlords in and sparks our curiosity.

When, as landlords, we know we will be getting paid each month without a doubt it greatly reduces our risk. That’s obviously fantastic in any circumstance but it also allows investors to take risks they might not otherwise consider.

High Demand

Regardless of how attractive guaranteed rent payments might be, it’s simply not enough to sway the number of landlords it takes to satiate demand for section 8 housing.

At least that’s been my experience.

And how do I know?

For starters, three of my Detroit rentals are rented to section 8 tenants. And if I advertise a home that accepts section 8 my phone will go absolutely bonkers.

In fact, even if I specifically say I am NOT accepting section 8 I will receive dozens of calls asking if I do. Or if I’ll make an exception.

In short, like guaranteed rent payments, knowing there is high demand for section 8 housing removes a good bit of risk.

Section 8 Tenants Tend to Stay Longer

In my experience section 8 tenants tend to stay longer than cash paying tenants.

Why?

As I hinted above, it’s difficult to find section 8 housing.

It’s also difficult just to get a voucher. Even the US Department of Housing and Urban Development (HUD) admits the waiting list for vouchers can be long. From the HUD website:

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“Since the demand for housing assistance often exceeds the limited resources available to HUD and the local housing agencies, long waiting periods are common. In fact, a PHA may close its waiting list when it has more families on the list than can be assisted in the near future.”

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Section 8 vouchers are difficult to obtain to begin with. And even if you are able to get one there is no guarantee you can actually find housing that’s willing to accept your voucher.

It makes sense then that, once someone is successful in navigating this system, they aren’t likely wanting to roll the dice and do it again.

While I only have three of my homes rented to section 8 tenants, I have yet to have one of those tenants move out.

As landlords we love long term tenants because it means lower vacancy rates and turnover costs.

But does section 8 make financial sense beyond that?

It depends…

Section 8 Might Pay Over Market Rents

I haven’t conducted extensive research on this but in my (limited) experience section 8 can pay above market rents for your area.

Take the below data for the Detroit area as an example:

If I’m renting a 3 bedroom home that’s in decent, rent-ready shape I know I can expect around $1,100/mo in rent for that home in Detroit today.

But fair market rents from HUD are showing that section 8 vouchers are paying up to $1,511/mo for that sized home.

Does that mean you’ll absolutely get that much for your home? No.

But it does give you something to shoot for. I have no doubt my typical 3 bedroom Detroit rental can fetch at least $1,300 or more per month.

In fact, I currently have one rented for $1,300 and we have yet to request a rent increase for the 2023 year!

That said, when I look at my local market here in California, fair market rents are 17-20% below that of market rate rents. You can look up fair market rental rates for any location here.

So it makes zero sense to do section 8 when fair market rents are well below what you could fetch on the open market, right?

Maybe…

If you are a risk averse individual in an extremely tenant friendly state you might consider section 8 even for below market rents.

If your main concern is a non-paying tenant that takes over a year to evict, well… it might make sense.

As we mentioned before, there are always trade offs.

Other Pros of Section 8 Rentals

Those are the main benefits of section 8 housing, at least the ones I’ve experienced.

Ultimately, these benefits translate into removing some risks for landlords. The result?

It opens up strategies and options that you might not otherwise consider. Here are a few obvious ones.

Out of State Investing

If you’re looking to invest out of state in a market you may not be super familiar with, section 8 might make a lot of sense. Again, it’s about controlling risk.

And knowing you’ll collect rent every month is a big de-risking factor.

Buying Lower Quality Neighborhoods

If you’re used to only investing in A/B class neighborhoods the idea of buying rental homes in anything lower-grade might seem risky.

Again, the overarching benefits I discussed above remove a great deal of risk which helps balance the risk/reward ratio of going outside your comfort zone.

The only thing I’d caution here is going too low-grade when it comes to neighborhood/area. You could easily find yourself in a situation where you can place a section 8 tenant but only one of the lowest quality.

Remember, section 8 tenants have a quality spectrum just like cash paying tenants. If you want to make sure you’re attracting the best section 8 tenants you’ll want to position yourself in, at a minimum, decent areas.

This is exactly what I do in Detroit. I like to target what I call strong C class areas that have the potential to transition to B neighborhoods. If that’s something you’re interested in doing, let’s talk!

More Flexibility to Self-Manage

If you’re collecting guaranteed rent payments each month you might be more inclined to try self-managing your rental properties even from afar.

When you eliminate potential rent collection headaches your only real issues will be limited to repairs and maintenance.

And if your tenants are staying far longer than they would be if they were non-section 8 tenants, you might rarely have to handle doing tenant turnovers.

Common Arguments Against Section 8

When I’m considering whether or not to rent a property under the section 8 program I always weigh the positives against the following:

• A lower quality tenant base
• Initial rental lag time
• Paperwork and future inspection
• Impact on the neighborhood

There’s a lot to unpack here so let’s dive right in.

Section 8 Tenants Tend To Be Lower Quality

Let me be clear here. I am not passing judgement. This is purely a fact.

Landlords and real estate investors tend to determine tenant quality largely on two factors: credit score and income.

If you qualify for section 8, by definition, you have a lower income than the majority. Chances are you also have a poorer credit score whether that’s a product of bad decisions or a simple lack of credit history.

Does this mean section 8 tenants are all bad?

Absolutely not.

But the overarching generalization here is that lower quality tenants are rougher on properties, requiring more maintenance and upkeep.

I’ve even heard people claim that section 8 tenants will cost you more in repairs than you will make from rent.

That seems like an absurd claim to me but, sadly, hearing that once or twice is enough to completely turn people off from implementing a strategy around section 8.

The reality… like any tenants, not all section 8 tenants are created equal. There is a varying spectrum of quality.

And it is your job to screen and evaluate section 8 tenants just like you would a normal tenant.

This is where a lot of people get into trouble. They feel that since they are getting guaranteed rental payments that there’s no real need to screen.

But that couldn’t be further from the truth.

My experience with section 8 has been greatly positive but that’s likely because I took my responsibility to qualify my tenants seriously, regardless of them being on section 8.

While some section 8 holders might be deadbeats, many are simply using it as a tool to help provide a good life for their children. They’re working a real job, trying to make ends meet like anyone else.

Initial Rental Lag Time & Inspections

It is going to take you longer to place a section 8 tenant than it will a cash paying tenant.

Why?

Paperwork and inspections.

No matter how perfect your house might be you will need to have an initial inspection done by your Public Housing Authority (PHA) before your prospective tenant can move and you can start getting paid.

How long will this take?

It’s hard to say but it could be as long as a couple months.

Beyond that, you will be required to do an annual inspection.

The initial lag is definitely sub-optimal, but again, you need to weigh it against all the pros that come along with a section 8 tenant. If your tenant stays far longer than a cash paying tenant it may very well be worth the couple months of extra vacancy upfront.

In terms of the annual inspections, I generally don’t mind them much. The positive spin is that I know there are eyes on my property at least once per year and repairs are being addressed.

Impact on The Neighborhood

This is a drawback that I don’t believe many people talk about or even think about.

But it’s always been something I consider.

A big part of my strategy in Detroit has been honing in on what I call “strong” C class areas.

I realize that sounds like an oxymoron to many people. But I promise there are varying degrees of C areas.

Now, if a neighborhood is 80% rentals and the vast majority of those are section 8 tenants where the owners didn’t do a great job of screening them… do you think it will look and feel desirable?

Probably not.

Too many homes rented to section 8 tenants could, in theory, bring down the value of the neighborhood.

Imagine a neighborhood where nobody is working, sitting around causing drama, not keeping up their yard, leaving garbage cans out all week, etc.

Homeowners simply aren’t going to want to move into this area. And if your goal is to pick C class areas that have the potential to transition to B class neighborhoods you have to consider how your prospective tenant might contribute to that transition.

I admit this is a very subjective point, but it’s worth considering.

And some folks truly don’t care about trying to position for appreciation in what’s traditionally been a cash flow market like Detroit.

But that’s not me.

There’s a reason all my properties have increased 2-3x in a very short period of time!

Is Section 8 Right For You?

Like most things in life, it depends…

Most of my homes are rented to cash paying tenants. But now that I’m thousands of miles away from my rentals I’d probably be more interested in filling vacancies with section 8 tenants.

Furthermore, most of the areas I had previously invested in have transitioned to B-class areas.

I’m more likely to place a section 8 tenant in those spots now because I know the areas have crossed the threshold of now being attractive to owner occupants.

I’m no longer at risk of holding back a neighborhood from progressing.

Ultimately, it’s going to come down to your situation, goals, etc. but I hope outlining these pros and cons of section 8 have helped you make a more informed decision.