Generate Cash-flow And Build Equity With Section 8 Rentals
Despite the doom and despair in the real estate and mortgage markets, savvy investors are still able to achieve consistent and sustainable returns. The reality of cyclical markets dictates that the extraordinary short-term gains that some investors realized in the past few years were not sustainable. Similarly, the current credit squeeze and decline in the demand from homebuyers cannot persist indefinitely. Given the current climate, many investors are wisely considering the option of entering the residential rental market as a supplement to their primary investment strategy. If considering the residential rental market, investors should not overlook the potential of Section 8 rentals as a part of their marketing and development strategy.
Section 8 Housing Choice Voucher Program (Section 8) is a housing assistance program funded by the U.S. Department of Housing and Urban Development (HUD), and administered locally through local housing authorities. In Houston and Harris County, the program is administered by the Houston Housing Authority and Harris County Housing Authority respectively. Section 8 allows a family, which qualifies, to choose the rental property of their liking that meets the cost requirements of the Section 8 Program. Some investors fear the stigma related to subsidized housing, but according to HUD Section 8 families pay a portion of the rent each month, the vast majority of the families are working families, and many of the eligible families are 2-parent households. The renter pays a portion of the rent and the Housing Authority pays the balance. The investor has the assurance that if she meets her obligations under the rental agreement she will be paid the agreed amount by the housing authority, and it is also most likely that the family receiving the Section 8 Program benefits will also pay their agreed upon rentals payments, since this is a requirement for continued participation in the Section 8 Program.
Families that have an annual household income which is less than 50% of the median household income, as defined by HUD, qualify for the Section 8 program if they meet other qualifying criteria. For example, HUD’s estimate of median household income in Houston was $60,900 for 2006. A household with annual income of less than $30,450 would qualify for Section 8 Program assistance. Once a household qualifies for Section 8 assistance, they can commit up to 30% of their monthly income for rent, and the Housing Authority will pay the difference between the amount that the family can commit to rent and the market rent for the property. If the family earned $25,000 annually, 30% of their monthly income would be $625. Since the Housing Authority would pay the difference between the market rent and the family’s commitment, if the market rent were $950 then the Housing Authority would pay $325 and the family would pay the balance.
To find new Section 8 renters, an investor should notify the local housing authority that she is interested in and will accept Section 8 Voucher payments. The investor may also consider including this information in fliers and marketing materials promoting the property. The investor is responsible for conducting the same screening and documentation as she would for any other renter. To get started, investors should have the following items in place:
A valid procedure for screening rental applicants and conducting background checks,
A current and customizable lease agreement that does not include language prohibited by law,
A system of documentation and record keeping to keep track of payments received, and responses to maintenance requests.
Investors should also be aware that the Housing Authority will conduct an assessment of the reasonableness of the rent being charged, and will inspect the unit to determine whether or not the rental property is habitable. Investors should ensure that they and their representatives do not violate the anti-discrimination rules of the Fair Housing Act, and that they are fully informed of the tax benefits and requirements of renting property. Serious investors should consult with professionals they trust, including an attorney and tax professional whenever entering a new area or when they are unclear of the rules in a particular area.