What is subsidized housing and should you as a real estate investor incorporate it into your investment strategy?
The answer really depends on your own unique investment goals. Subsidized housing, typically Section 8 housing, like any investment property comes with a list of pros and cons. Having a clear understanding of each will help guide your decision. Let’s start with the pros.
- Guaranteed Income
The government guarantees a percentage of your tenant’s rent, generally somewhere from 30 to 70 percent meaning you as the owner can count on (majority) of the rent being paid on time each month.
- Less Vacancy
Did you know that there is a waiting list for subsidized housing? That said, when a tenant moves in, they usually don't want to move out anytime soon. This is a big perk to you as an investment property owner as it cuts down on vacancy and turn costs.
- Prequalified Tenants
The government, in some way, screens all tenants who participate in the subsidized housing program. While the government standards may be lesser than your own, the tenants have been prequalified to some extent. You should however still conduct your own background check on all prospective tenants, Section 8 or not.
Now to examine the cons associated with providing subsidized housing.
- Government Inspections
The government does a full interior inspection before the tenant moves in, sometimes requiring higher property specifications than what yours would be as a landlord. The government also does a full property inspection at least once a year. The purpose of the annual inspection is to find repairs that you as the owner will be responsible to fix in order to continue participating in the subsidized housing program. This can sometimes lead to more expenses cutting into your bottom line than if you were to rent your property to a non-government supported tenant.
- Your Lease Terms are Superseded
Simply put, if your lease is up against HUD, HUD will always win. If contradictions come up, like your lease allows a 10 day eviction notice but HUD requires a 60 day notice, you will be required to abide by the 60 day notice rather than your own lease terms.
- Less Qualified Tenants
This is not to say anything negative about Section 8 tenants, however these are tenants who usually wouldn’t qualify for housing based on their own credit and income. They may not meet your minimum criteria for credit and income meaning they may be less qualified than your typical tenant.
- Rent Control
Practically speaking, HUD can and does sometimes deny your rent increases. For example, at lease renewal you may want notify your tenant of a $100 rent increase. HUD may come back with a note saying you are only able to raise the rent $50 that you are required to abide by in your renewal. Long term, this can hinder your investment returns, especially in a hot rental market where the $100 renewal would’ve been appropriate and accepted by your tenant.
In the end, it’s up to you as an investor to choose your own strategy. However, for investors in hot markets such as the Denver rental market, we advise against Section 8 investments simply because they are not necessary and can end up costing investors more than if they owned and operated traditional rental properties.
The team at Grace Property Management is here to help! If you have any questions, give us a call at 303-255-1990.