“The key is to be prepared. “– Rafael Castro
Have you ever been curious as to which is a better investment, a Private pay, or section 8 rentals? Which would be safer to invest in and at the same time know which yields more profits? Let us join Jorge and Rafi as they discuss, give us some tips, and elaborate more between section 8 and the private pay rentals.
Note – This article has been created based on the YouTube video titled “Section 8 or Private Pay Rentals – Which is the better investment?” by Rafael Castro and Jorge Vazquez.
Rafi: The topic we have for this week is Section 8.
Rafi: People heard about section 8 and developed some preconceived notions about it. This was a law established in the 1930s, and it has progressed until it has become a very complex law. But today, we are focusing on one particular part in section 8. Which one is a “better tenant?” Is it private pay rentals section 8?
Jorge, I know you have a lot of experience here in Tampa Bay. First, tell me more about what a section 8 tenant is in terms of managing that process.
Jorge: That is a good question. A section 8 tenant is a tenant that is assisted by the government. Around 9 out of 10 times, the government will be paying the whole amount or a portion of it.
Rafi: So you do not go to the government and declare, I have a property that is section 8. The tenant is the one that requests a section 8 voucher to the government.
Jorge: Correct, sometimes there is a waiting list of a year or two depending on your financial situation. To answer the original question, it’s not one is better than the other, but you have to be open to section 8. It has its advantages and disadvantages.
Rafi: Let’s start with the advantages. What are the good things about having a section 8 tenant?
Advantages of a section 8 tenant
Jorge: Number one is Guaranteed payment by the US government.
Rafi: Going back to our previous talks, we know that vacancy is one of the highest expenses for investors. That sounds like the solution to my vacancy problems.
Jorge: It’s a more complicated process than that. Once the properties are approved, then it needs to pass inspection for it to qualify. The tenant, in this case, will be given a voucher. As long as the voucher is valid, it is up to the government to guarantee that rent and pay you by direct deposit.
Rafi: So the property manager does not have to chase the tenant for the payments, once you get that arrangement, the payments go directly to you. What are other advantages?
Jorge: Number two is Higher rents and the capability of increasing those rents periodically. The government will accept increases 9 out of 10 times. Let me give you a scenario from one of my investors that purchased a property years ago. He bought a property in Ybor City about 7 or 8 years ago. The market rent for that property is $1100. He had the option of choosing between private pay or a section 8 tenant. He picked the section 8 tenant, and about four years later, the rent for that property is $1700 a month. There is more risk in section 8 because it takes extra steps. But as long as you understand the system, the psychology of the tenant, and you can deal with the whole thing, it could potentially get you a higher income.
Always have a property manager
Rafi: Our advice is always to have a property manager. The key is to find a property manager that has experience with section 8 and knows that there is an increase every year in rents. What would be another benefit of having a section 8 tenant?
Jorge: Number three, is the incentives to maintain the property or they kicked out of the program.
Rafi: They can also be kicked out of the program if they do not do something to fix a problem. That is a huge advantage. They need to keep your property in better shape. If they don’t, you can report them to the government, and they can take the voucher away.
Jorge: Number four, is you have a larger pool of potential tenants. In the US, there are about 2 million people with vouchers right now.
Jorge: It’s pretty easy to register for section 8 on their website. Once you are listed and put the property in there, you immediately start getting calls.
Rafi: Got it!
Jorge: Number five, there is a chance of a longer-term tenant. They do not want the process of re-inspecting a new property and getting another voucher for a new home. It takes more work for the tenant.
Rafi: So let’s recap:
- Guaranteed payment by the government
- Higher Rents
- Incentives for tenants to maintain the property
- A larger pool of tenants
- The chance for a longer-term tenant
Rafi: So, it’s a no brainer, correct? But, there are also disadvantages.
Disadvantages of a section 8 tenant
Jorge: Number one is dealing with the government, the red tape, and regulations. If you have a great looking property, it will be quicker arranging someone from private pay in a week, where it takes around 30 to 60 days before you receive a section 8 voucher.
This would also require patience and additional reserves. This further expects you to become an expert in section 8 before it all makes sense.
Rafi: So that first payment will not come right away?
Jorge: If you have a mortgage payment, reserve at least two or three months of reserves.
Rafi: So, at least two to three months of reserves because you know the first payments will take a while. But once that first payment comes in, they will catch up. But you have to be ready for around two to three months. What are the other disadvantages of section 8?
Jorge: Number two would be delayed payments and accounting delays. Section 8 inspections are brutal! You can fix a property and have it rent ready for private pay, and a tenant would say it’s perfect. An inspector would come in and say we have to demolish this house.
One item I could think of is windows. If the windows are not 100% functional, meaning it does not close all the way, you need to replace the windows. Insulation issues are another thing, for example, if there are gaps in the doors. If it is a wood frame home, because of the insulation, be ready to put some money into that. They will test the temperature, particularly the AC. If it does not meet their standards, they will make you insulate everything.
Rafi: To review, we talked about advantages like higher rents and longer-term tenants.
Preparation is the key
Rafi: But! The key here is to be prepared. You have to be a prepared investor/landlord to deal with section 8. If you planned and did your homework, have a property manager that has experience with section 8 and prepared those financial reserves, Guess what? There is a potential higher Cap Rate. I’ve section 8 homes with around 15% – 18% Cap Rates. But, understand there is additional work at the beginning. There is also the fact that you feel good that you are helping someone.
Jorge: A couple of things worth mentioning, there is increased wear and tear. Because the tenants are not as invested in the property as much, this will appear more often in a section 8 housing than others. There is little recourse for damages. They will kick the tenant of the program, but seeking compensation for any damages is a dead end.
If it’s section 8, you want 100% rent or do not do it at all. If the government is paying a portion of the 70% that 30% left is hard to collect.
Rafi: Again, there are significant advantages, but you need to make sure to be ready for reserves, time, and patience.
Rafi: That is all for today. Again where can they contact us, Jorge?
Jorge: They can always find us at homes4income.com.
Rafi: And, thank you for sharing with us your time.
Jorge: See you!