Section 8 & Government Subsidized Tenants Explained

There are many different strategies for investing in residential multi-family real estate. One strategy that might go overlooked by some investors is focusing on lower income neighborhoods where the rental base is largely made up of government subsidized tenants. While these areas might have developed a reputation in some circles as having properties that are difficult to manage, there are responsible tenants in all income brackets. Like all real estate investments, it takes the right team with the skills needed to make sure you are selecting the right tenants and managing the property properly from day one.
Government subsidies paid directly to landlords on behalf of lower income tenants in the United States began in earnest following the Housing Act of 1937. Government subsidized tenants are colloquially known as “section 8” because this was the section of the act that authorized rental housing assistance. There are federal, state, and local subsidies that may vary depending upon where your property is located, but today millions of Americans rely on some form of subsidy to either wholly or partially cover their rental income.
This is a substantial portion of the population, and as a landlord it would be foolish to not consider investing in lower income areas. Of course, every investor has their own strategy and at the end of the day, maybe your strategy is class A luxury real estate. That said, if you’re still weighing different investment strategies, or you’re looking to diversify your portfolio, here are a few points to mull over when considering whether to invest into areas with a large amount of government subsidized tenants.

Guaranteed Payment on the Due Date
When you’re dealing with government agencies, one of the greatest advantages as a landlord is that rental payments roll in consistently on time every month. If you’re investing in areas with a solid population of renters, then you should already be selective enough in your tenant screening to achieve this on your own, but it’s definitely nice to have the weight of public or publically supported agencies guaranteeing your rent will be paid in a timely manner each month.
Subsidies can cover the full rental amount or a partial amount
Depending on the income status or the type of rental subsidy your tenant receives, their rent may be divided into two segments. Often, the bulk of the rent will still be paid by the subsidizing agency, but the tenant still has to cover some lesser portion of the rent out of their own pocket. This is important to pay attention to and manage correctly.
As always, proper screening of new tenants when your units turnover is critical. As mentioned before, there are responsible, respectful, great people that are lower income and will pay their portion of the rent on time every month without any problems.
It’s simply a matter of working with the right management company that knows how to properly select tenants, or, if you self-manage, having systems set up in place to properly screen new tenants.
One thing to keep in mind is that the tenants will have their own agreement in place with the subsidizing agency that usually stipulates their subsidy will be discontinued if they fail to pay their monthly portion to the landlord. If a problem tenant becomes an issue, your property management team should be familiar with interfacing directly with the agency to report their breach of the contract.
Inspections

The agency or company subsidizing your tenants will have annual or sometimes more frequent inspections of the units to make sure you are complying with all local and federal regulations. Obvious things to look out for here might be making sure your smoke and carbon monoxide detectors are functional and to code, but the inspections can cover all areas of the living space.
For example, if your carpet were installed incorrectly and portions of it presented a tripping hazard, that might be cited as a violation and required to be repaired. If vital appliances like the refrigerator were not operating correctly, this would definitely be cited. Do not go into investing in lower income neighborhoods with the intention of skimping on upkeep.
Keeping your buildings in tip-top shape is your responsibility as a landlord. Doing so will not only attract higher quality tenants, it will be a necessity when you have government inspectors combing through to make sure you are managing properly. Like most potential problems in real estate, this can be avoided by having the right property management team in place to select tenants that will respect your property as well as address problems as they arise.
Invest in Areas with Solid Renter Populations
This point is true of all types of real estate investment, however it is imperative to keep in mind when pursuing this rental strategy. Novice investors may become complacent with the prospect of government subsidy guaranteeing the rent comes in each month and pursue areas that are shedding population over time. Population growth in lower income areas is perhaps the golden scenario, as it presents the possibility for future appreciation. However I would speculate, based on my experience and research, that the most typical “solid” lower income communities to invest in have relatively stable population levels. Remember to also look into data on the percentage of the population that rents as opposed to homeowners. While lower income populations by their nature will always have a higher percentage of renters, the amount can vary from area to area.

Consider Subsidized Affordable Housing Development

If you’ve found a gem of a property that is in need of renovations, consider the option of pursuing affordable housing. This strategy should only be pursued once you have a few years of development experience and if you are investing in larger properties with a higher unit count. Affordable housing development is another great way to provide much needed housing and revive lower income communities. This can be in the form of new construction development or adaptive re-use of an existing structure.
Many lower income areas with higher population levels are also former manufacturing hubs that have many run down and neglected buildings that may be eligible for additional government subsidy in the form of historic tax credits. These are all complicated subjects to explore in other articles, but are a common way for more sophisticated real estate investors to generate profit in lower income neighborhoods.