What Are Section 8 Tenants?

These are low-income families who qualify to avail of the Section 8 housing assistance provided by the US Department of Housing and Urban Development. They are given Section 8 vouchers as tokens to their entitlement to such subsidy. Many of these Section 8 Tenants are single mothers with children while a handful of them are grandmothers with grandchildren.

Why Accommodate Section 8 Tenants?

Ensure Timely Rental Payments

The government will pay for at least 60 percent of the rent, but if your rental fee is rather low then a 100 percent subsidy may be provided for the tenant. Your rental fee must be between 90 and 110 percent of the local Fair Market Rent determined by the housing authority. With Section 8 tenants, monthly rental collection becomes a duck soup because the government will just transfer the due to your specified account monthly. Also, if the tenant has a share of the rental, do not worry as most Section 8 voucher holders are keen on settling dues on time because they do not want to tarnish their records and squander this housing benefit.

Protect Your Property From Vandalism

If you have been in the business for some time, you may have encountered difficult tenants who damage the rental property to get back at you for serving them overdue notice. The security deposit cannot really secure your property as these tenants owe you rent for how months already. However, by accommodating Section 8 tenants, you can give them the heads up that you will report them to the housing authority should they damage your property so that they get booted out of the assistance program.

Lower Turn-Over and Shorter periods of Vacancies

Since most Section 8 tenants are single moms with children, these moms would surely prefer to stay put in a pleasant community especially if the kids have started school already. Moreover, as a Section 8 landlord, you would be required to set the rental period for a year. This translates to long-term tenants. And long-term tenants  could mean lesser vacancies and responsible tenants who would take care of your property because it will be their home for quite some time. Additionally, supply of Section 8 homes are short, hence, you can immediately find a replacement for a leaving tenant shortening the period of vacancy.

Get Satisfaction from Helping the less Fortunate

Besides enjoying property security, the assurance of timely monthly payments and lesser vacancies by dodging the bugbears of many landlords, housing Section 8 tenants may also give you that satisfying feeling no amount of rental income could beat when you are able to be of service to others especially the less privileged. However, you do not want your rental property to be branded as a welfare building, so also keep in mind to maintain a good mix of Section 8 and compliant non-Section 8 tenants.

The market of Section 8 tenants is one unsaturated niche that rental property landlords should consider because accommodating them could mean effortlessly receiving timely payments, security for your property and lower turn over and vacancy rates.

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Rehabbing bank foreclosures, a.k.a REO’s, for long term positive cash flow with little to no money down, will typically require investing in low to middle-low income neighborhoods.  When working in these neighborhoods, there will be times when the pool of tenants to choose from will all have bad credit along with several delinquencies on their credit report.  So how does the real estate investor, rehabber, and/or landlord choose a tenant under these circumstances?

Steady Employment

When credit scores are low and late payments take up the first three pages of the credit report; look for the tenant with a steady a job with at least a year of current employment.  The longer the tenant’s current employment, the better.  Steady predictable income shows that the person is capable of holding on to a job and most likely does want to deal with eviction headaches.  One tenant I have has been employed for over 17 years for a large transportation company and has never been more then 12 days late on her rent in the past 3 years.  This tenant’s credit score was 538 at the time of application.

Reputable Employer

Make sure the employment is with a reputable company and not the local home day center down the street.  It’s pretty easy to lie about the details of one’s income or length of employment when the employer is a small and unknown business that solely pays in cash.  Make sure the employer is established and not just someone’s car repair service in the back of a friend’s garage.  Remember, only select tenants with verifiable income (1 month of paycheck stubs) and always confirm their current employment.  Do not bend on this one.

Enough Income

Make sure the income can cover the tenant’s expenses.  Look at all of the tenant’s debts, well at least those that will most likely get paid such as the car note and make sure there is enough income there to cover monthly living expenses.  There is not a great rule of thumb here (such as when qualifying a mortgage applicant) so just make sure the debt to income ratio makes sense.  Ask for more clarification if it doesn’t.

Steady Rental History

Look at the past rental history of the potential tenant.  If the tenant has lived at 6 different addresses in the past 5 years then stay away.  Someone that has shown that they can stay at an address for 3 or more years at a time is more likely to have been paying their rent on time and will not cause you a sooner than expected turnover cost.  Also, a history of steady addresses of several years each indicates that they will at least pay their rent if nothing else when money is short.  Address history will be shown on the tenant report provided by most reputable tenant screening companies.

Recent Bankrupcy

Recently discharged bankruptcies can be a good thing if there is a steady rental history with verifiable income and steady employment.  After a bankruptcy, the person’s debt has been wiped out by the court and they have been given a fresh start in which they should be more capable of making their monthly housing payment.  The fresh bankruptcy also means that the tenant will have a hard time obtaining credit to run up and fall behind on again.

One Month’s Security Deposit

Finally, anyone capable of putting down one month’s rent as a security deposit is more likely to take better care of the property and is less likely to skip out on you in the middle of the night.  This shows that the tenant has some positive income and provides the landlord with a months cushion if the tenant falls behind on the rent.  Make sure to obey your state’s security deposit laws before touching this money.

Not everyone will be able to put down one month’s security deposit.  In these cases consider collecting a move-in fee instead of a reduced security deposit.  Move-in fees are non-refundable and are not governed by strict holding laws like security deposits are.  Even luxury apartment complexes are now collecting move-in fees instead of security deposits.

Automatic Withdrawal

Another sure-fire way to maximize the chances of collecting your rent is to make the tenant sign up for automatic withdrawal from their checking account every month.  If a tenant does not agree to this, just ask them if they are actually planning on paying the rent on time every month.  Most people will go out of there way to avoid overdraft fees on the checking accounts which makes it more likely you will be paid every month and on time.

The Goal is to be Flipping Houses not Flipping Tenants

It is possible to find quality tenants in low income neighborhoods as long as you understand what to look for during the screening process.  There are several factors on the tenant’s screening report that are red flags and those tenants should be avoided in most cases.  See the article, “3 Zero Tolerance Red Flags all Landlords should look for when Screening a Tenant” for more information.

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Deadbeat Tenant

Previous Evictions

Immediately throw this application in the garbage.  Any tenant with a previous eviction knows how to manipulate the tenant-landlord laws in their favor and will more than likely be a headache from day one.  An eviction on a tenant’s record means that they refused to move out, even after getting served the proper legal paperwork by the sheriff.  The landlord  had to actually go to court for a judge to order this tenant to move out.  Landlords and property managers should avoid tenants with evictions on their record like the plague.

Drugs or Violent Crimes

Draw a line in the sand and refuse all tenants with drug or violent crimes on their background check.  As real estate investors, we need to minimize our risk and a drug or violent crime conviction carries too much risk of a repeat offense.  Waiting an extra three months to rent a house to a qualified tenant is much less expensive than evicting a bad tenant.  Bad tenant costs involve lost rental income, eviction costs, property repairs from turnover, and finally the cost of waiting for another tenant to move in.

No Verifiable Employment or Income

Tenant Screening

The landlord or property manager needs to be able to verify the tenant’s employment in order to make sure the tenant actually has a job.  Sounds simple, doesn’t it?  If the tenant is self employed and cannot provide paycheck stubs, then ask for their last 6 months of checking account statements to verify a stable income.  I had one tenant tell me they were self-employed and could not prove their income.  So they offered to pay the first 5 months of their rent upfront along with a security deposit because of the higher risk they posed.  I accepted the offer and they deposited all the money electronically into my account from several different credit cards.  As soon as the 5 months were up, I never received another rent payment and they moved out two months later leaving the property with $2,000 in repairs.  I’m sure these credit cards will never be paid off either.

Good Tenants can Make or Break your Investments

The tone of this article may seem harsh, but this is a serious issue that can cost a real estate investor thousands of dollars if the wrong person moves into your freshly rehabbed rental property.  Depending on the state you live in, it can take 4-6 months for the eviction process to get to the point where the sheriff comes out to physically remove the tenant.  There are many true stories of desperate landlords accepting an unqualified tenant to fill their vacancy and in return the tenant never pays a single penny of rent after moving in.

Buying and rehabbing foreclosures to be held as rentals can provide great tax benefits and a secure retirement cash flow for the smart real estate investors who are not afraid to seize the moment.  Great equity positions can be easily obtained and realized if you plan to hold for at least the next 5 -10 years.   Investors that accumulate rental properties in this market will become the quiet millionaires of tomorrow.  See you at the end of the rainbow.