A lot of people are attracted to Section 8 right now. They’re getting into this niche because investing in their local markets doesn’t make sense.
And they feel like Section 8 will help mitigate some of the risk that comes with out-of-state investing.
One of the biggest, and under talked about, risks to Section 8 is the potential for your tenant’s voucher amount to change.
This recently happened to me. So I’m using it as an opportunity to talk through how I think about Section 8 rent increases.
Sometimes I’m afraid to increase Section 8 rents at all. Seems odd, right?
Other times I’m pushing it as much as possible each year.
So let’s break down what you might want to consider before increasing that Section 8 rent going forward.
The Risk of Section 8 Vouchers Payments
Many people get hooked on the idea of Section 8 because of the guaranteed rent.
While this is definitely the most attractive part of the program, most folks don’t realize that it’s not actually guaranteed.
Most Section 8 tenants tend to have a portion of the rent that they are personally responsible for.
This could be as little as 10% of the total rent amount or much higher. One of my tenants is responsible for over 65% of her monthly rent with Section 8 only covering 35%.
That means only a portion of the rent is guaranteed in these cases.
With the tenants that do have the full rental amount covered by the Section 8 program, it’s still not a guarantee.
Each year there’s some kind of reassessment.
While we kind of know how this calculation is handled, it’s impossible for us, as landlords, to do. We simply don’t have access to the inputs (the tenants’ personal information).
So tenants might be getting a “full ride” or having to chip in a big chunk of their Section 8 rent. Where they fall on this spectrum has a big impact on whether or not I decide to increase their rent.
When Section 8 Rent Increases Always Make Sense
When tenants have their full voucher covered by the program, I am almost always doing a Section 8 rent increase.
You can do it once a year, and I’m generally targeting a 5% bump unless market rents have moved even higher than that.
The logic?
It has zero impact on the tenant. Since none of the monthly rent is coming out of their pocket it won’t affect them at all.
The other side of this is that tenants with full voucher coverage have a track record of being the hardest on your property.
Since they have no skin in the game they tend to take the property for granted.
This is a generalization of course, and I’m sure there are exceptions, but I’ve seen enough data to accept it as a good rule of thumb.
One of my tenants is living in a 3 bed, 2 bath bungalow with 5 (five!) children. She’s the one that didn’t realize sewage was coming down the main plumbing stack for far too long. Read all about that on this rental performance write up.
At this point, I know she’s rough on the house. And all I can really do about it is make sure I’m maximizing our rental income until the day comes where I have to do a turnover.
It’s going to cost me!
So when do I hesitate to do Section 8 rent increases?
When You Have To Be Careful With Section 8 Rent Increases
Generally, I’m a bit gun shy on raising Section 8 rents when the tenant’s portion is a significant amount of the monthly rent.
I’m defining significance as anything over, say, 50%.
My concern here is that if I raise the rent too much my tenant may be unable to afford their portion of the voucher.
Then, they either move or you end up having to do an eviction.
That may be great if you have a terrible tenant. But if you have a decent tenant that you’d like to retain, a Section 8 rent increase might not be a smart move.
Turnovers are expensive and great tenants are like gold.
One of the first rentals I ever bought is still home to the tenant that was living there when I purchased it.
It’s a 5 bedroom home but she lives there with her boyfriend and teenage son.
That means a lot less wear and tear than the number of people you could pack into a large home like this.
I’ve been hesitant to raise her rent because she’s paying $913 of her $1,200 Section 8 voucher.
Until recently…
I received this notice the other day that our tenant’s rent portion dropped from $913 to just $386.
This is great for our tenant, and great for me! I can now feel comfortable raising the rent to $1,300/mo to get it more in line with market rates.
And that’s exactly what I’m going to do.
Section 8 Reexaminations Can Go Both Ways
While I was ecstatic to see my tenant get such a favorable reexamination this year, I also realize it goes both ways.
I’ve seen favorable reductions for tenants like this before but it’s far more likely that I see it go the other way. In these cases, the tenant is having to pay more than they did the previous year.
If my tenant hadn’t received a favorable reexamination this year I would not be raising the rent, and I’d be happy maintaining the $1,200/mo rental amount. My wife and I have talked about it at length.
We know we’re well under market for this home, but we’re ok with it given all the other factors.
This reexamination gives us the ability to close that gap a bit, and definitely secures the home for the tenant for at least a few more years.
To me, that’s a win-win.