Purchasing properties in low-income areas can open more doors for you than you think. While low-income housing is often associated with late payments and evictions, there are government programs that can help you – and your tenants.
Government-funded programs like Section 8 and Section 42 fund your tenant’s rent and give you tax breaks, respectively. Participants don’t want to lose their funding; therefore, they work hard to comply with your contract’s guidelines.
The U.S. Department of Housing and Urban Development (HUD) has developed several programs to encourage the creation of housing that is safe and affordable for those who are elderly, disabled, or have low income. HUD does so by funding construction of restricted housing, giving tax breaks to those that cap prices, and paying rent for participants. Local housing agencies implement these programs with funding from HUD. These rental subsidies are regulated by the Code of Federal Regulation Subpart F.
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Section 8 – Housing Choice Voucher Program
The Housing Choice Voucher program helps participants to rent their choice of homes in the private market that meet program guidelines. The local housing agency directly pays the landlord a portion of the rent on behalf of the participant. Participants pay the remainder, which is typically about 30 percent of the participant’s adjusted gross income.
The program can fund anyone who makes less than 50 percent of the area’s median income; however, 75 percent of program participants need to make less than 30 percent of the area’s median income. The local housing agency determines income and whether a participant qualifies for the program.
Most housing authorities require an initial Section 8 lease to be for at least one year. In fact, it is a federal requirement for lease terms to last at least a year, as per the Code of Federal Regulations. After the first year, the landlord has the choice to renew the lease on a yearly or month-to-month basis.
However, housing authorities can make exceptions to the one-year rule if there is a clear, documented benefit to the tenant to have a shorter lease term. For example, if a student will be attending school in the area for less than a year.
The tenant is expected to pay rent, keep the property in the same condition that they received it in and follow the lease.
While renting to tenants with low incomes is beneficial for the community, it’s also convenient for you. Renting to tenants using Housing Choice Vouchers gives you tenants who follow contract guidelines, stay for a long time and pay on time; you have access to a larger pool of tenants who can rent your property; you can purchase cheaper properties; and you don’t have to worry about your tenants sneaking in more people who will drive up utility bills and make a lot of noise.
Guaranteed Monthly Income
By renting to Section 8 tenants, you have a guaranteed monthly payment. The housing authority will pay you every month. Additionally, tenants are paying 30 percent of their monthly income, which is considered affordable rent. When tenants are better able to afford rent, it’s easier for them to make rent payments. So, you’re more likely to get paid by them!
The government pays you promptly at the beginning of each month. While tenants from all walks of life pay late, the housing agency won’t. That means at least part of your payment will be on time every month. Reliable payments are a big incentive of the Housing Choice Voucher program.
The tenant is responsible for a small payment. Like any other tenant, a Section 8 tenant may pay late or ask for extensions. However, it is up to you to crack down on it. The housing agency won’t help you collect your rent, but your tenant is motivated to pay you on time to avoid calling his or her voucher into question. Sometimes a gentle reminder makes the difference other times, eviction notices do. However, most tenants will pay you long before it gets to that point. They don’t want to jeopardize their voucher for any reasons. An eviction calls their voucher into question.
Following Contract Guidelines
The program is very popular. Typically, there is a waiting list of people who want vouchers. In some areas, it can take years to get a voucher. For that reason, tenants truly appreciate their vouchers. They don’t want to lose the voucher because they may not get another or it would take a long time for them to get another.
It’s likely that a tenant would not be able to get another voucher for the program if they lose the first. The vouchers are in high demand; therefore, the housing authority needs to be selective about who gets one. People who have not had vouchers will likely receive preference; however, each housing authority makes its own decision on how to award preference. Some authorities, for example, offer preference to people who are homeless.
That is not to say that a tenant that loses his or her voucher cannot get another voucher. Some housing authorities place a 5-year sanction to when tenants can get back on the list if they violate program rules; however, these are typically for extreme situations. Many tenants can get back on the list if there is room.
Additionally, even if there is not a sanction placed on them for violating the rules. They return to the bottom of the list when they lose their voucher and need to wait their turn before getting another one, which can take a long time.
Purchase Cheaper Properties
When you rent to low-income tenants, you can purchase properties that are less expensive. For example, properties that are smaller, that are located in marginal areas or that have fewer amenities – like community pools or clubhouses.
That’s not to say that properties should be substandard, as they will need to pass inspections. Substandard properties will not pass inspection and, more so, substandard properties will lead to unhappy tenants who won’t want to stay long. Just because the unit is small or in a marginal area does not mean that it cannot be nice.
Larger Pool of Tenants
The Housing Choice Voucher Program makes it possible for a lot of families to rent a home. In fact, most large cities have a waiting list of people who want a Housing Choice Voucher. By accepting Housing Choice Vouchers, these families will look at your property as an option. There are a limited number of landlords that accept the vouchers. Therefore, accepting Housing Choice Vouchers makes it a lot easier for you to find a tenant!
Section 8 properties are often less expensive than other properties. Families with government assistance qualify for a certain size and priced home. If your property is more expensive or bigger than that specification, the tenant won’t be able to rent from you. Therefore, you can purchase more properties at a lower price.
There aren’t a lot of landlords that accept Section 8 tenants. Finding an eligible property that passes inspection is difficult. If you’re a good landlord and your property is nice, tenants won’t want to move.
No Surprise Family Members
The tenant’s voucher is for a certain unit size, which is dependent on the size of the family. Therefore, you will know how many people are staying in your property up front. Your tenants won’t want to go over the number of people listed on the voucher because they could end up losing the voucher.
There are a few drawbacks to Section 8, like going through the routine inspections. Other drawbacks include:
If you want to rent your property to someone with a Housing Choice Voucher, price your property at a rate the housing authority finds reasonable. If the housing authority deems the price too above fair market value, you will need to lower your rate if you want to accommodate the program. You have the option to request a rent raise once a year. To do so, you must give the housing authority and tenant notice 60 days in advance.
Annual property inspections protect the tenant and draw your attention to repairs that need your attention. Catching repairs yearly, keeps them from getting worse and becoming a more expensive issue. However, it can be frustrating to worry about units passing inspection, even more so when they don’t. What one property inspector views as a serious defect, might not be noticeable prior to inspection, making it difficult to prepare to pass inspections. If you fail an inspection, you have to make the needed repairs and schedule a re-inspection. If you fail again, you could risk losing a portion of that month’s rent or even the full Section 8 subsidy.
Fair Market Rent
You might be able to charge a tenant a rent that’s higher than fair market value if they really like your property; however, that’s not the case with Section 8 tenants.
The local housing authority regulates how much you can charge a Section 8 tenant. While you can request to raise rent once a year, your request is just a request. You don’t have control over whether the housing authority will approve it like you would with any other tenant. However, after the first year, you can request an increase multiple times after the initial term, or first year.
The public housing authority will compare your property to similar units within the area of your property to determine what fair market rent will be.
Your property must qualify as decent, safe and sanitary, as judged by an annual inspection. If at any point your property fails inspection, the housing agency won’t pay you until you schedule and pass inspection.
Rent should be reasonable. The Housing Choice Voucher Program may require you to lower rates to qualify. You can apply to raise your rates once a year.
Make sure that what you charge for rent is within the estimated rental maximum. The housing voucher indicates how many bedrooms the unit should be and the maximum amount rent can be. The voucher indicates how many bedrooms should ideally be part of the tenant’s home; however, tenants can choose to rent a unit with more bedrooms than recommended or less bedrooms than recommended.
Transfer utilities to the tenant’s name if the tenant is supposed to pay their own utilities.
Screen your participants. The best way to have great tenants is to screen them in advance. The Section 8 screening process is strictly financial; it is up to you to determine whether you are renting to a good tenant. Even if you’re a part of the program, you have a right to reject a tenant with a voucher who doesn’t meet your standards. Make sure you are applying the same set of standards to all tenants, as you cannot refuse to rent to Section 8 for reasons you wouldn’t refuse any other tenant. Treat Section 8 tenants like all other tenants.
You must give the housing authority an initial eviction notice at the beginning of the eviction process if you choose to evict a tenant who is part of the voucher program. Most housing authorities request that you give them copies of any notices you give the tenant, like notices to comply, 3-day-pay or vacate, or rent increase requests.
✓ How to Apply
Any landlord can use the program. You just need to get your property approved by your local housing authority. Each housing authority has varying requirements.
- Alternative fire exit.
- Kitchen appliances.
- An openable window in the bedroom and living room.
- One working smoke detector on each level of your unit.
- Light in the bathroom and kitchen.
- Two or more outlets in the kitchen, living room and each bedroom.
- A kitchen, bathroom, living room and at least one bedroom/living-sleeping room.
- Adequate air circulation.
- No gas pollutants.
- Bathroom necessities.
- No serious defects, like big holes or loose materials on floors, ceilings and walls.
- A firm and weather tight roof.
Your housing authority might have a checklist that you can follow to make sure you pass inspection.
If you don’t meet one or more of these qualifications, you will be given a violation. The housing authority will not pay you until you have fixed the violation and your property has passed re-inspection.
It’s important to note that while a housing authority might use your property as a resource for tenants, they do not pre-approve properties. Your property is not approved for Section 8 until your Request for Tenancy Approval(RTA) has been submitted and approved.
Section 42 – Low-Income Housing Tax Credit
Section 42 is a tax liability reduction given to investors for capping rental rates for Section 42 renters. Section 42 aims to create affordable rental housing. The tax credit is for investors who are building affordable housing, not just those who own buildings with affordable housing. The code also applies to education and healthcare businesses who serve a clientele whose incomes are below 60 percent of the area’s median income.
The investor receives a federal income tax reduction over the course of 10 years, they receive tax losses and deductions on accrued subordinate financing. Accrued subordinate financing means that your debt is ranked behind other debts from secured lenders. For example, if a bank loaned part of the money and you invested the rest, the bank is paid back first.
The tax credit is a great way to recoup costs on your investments. Additionally, this is one of the few government assistance programs that allows you to make a profit while receiving funding. However, like all programs, you’ll have to meet certain requirements and guidelines to receive funding, including rent control.
As specified in obligations, you’re also making a commitment to rent to tenants with low incomes for a long period of time. While that isn’t necessarily a bad thing, it is a drawback that you cannot change your mind.
The credit is for the owner of the property, not the tenants. Tenants pay their rent with their own money. Rent is assigned to the unit, not the person renting it. A unit is assigned as 30 percent, 40 percent, 50 percent or 60 percent of the median area income. The U.S. Department of Housing and Urban Development releases these values annually.
For example, if the median area income is $1,000, the rent for a:
- 30 percent property is $300
- 40 percent property is $400
- 50 percent property is $500
- 60 percent property is $600
If your property is set to 60 percent, that means you can charge up to $600 in rent for your property. If you choose to, you could charge a tenant less. For example, you could charge a tenant $450.
However, if your property is set at 40 percent, that means the maximum you can charge for rent is $400, even if you find a tenant willing to pay more.
Property owners who take advantage of the tax credit must restrict a percentage of building occupancy to households eligible for Section 42. Mixed-use buildings have some, but not all housing designated for Section 42 renters. In these buildings, 20 percent of units need to be occupied by people whose incomes are below 50 percent of the area’s median income or 40 percent of units need to be occupied by people with income below 60 percent of the area’s median income.
Between 1986 and 1989, properties that signed up for the tax credit had to rent to low-income renters for at least 15 years. After 15 years, landlords could either sell the property or extend the credit to 30 years. Anyone who signed up for the program after 1989, had to comply for 30 years. Your state may have even more regulations because the program is popular among landlords. The makers of this section of the Internal Revenue Code wanted the tax credit to do the most possible good.
The housing authority does not screen tenants, the owner of the property accepts applications directly. You need to have a written document that lists your criteria for how you will review applications. You can decide how you screen candidates. Be sure to check their previous history with landlords, their credit and if they have a criminal background. However, you need to check the tenant’s income to see if they qualify for your unit. You also must make sure that at least one person in the unit is not a student. You need to ask the tenant to sign a Tenant Income Certification form stating that all given information about income and family size is true.
Additionally, if you want to charge the tenant for utilities, it needs to be deducted from the rent as a utility allowance. So, if your property can rent at $400, but the Department of Housing and Urban Development has designated the utility allowance in your area as $75, you can only charge $325 in rent. The pro is that if your tenant spends more than their allowance, they are still responsible for paying for the utilities. The negative is that if the tenant spends less than that on utilities, you are still restricted to charging them $325 if they’re paying for utilities.
If the median income for your area decreases, you are protected from having to lower your rent. If your property was open for occupancy when that median income was in effect you can continue to use it. However, if the median income increases, your rent can too!
You cannot discriminate based on race, color, national origin, disability, marital status, religion or sex. You cannot refuse a Housing Choice Voucher for a reason that you would not refuse someone without a Housing Choice Voucher. For example, if you allow tenants to have pets, you cannot refuse a Section 8 tenant because they have a pet.
You cannot evict or non-renew leases without a good reason. Good reasons include: lease violation, not paying rent, damage to property, not following rules, fraud or withholding information.
✓ How to Apply
To apply for the credit, the project owner needs to apply to the local public housing authority for competitive consideration. The application includes how much the project will cost and how many units it will produce.
Section 515 – Rural Rental Housing Loans
Rural Rental Housing Loans are given out by the Rural Housing Service (RHS), a part of the USDA. The service is operated under the Housing Act of 1949, which is a national housing policy that aims to provide every American family with a decent home and a suitable living environment.
These loans last up to 30 years and the interest rate is only one percent. They are amortized for more than 50 years. On your promissory note, current interest rates are included to determine maximum rent payments.
The loans are for developers of rental housing for very low income, low income and moderate income families, the elderly and persons with disabilities. Your tenants pay 30 percent of their income as rent or basic rent, whichever amount is greater.
Definitions of Income Classes
Very low-income families make less than 50 percent of the area median income.
Low-income families make between 50 percent and 80 percent of the area median income.
Moderate income families make no more than $5,500 more than low-income families.
The interest rate on Section 515 loans is very low. Therefore, financing the money for one of these projects is an inexpensive way to build equity. The program loans have a 1 percent interest rate that amortizes after 50 years.
Additionally, the Rural Division of the USDA has offered assistance to owners of Section 515 properties, such as debt deferral, grants, loans and soft-second loans to improve the property. This is called the Multi-Family Housing Preservation and Revitalization Demonstration program.
The program aims to preserve the availability of safe and affordable housing fo residents with low incomes. If you accept assistance, you must continue to provide safe and affordable housing for another 20 years or however long the loan is, whichever is longer.
There are four types of loans that RHS gives out:
- Cooperative Housing – residents own part of a corporation that owns the building. The residents own stock from the company, which gives them the right to live within the unit.
- Downtown Renewal Areas – efforts to restore downtown areas to former prominence as a center for community activity.
- Congregate Housing – a shared living community designed to meet the needs of the elderly and people with disabilities. Individuals have their own rooms, but share common areas like a dining room and recreational area.
- Rural Housing Demonstration Program – innovative, affordable and durable housing that reduces costs, raises living standards and improves rural area living environments.
While for-profit companies can apply, you must agree to operate on a limited profit basis while you are receiving aid from the programs. That means you can only make 8 percent on your initial investment.
Additionally, to be funded by Section 515, you must not be able to get funding from anywhere else that will enable you to charge affordable rent for tenants with low and moderate income.
You are required to rent to people who have very low income, low income or moderate income, are elderly or have disabilities until you have paid off your mortgage. While you can prepay your loan to stop being restricted, there are federal laws that may impact when you can do so, depending on your loan. The USDA can always offer you an incentive not to prepay if you continue to restrict your properties to those with very low, low or moderate incomes, the elderly and people with disabilities for another 20 years. These benefits might include equity loans, increased return on investment, lower interest rates and more rental assistance.
✓ How to Apply
The Rural Housing Service (RHS) determine which communities are most in need of assistance. They make a list of those communities and applicants from them may apply for funding. RHS rates the applications and gives out funding in the order of ranking. Your district office can approve loans up to $500,000. State officers can approve loans for more than $500,000 but less than $1.5 million.
Contact the Rural Housing Service National office at 202-720-4323 for loans of more than $1.5 million.
Contact your state office if you are interested in applying for the Multi-Family Housing Preservation and Revitalization Demonstration program.
Section 521 – Rural Rental Assistance Program
The Section 521 Rural Rental Assistance Program piggybacks off Section 515 Rural Housing Loans. The program covers the difference between rent and 30 percent of the renter’s income for people living in Section 515 rural housing.
Government assistance ensures that at least some of your payment is on time each month. Additionally, it will be easier for tenants to pay their rent if their rent is affordable. Affordable rent is 30 percent or less of a family’s income. This rental assistance program ensures that rent is affordable for tenants.
Funding for the program is very low. Typically, all funds are used up for renewals. The demand for Section 521 is much greater than the supply.
Additionally, funding is limited to nonprofits or companies operating on a limited profit basis. Therefore, there isn’t a lot of money to be made from this assistance.
You need to be the one to request the rental assistance. Otherwise, your tenants can petition you to apply for it. They can ten go through an appeals process if you disagree.
Once you are approved, you need to sign a one-year contract with the U.S. Department of Agriculture’s Rural Development Housing and Community Facilities Program office. That contract ensures that they make payments on time for your tenants.
✓ How to Apply
This program is only available for properties using Section 515 Rural Housing Loans. The landlord requests the rental assistance for the tenant. To get information about requesting assistance in your area, call 202-720-4323.
You can renew the contract as many times as you want, so long as funds are available.
Section 202 – Housing for the Elderly Program
The Supportive Housing for the Elderly Program or Section 202 provides capital advances for projects that create or acquire property for low-income elderly persons. The program also provides rent subsidies for the projects to help make them affordable. The project must help support the elderly living on the property with services like cleaning, cooking or transportation. It comes from Section 202 of the Housing Act of 1959.
The money is used to cover operating deficits throughout the first 3 years of business. It does not cover anything dealing with construction. HUD also provides project rental assistance contracts to help eligible families make rental payments. This is a good opportunity for you to look into if there are people using your services who have had difficulty making payments on time or at all.
For an investor looking to open an elderly facility, government assistance covers the cost. Therefore, not a lot of personal money needs to be invested. However, only nonprofits qualify for this funding; therefore, no profit can be made from the business.
Only nonprofits qualify for funding. Therefore, while using funds to create housing for the elderly wouldn’t cost you any money, it wouldn’t earn you any money either.
Taking advantage of Section 202 isn’t a profitable investment, it is a charitable one.
To qualify, you must provide certain services to the elderly using your facility. These services include meal preparation, housekeeping, personal assistance, transportation and any health-related services.
✓ How to Apply
Private nonprofit organizations and nonprofit consumer cooperatives that meet the requirements can apply for the Section 202 program. As of 2017, HUD has provided this list of requirements to be approved Section 202 funding. The requirements are modified every year.
Investors can apply in response to the Notice for Funding Availability (NOFA) at Grants.gov
Section 811 – Housing for Persons with Disabilities
The Supportive Housing for Persons with Disabilities or Section 811 program provides HUD funding to subsidize rental properties for low-income persons with disabilities. The program provides capital advances and subsidies to those building the property and disperses funds to state housing agencies for rental housing.
The program began in 1990 and has assisted in building more than 30,000 units.
Section 811 is a great opportunity for nonprofit organizations to expand reach and do more.
Capital advances provided by HUD are given to nonprofit investors to pay for independent living projects, condominium units and small group homes. The money can help build, rehabilitate or acquire property. The investor does not need to repay the money if the property continues to serve Section 811 purposes for 40 years.
HUD also provides project rental assistance contracts for properties using Section 811 capital advances, just like Section 202.
Additionally, HUD can fund you through Section 811 by giving out project rental assistance under the Frank Melville Supportive Housing Investment Act of 2010. This type of assistance does not go towards developing housing like capital advances do. Instead, these funds help with operational costs. You must receive the funds for at least 15 years.
Additionally, the Fair Housing Act typically restricts you from discriminating on the basis of familial status. However, if you are operating a property specifically for seniors, you do not need to follow this law. According to the Department of Housing and Urban Development, you can deny housing to families with children if:
- The housing is restricted to residents 62 or older.
- Eighty percent of units are occupied by at least one person 55 or older.
- Or, a State or Federal program has classified the program specifically designated by HUD has determined that your housing is for the elderly.
Like Section 202, only nonprofits qualify for funding. Therefore, using Section 811 funds to build, rehabilitate or acquire property would not be a profitable investment.
You need to make sure your property and the money generated from it remain available to help people who have low incomes and disabilities for at least 40 years. Otherwise, you will need to return any and all funds that you received from Section 811.
Construction on the project needs to start within a year and a half of when the funds are reserved for you. There’s a very unlikely chance that deadline will be extended. Section 811 will give you funds on a monthly basis to use for construction.
You can use the funds to create one of three types of living communities.
- Group Homes – is licensed by the state for occupancy by elderly persons and/or persons with disabilities. The home has bedrooms for residents with no more than dual occupancy. It also includes a living room, kitchen, dining area, bathroom and other community spaces. Group homes have a maximum of 12 people living in them, including employees who live there.
- Independent Living Facilities – these are rental housing communities restricted to elderly individuals and younger people who have disabilities.
- Cooperative/Condominium Projects – residents own part of a corporation that owns the building. The residents own stock from the company, which gives them the right to live within the unit.
✓ How to Apply
You must have a supportive services plan to apply. The appropriate State or local agency looks through your application to make sure the plan is well designed to suit program purposes and the needs of your community. They certify your application to make sure that it does.
To be eligible for a project rental assistance contract, you must have a partnership with a state health and human services and Medicaid agencies, and you need to be receiving help from some other government housing assistance, like Section 42.
Investors can apply in response to the Notice for Funding Availability (NOFA) at Grants.gov.
Taking Advantage of Programs
Taking advantage of government-funded programs is a great way to turn a profit with a smaller investment amount. Owning multiple properties in low-income properties can generate the same if not more income than a more expensive property of equal value. Additionally, these programs provide great opportunities for lower-income community members to find acceptable housing.