Pros & Cons of Investing in Subsidized Housing

Key Points:

• Determine your unique investment goals.
• Pros and Cons of investing in subsidized housing.
• Update for Properties in the City of Denver.

What is subsidized housing and should you incorporate it into your investment strategy as an investor? Depending on your own unique investment goals, the answer may be yes. Subsidized housing, (often referred to as Section 8 housing), like any investment option, comes with a list of pros and cons. Having a clear understanding of each will help guide your decision. 

PROS:

1. Guaranteed Income:
   The government guarantees a percentage of your tenant’s rent (generally somewhere from 30 to 70 percent). Owners then have a higher degree of certainty that rent will be paid each month.
2. Less Vacancy:
   Did you know that there is a waiting list for subsidized housing? When a tenant moves in, they often want to stay long term. This is an advantage to you as an investment property owner as it cuts down on vacancy and turn-over costs.
3. Pre-qualified Tenants:
   The government, in some way, screens all tenants who participate in the subsidized housing program. While the government standards may be less than your internal screening standards, the tenants you receive have been prequalified to some extent. You should, however, still conduct your own background check on all prospective tenants.

CONS:

1. Government Inspections:
   The government does a full interior inspection before the tenant moves in, sometimes requiring higher property specifications than what your would personally. The government also does a full property inspection at least once a year. The purpose of the annual inspection is to find repairs that the owner is responsible to fix in order to continue participating in the subsidized housing program. This can sometimes lead to more expenses, cutting into your bottom line. 
2. Your Lease Terms are Superseded:
   If contradictions between your lease and the government's lease arise, the government's lease will take over. For example, if your lease allows a 10-day notice of non-renewal, but the HUD lease requires a 60-day notice, you will be required to abide by the 60-day notice rather than your own lease terms.
3. Less Financially Qualified Tenants:
   This is not to say anything negative about subsidized tenants - most of them are great people! However, these tenants normally would not qualify for housing based on their own credit and income. They may not meet your minimum criteria for credit and income as they are less financial qualified than your typical tenant.
4. Rent Control:
   HUD has the option to deny your rent increases. For example, at lease renewal you may notify your tenant of a $50 rent increase. HUD may only approve and allow an increase of $25. This can hinder your long term investment returns, especially in a hot rental market where the $50 renewal would have been appropriate and accepted by your tenant.

Update: If you have a property in the city of Denver, you may not discriminate against an applicant based on source of income.

In the end, it’s up to you to choose your own strategy as an investor. However, for investors in rental markets with strong demand, we advise against subsidized housing.

The team at Grace Property Management is here to help! If you have any questions, give us a call at 303-255-1990.

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