Guidance On Renting
To Subsidized Tenants

For landlords, finding a tenant is no small task, and a government-subsidized renter can add to the paperwork. Many landlords say there's an upside to working with these renters. After all, as much as 70% of the monthly rent comes from the federal government, and it's always on time.

Of course, there's no guarantee a subsidized tenant's check for the balance of the rent will be punctual, but there's no assurance your other renters' checks will be on time, either.

Vanessa and Glenn Dandridge began renting their Spanish-style two-bedroom house in Oakland, Calif., to a federally subsidized renter in 2001 after about a year of renting to family members. They screened the renter as they would any tenant, then completed the steps the government required -- including an extensive housing-authority inspection, confirmation that the Dandridges would charge "fair market rent," and signing a housing-authority contract, in addition to a lease with their tenant.

For the Dandridges, the arrangement works well. The $1,485 monthly rent, which includes the subsidy, covers their mortgage and property-tax costs while allowing them to make a modest profit in a market where property values are escalating.

"For us, not having a lot of experience as landlords…this was comparatively simple," said Ms. Dandridge. "The rent payments come like clockwork."

Formerly known as Section 8 (after part of a federal housing law), the Housing Choice Vouchers program is the federal government's effort to help very low-income families, the elderly and the disabled pay for housing in the private market. In 2004, 2 million individuals or families in the U.S. were renting apartments and single-family homes under the program.

The stigma associated with federally subsidized renters is unfair, say landlords who rent to them. Section 8 renters might be people landlords already know. For example, the Dandridges' tenant is a friend of friends.

"It drives me crazy that landlords won't rent to a 'Section 8' tenant," says Kate Hartley, a development specialist at the San Francisco Redevelopment Agency. "Some people have a prejudice that they're poor, or that they're all crack-heads."

In the San Francisco Bay area, high rents have begun forcing many residents, not just the poor, to pay disproportionately large portions of their income toward rent. Ms. Hartley says residents who apply for assistance include nurses, teachers, journalists, artists and even city workers. "We qualify for the housing we help rent," she says.

The regulatory burdens associated with the program can be considerable. In a statement to the House Subcommittee on Housing and Community Opportunity in 2003, the National Association of Realtors and the Institute of Real Estate Management said property owners are increasingly unwilling to accept housing vouchers because of the red tape.

Clearly, landlords considering these renters for the first time should know what they're getting into. The following is a run-down of some of the issues they may encounter.

Landlords who rent to a federally subsidized tenant must offer a one-year lease and may require a security deposit. If the tenant and landlord renew the lease, the landlord should be prepared for an annual visit from an inspector appointed by the Department of Housing and Urban Development (HUD).

Michael Simmons, a 40-year-old institutional property developer in Los Angeles, is also an independent real-estate investor who owns 30 units in multifamily buildings in Nashville, Los Angeles and San Francisco. As he bought properties in the past eight years, he "inherited" a federally subsidized tenant and later offered a lease to another.

However, he says the responsiveness of the local housing authority contributes to a landlord's success with the program. Local housing authorities enforce HUD rules. Securing dates for housing-authority inspectors to handle inspections and other paperwork can create costly delays. Mr. Simmons recommends that landlords learn about their local housing authority and speak to other landlords who have rented to subsidized tenants.

While his local housing authority acted efficiently when tenants moved in, it was slow to respond to his request to increase the rent. Rent increases require tenant notification and approval from the housing authority.

"The regular things you need to do, like raising the rent, can take months," Mr. Simmons says. "The move-out is also tricky because you have to document everything" to be compensated for damages, he says.

Mr. Simmons says one subsidized tenant, a family of eight, left him with damages of about $2,000 due to normal wear-and-tear that a family of that size living in a three-bedroom unit typically would incur. Rather than wade through the paperwork required for a housing-authority payment, he paid for repairs himself.

His housing authority was easy to work with on inspections, however. Although he had to make required repairs or lose the tenant rent subsidy, he says the problems inspectors flagged were easy to fix: loose knobs on stoves and batteries pulled from smoke alarms.

Landlords considering renting to federally subsidized tenants should learn about local housing law. Attending seminars or housing-authority programs for landlords is a good way to start.

Evicting federally subsidized tenants can be more complicated than evicting other tenants. For example, if a tenant would be otherwise homeless or would have great difficulty finding housing, a variety of advocacy groups may protest having the tenant move. For this reason, Mr. Simmons says, he looked into the background of a subsidized tenant carefully prior to renting to him.

Would he rent to other subsidized tenants? "Yes, I'd do it again," he says. Mr. Simmons says he was pleased with his subsidized tenants. The biggest benefit of renting to such tenants, he says, is the assurance of on-time rent -- not a given with other tenants.

HUD establishes "fair market rent" on an annual basis, and landlords need to offer leases that fall within fair market ranges. On Sept. 30, HUD released 2005 fair market data. Lately, fair market rents have remained flat or increased slightly, reflecting the changes in the marketplace.

But in several major cities, HUD has been slowly correcting market rents with decreases. The following cities and suburbs are among the markets slated for decreases in 2005: Washington, D.C., Baltimore, Seattle, Boston, Chicago, San Francisco, San Jose, Southern California's Orange County, and Fort Worth, Texas.

Ms. Hartley says in San Francisco, average rents grew 175% between 1991 and 2000. About 7,200 households are renting under the program -- less than 1% of the city's 800,000 population. There are 10,000 households on the waiting list.

Landlords need to study the direction of fair market rent trends in their area, especially if they own property in an expensive city. In 2004 and 2005, landlords with subsidized tenants may find themselves renting at a loss. Suburbs or small cities might see less rent inflation over time than major cities, and they'll be less subject to dramatic rent bubbles and corrections.

Landlord Matthew Martinez, 34, manages several properties in Boston's Dorchester community. Half of his tenants are subsidized renters. When HUD lowered its fair-market-rent rates in Boston for 2004, he had to absorb the reduction in rent.

A triplex that had fetched $2,000 in monthly profit soon began bringing him only $1,600. "That's the tricky part of working with the government," says Mr. Martinez. "It can, at will, say, 'We're going to make a change.' "

-- Ms. Hodges is a free-lance writer in Seattle.

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