The term Section 8 arbitrage seems quite loaded, something thrown around in a deeply technical conversation on Wall Street or a James Bond movie.
This, however, isn’t the case for professional real estate investors, given the importance of Section 8 in the housing market, and the value it stands to bring for investors, homeowners, and other players in the real estate industry.
In this article, we uncover the term ‘Section 8’ and all that it conveys in its entirety, along with a brief primer on Section 8 Arbitrage, and what it means for real estate investors.
Understanding Section 8 In Housing
For the uninitiated, Section 8 is essentially a program by the US Department of Housing and Urban Development (HUD), aimed at helping low-income families afford housing.
Under this program, tenants only need pay as much as 30% of their income in rent, with the rest being covered by the US Federal Government. As you can expect, this offers remarkable support for low-income families, creating housing stability, so that families can focus on saving and thriving in the long run.
In order to be eligible for this program, an applicant’s income should not exceed 50% of the median in the county or metropolitan area they choose to live in. For example, in San Diego, your median income has to be less than $2,500 to qualify, but in Cleveland OH, it has to be less than $1,250 per month.
Once an applicant is deemed eligible, they receive a housing voucher which they can then use to apply for qualified housing in their locality. Vouchers, of course, have a long wait time, given the high demand and limited funding that is impairing this program in recent years.
Now, apart from this, there are additional procedures pertaining to the housing side of the equation. If a landlord agrees to lease out their property under this program, the PHA (Public Housing Agency) must first inspect the premises, before approving the lease.
What Is Section 8 Arbitrage?
So, now that we know what the Section 8 housing program essentially is, let's discuss the fairly lucrative arbitrage opportunity that this program presents for investors.
Arbitrage, as the term implies, is all about taking advantage of tiny price differences and discrepancies in markets to turn a profit. In the case of the Section 8 affordable housing program, the arbitrage opportunities are fairly straightforward.
It involves taking advantage of lower-value homes in non-prime areas and matching them with the guaranteed above-market returns that come from the Federal Government.
Usually, such areas of any city or town attract lower-quality tenants, who often tend to default on rental payments, thus resulting in lower valuations. The arbitrage essentially involves taking advantage of these lower values and generating higher returns from them.
The Nuances of Section 8 Arbitrage In California
When it comes to Section 8 laws, California pretty much lives up to its reputation for dense rules and regulations that shroud every aspect of the process with red tape and ambiguity.
That being said, California also happens to be one of the most lucrative markets in this regard, with plenty of opportunities for Section 8 arbitrage. This means that serious investors cannot afford to look past the state, no matter how daunting it might be to navigate the Golden State’s laws and regulations.
When it comes to California’s specific regulatory framework for Section 8 Housing, here are some pointers to keep in mind:
● Statewide Anti-Discrimination Law: California prohibits landlords from discriminating against tenants based on their source of income, including Section 8 vouchers. This means landlords cannot refuse to rent to someone just because they are a Section 8 voucher holder.
● Rent Control: Some cities in California have rent control ordinances that limit how much a landlord can increase rent each year.
These regulations can affect Section 8 rentals, particularly when it comes to setting and adjusting rent amounts for Section 8 tenants in rent-controlled areas.
● Fair Market Rent: The Department of Housing and Urban Development (HUD) sets Fair Market Rents (FMRs) for different areas, which influence the amount of subsidy Section 8 vouchers can cover.
In California, high housing costs mean that FMRs can vary significantly by region, impacting the affordability and availability of Section 8 housing.
● Inspection Requirements: Before a rental unit can be approved for Section 8 tenants in California, it must pass a health and safety inspection conducted by the local Public Housing Agency (PHA). These inspections ensure that properties meet HUD's Housing Quality Standards (HQS).
● Lease Agreements: In California, lease agreements with Section 8 tenants must comply with both federal Section 8 requirements and state landlord-tenant laws. This includes provisions related to security deposits, lease termination, and eviction processes.
● Local PHA Policies: Public Housing Agencies in California may have their own additional requirements or policies for Section 8 landlords and tenants. It's important for both parties to be aware of and comply with both state and local regulations.
Airbnb Section 8 Arbitrage - How It Works?
Now, this is where things get real spicy. As you might already know, Airbnb is a great way to generate outsized returns from your property, but the income isn’t always stable and requires additional work as opposed to straightforward leasing.
When paired with Section 8 rentals, however, landlords can reap the best of both worlds, all the while further reducing the rental expenses of the tenant, who in this case, would be from a lower-income background, or family.
How this works, is you rent the property to a Section 8 candidate, where a significant chunk of your rent is paid for by the Federal government. But in addition to this, you allow your tenant to sublet the property, or a small room in the property, to guests on Airbnb, to cover their share of the rent.
You can share in the additional income generated via Airbnb, that exceeds beyond your tenant's monthly payables. This, of course, isn’t that straightforward and is fraught with challenges, but for those really interested in chasing yields, this can be a blockbuster of an opportunity.
Section 8 Arbitrage Calculator
A Section 8 arbitrage calculator essentially involves ascertaining the difference between the rental yields of a regular property in an area, and a Section 8 property in the same area, while also considering the risks and uncertainties involved in both propositions.
Usually, the rental yields and risk factors are priced into the value of a property, and thus a low-value property that offers better yields and favorable risk dynamics is an arbitrage opportunity, and should up positive in any arbitrage calculation.
There are no Section 8 arbitrage calculators out there right now, but knowing and understanding the nature of price, value, yield, and risk, it isn’t hard to come up with a rough figure by yourself. Something that is just enough to help support your investment decisions.
Conclusion
In the increasingly crowded and nearly saturated real estate market within the US, opportunities like Section 8 housing, and their arbitrage are a godsend, helping new investors who are just getting started find value in the markets, when it is largely a fleeting concept.
Section 8 arbitrage is certainly not an easy concept to either understand or implement, and is thus, better suited for more experienced investors. However, for beginners who are hellbent on giving it a try, and are capable of assuming the risk, there cannot be a better way to dip your toes in the market.
If you're looking to learn more about real estate investing, feel free to contact us today.
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