Does the idea of a never-ending stream of potential renters, many of them with guaranteed payments, lining up to apply for your vacant apartments sound appealing? Then you might want to consider renting to lower-income tenants.
Before you rush to judgment, it’s worth taking a broad look at the current rental market. America’s affordable rental crunch means that the biggest segment of the population that needs housing is the one that can least afford it. For landlords willing to serve this growing demographic, a golden opportunity awaits—as long as it is approached correctly.
A National Shortage That Isn’t Going Away
If real estate is about supply and demand, there is an almost bottomless demand at the lower financial end of the market. The United States is short about 7.2 million affordable rental homes for extremely low renters, defined as those at or below the poverty line or 30% of the area median income, according to the National Low Income Housing Coalition’s (NLIHC) “The Gap” report. That translates to only 35 affordable and available units for every 100 extremely low-income renter households nationwide.
The report shows that roughly 11 million households fall into this category, with some states having more than others. However, as Renee Willis, president and CEO of the NLIHC, said in the report, “The findings from ‘The Gap’ show that no state or major metropolitan area has an adequate supply of affordable and available homes for extremely low-income renters.” She added that only about one in four households that need assistance actually receive it.
Western and Sunbelt States Are the Most Affordable Housing-Challenged
According to a Newsweek map based on NLIHC data, Western and Sunbelt states such as Nevada, Arizona, Florida, and Texas rank among the most challenged. The report shows that seniors, those with low-wage jobs, and people with disabilities are often forced to compete with higher-income tenants for modest-priced rentals.
Focusing on Texas, a recent report from the Texas Tribune finds that Dallas—often celebrated for its burgeoning jobs and middle-class population—was short about 46,000 rental homes for families making 50% of the area’s median income as of 2023.
“We have a serious shortage of affordable rental units for very low-income households,” said Ashley Flores, the Dallas-based housing chief for nonprofit Child Poverty Action Lab, who coauthored its new report.
The Problems With Section 8
Although there is a deep need for affordable housing, there is a chronic shortage of tenants approved for Housing Choice Vouchers (Section 8). A New York Times article found that these vouchers are too scarce in major American cities where they are most needed. In Orlando, for example, there are roughly 200,000 rent-burdened households (those paying over 30% of their household income in housing costs) but only 7,401 available Section 8 vouchers.
More recently, the Trump administration proposed imposing a two-year time limit on rental assistance, which could affect as many as 1.4 million households, exempting the elderly and those with disabilities.
Many landlords choose to avoid Section 8 housing altogether because they feel it is too much of an administrative nightmare, requires excessive inspections, involves chasing tenants for their share of the rent, and soaring rents make it easier to get top dollar from regular tenants without the hassle of dealing with the government.
Each county has its own rules for affordable housing, and many have programs beyond Section 8 that can also offer qualified tenants steady, market-rate rents.
How Landlords Can Turn The Affordable Housing Shortage Into Cash Flow
A recent Business Insider story detailed the story of Ted and Jamie Gerber, who own 28 rental units across 15 commercial and residential properties in Florida. “We always rent at or below market rates,” said Ted Gerber. “Our tenants value the fact that they’re renting slightly below market rate, so they’re going to want to take care of the place. They’re getting a deal, and we’re still making money from it all.”
Another investor, Washington-based Dion McNeeley, interviewed for the same article, uses a similar strategy.
“Happy tenants don’t trash the place, and they don’t move, and tenant turnover is one of the most expensive things a landlord has to deal with,” McNeeley said. “I’m making tens of thousands of dollars more in the last few years than I would have if I raised the rent to the area average and then dealt with a bunch of turnover.”
A BiggerPockets article outlined some of the essentials for renting to low-income tenants:
- Accept it for what it is: Homes in lower-income neighborhoods generally won’t appreciate at the same rates as other areas unless they are hit by a wave of gentrification.
- Anticipate high potential cash flow, but be realistic: On paper, your cash flow can be extremely high, especially if you are not heavily leveraged, but management-wise, these types of properties can be quite labor-intensive.
- Work with a responsive management company experienced in this type of rental: Unless you want your passive income plan to turn into a full-time job and have to deal with tenant calls, outsource management to a responsive management company well-versed in this type of rental.
- Patience is key: Many landlords steer clear of low-income rentals because of the labor-intensive management and the types of tenants they attract. Clearly, beyond meticulous screening, having a thick skin and playing the long game are key. Some years, you might not generate much cash flow due to repairs and turnover, but eventually equity and rents will increase.
Final Thoughts
Stable tenants with stable jobs in stable neighborhoods are an ideal scenario for most landlords. However, due to the U.S. housing crisis, a much larger pool of rentals and tenants lies within the less-glamorous affordable rental segment.
Having owned multiple low-income units in the past, I can attest that they can be challenging—which is putting it mildly. However, experience has been a great teacher, and these are some of the lessons I’ve learned.
You cannot be too leveraged.
BRRRRing your way to success with low-income rentals is fraught with risk. Other investors I have known who have succeeded in low-income areas have bought rentals in auctions for cash, used their credit cards to fix them up, paid off the debt, and used the cash flow to service the repairs while keeping a full-time job. Eventually, rents increased, and the areas turned around. It was a conservative long-term strategy.
Screen meticulously.
Landlords are often so desperate to fill units that they will let anyone in, especially if they have a Section 8 voucher. Vouchers or not, comprehensive tenant screening is a must, which is why an experienced outside management company is important.
Older tenants or those with disabilities tend to be more stable.
I once had a three-unit rental where, unbeknownst to me, all the tenants were drug dealers—even the single mom with a baby. One day, I found out that my building was completely vacant due to a DEA drug bust. Older folks usually know better than that.
Have a slush fund ready for repairs.
Even with good screening, you will still encounter your fair share of repairs. This is why buying with cash or minimal leverage and having a slush fund and a reliable, affordable contractor are essential.
One of the biggest dangers with low-income rentals is actually expecting to get the same cash flow in reality as you worked out on paper. Things often go wrong, and making your rental work means having enough cash to cover repairs and absorb vacancies.
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