There are many discussions about the pros & cons regarding having Section 8 tenants. Rather than discuss those pros & cons, I’m going to take a step back to take a look at why it seems that HUD would pay higher than market rate rent in certain cases.
HUD calculates Fair Market Rents (FMR). Why? Here is the explanation directly from HUD:
Fair Market Rents (FMRs) are primarily used to determine payment standard amounts for the Housing Choice Voucher program, to determine initial renewal rents for some expiring project-based Section 8 contracts, to determine initial rents for housing assistance payment (HAP) contracts in the Moderate Rehabilitation Single Room Occupancy program (Mod Rehab), and to serve as a rent ceiling in the HOME rental assistance program. The U.S. Department of Housing and Urban Development (HUD) annually estimates FMRs for 530 metropolitan areas and 2,045 nonmetropolitan county FMR areas. By law the final FMRs for use in any fiscal year must be published and available for use at the start of that fiscal year, on October 1.
So why do FMRs sometimes seem like a great deal for landlords and investors in multifamily income properties? First, the HUD estimates these FMRs for a total of 2,575 areas. That means that they lump together geographic locations.
Let’s take a look at an example. You are an investor in Arlington, MA. That’s a part of the Boston-Cambridge-Quincy, MA-NH HUD Metro FMR Area. Another person is an investor in Lynn, MA. That is also a part of the Boston-Cambridge-Quincy, MA-NH HUD Metro FMR Area. HUD calculates one value for this area. Those 40 percentile values are:
- $1,099 for an efficiency (known as a studio around here).
- $1,166 for a one bedroom unit.
- $1,369 for a two bedroom unit.
- $1,637 for a three bedroom unit.
- $1,799 for a four bedroom unit.
HUD’s 2 bedroom apartment FMR for Lynn and Arlington is $1,166. From MLS PIN 2011 average rent figures, Arlington’s 2 bedroom rents for $1,339 and Lynn’s 2 bedroom rents for $1,132. Granted that we are not comparing 40 percentile rents but I think you get the idea.
