A New HUD Idea Could Put Money Directly Into Renter Pockets—What Does This Mean For Investors?

Researchers at the Department of Housing and Urban Development (HUD) are creating an experiment that relies on a simple concept to achieve greater housing security—the project would provide direct payments, in the form of prepaid debit cards, to low-income renters on the wait list for housing vouchers. 

Recipients would be entitled to no more money than a housing voucher would provide, but streamlining the process could increase the effectiveness of housing assistance, allowing federal funding to reach more people in need. And landlords wouldn’t have to deal with the bureaucratic hurdles that make renting to voucher holders more difficult. 

The Issues with Housing Choice Vouchers

Research shows that federal rental assistance lifted 3 million people from poverty in 2018, reduces homelessness and health costs, and improves educational and social outcomes for children, which helps mitigate the cycle of poverty. But, despite the success of existing programs, about 16 million cost-burdened households are left without assistance due to funding constraints.

Local public housing agencies review applications for Housing Choice Vouchers from a wait list of people with very low incomes relative to the area median, but inadequate funding means that applicants wait an average of 28 months to receive the assistance. That figure doesn’t include the millions of eligible renters who never receive a voucher at all.

For applicants who manage to get approved, the struggle doesn’t end there. A HUD study found that in 2019, only 61% of voucher holders had success finding a rental unit within 180 days of searching. The median search time was 60 days. Public housing agencies determine when a voucher expires. Typically, a voucher holder will only have 60 to 120 days to find an appropriate rental unit before giving up the voucher, depending on the local public housing agency’s rules. 

One problem is that it’s hard for voucher holders to find an eligible unit. In an Urban Institute study of 341,000 rental ads, only one in 39 featured units that could potentially be eligible based on testing parameters and rent limits. Voucher holders can choose to rent a unit with costs in excess of HUD caps, but they have to make up the difference. 

Another problem is that landlords of eligible units are likely to reject potential tenants who use housing vouchers, especially in areas that don’t have laws prohibiting landlords from denying voucher holders. The landlord denial rate is 77% in areas without antidiscrimination laws, compared to 35% in areas that have the protections, which cover only about one in three voucher-holding households. Landlords in lower-poverty neighborhoods tend to refuse more tenants with vouchers, meaning it’s even harder to find a unit in a good neighborhood. 

Landlords’ perceptions of low-income tenants may play a role, but the housing choice voucher (Section 8) program also imposes additional oversight, requires more work on the part of the landlord, and comes with financial considerations, all of which deter landlords from participating. 

One of the primary concerns is that, in a hot rental market, a landlord can fill a vacancy faster and at a higher rental rate with an open-market tenant. A landlord can get an open-market tenant moved in within two to three days, when compared to at least 10 days for housing voucher holders, due to a required inspection of the property and other hurdles involved in the housing choice voucher program. 

There are some reasons to accept housing choice vouchers, including high demand and free advertising on public housing agency websites, but in a tight rental market, the disadvantages outweigh the advantages for many property owners. 

Another common concern among landlords is the possibility that voucher tenants will damage their units since the housing choice voucher program does not pay security deposits. And if the inspection uncovers required repairs, that’s another financial consideration for landlords to contend with. 

Is Direct Rental Assistance a Better Option for Landlords and Tenants?

HUD researchers plan to test whether a direct, streamlined process will better serve low-income Americans, drawing inspiration from a housing allowance program piloted in the early 1970s. They’ve uncovered old reports indicating the success of the Experimental Housing Allowance Program, which distributed money to tenants directly, providing cash assistance to almost 50,000 households over the course of nine years. Congress moved forward with creating the Section 8 program before the research was finished, but now HUD researchers are giving life to the idea again. 

Additionally, researchers are building on an ongoing program in Philadelphia testing the idea of direct cash assistance, along with more than two dozen guaranteed income pilots across the country. These programs study the impact of providing unrestricted cash monthly payments to local low-income residents. 

Streamlined housing assistance was also shown to be successful in Emergency Rental Assistance programs during the pandemic, which evolved to be less burdensome than housing vouchers. For example, Denver eviction filings were down 40% in 2021 when compared to pre-pandemic averages, presumably as a result of the Emergency Rental Assistance program. 

Philanthropic groups are already expressing interest in providing funding for the HUD idea, an HUD official told Vox. HUD can’t legally disburse federal funding for housing as cash to tenants, so researchers are relying on philanthropic funding for the study. The hope is that the study will provide evidence for changing the law.

The leaders of the initial meetings are pitching a small pilot, but if it’s successful, it could progress to a larger study, which may get the attention of Congress and permanently alter the federal approach to housing assistance. That could be a decade down the road, but it might allow more renters to find housing while taking some of the pressure off landlords. The HUD official explained that the goal is for landlords to work directly with tenants, so there’s no sense of interference from the public housing agency. 

Unlike the unrestricted monthly payments tested in guaranteed income pilots, the cash provided in the HUD study would be required to be used for rent payments. The proposed study would randomly assign applicants from existing voucher wait lists in a diverse group of cities to either receive a traditional housing voucher or a direct monthly payment of the same value. 

For recipients of the Direct Rental Assistance model, there would be no requirement for the landlord to schedule an inspection, and there would be no contract between the landlord and the public housing agency. Interactions between landlords and public housing agency staff would be kept to a minimum. 

Instead, the tenant would be responsible for inspecting the unit prior to move-in, and the public housing agency would arrange a remote or in-person inspection with the tenant after move-in. The tenant would also be responsible for making the full rent payment to the landlord each month.

Since the study will draw participants from existing wait lists, prospective tenants will already be fully background-checked and approved, which benefits landlords. 

Ideally, the study would run for four years, during which HUD researchers could evaluate the outcomes. They’d likely assess landlord participation, for example, and look at whether recipients of the cash payments find housing faster or stay in their rental homes longer. 

To the extent that landlords’ perceptions of low-income tenants are to blame for their denials of housing choice voucher applicants, direct tenant payments may not have the intended effect. That’s why it’s important to test the idea. There are also some problems direct rental assistance can’t solve, like the limited funding for housing assistance in general and the short supply of eligible units that are affordable for people receiving housing assistance. Still, eliminating some of the red tape could mean that federal housing assistance dollars stretch further. 

The Bottom Line

Finding a landlord who accepts housing choice vouchers can be a challenge for renters, and that may be largely due to the cumbersome process for landlords. HUD plans to test the theory that giving housing assistance dollars to renters directly as cash is a more efficient way to improve housing outcomes for low-income people. Researchers are in the early stages, and it could take a decade to change the existing housing choice voucher program, but the implications for landlords and tenants could be significant.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.