Can Large Institutional Investors Support the Success of the Housing Choice Voucher Program?

The affordable housing crisis has exacerbated economic segregation and has created barriers to families accessing neighborhoods with amenities, such as highly ranked schools and access to jobs. The Housing Choice Voucher (HCV) program has long sought to help qualifying families afford safe, stable rental housing in the private market. Families can choose any housing that meets the program’s requirements. They often try to move to neighborhoods close to amenities like good schools, jobs, and transportation.

The program has helped many access housing and achieve stability, yet one ongoing challenge is that landlords often don’t accept tenants with HCVs. This is especially true in neighborhoods with higher incomes and highly ranked schools. This has forced many households to either forfeit their voucher or remain housed in neighborhoods with lower average incomes.

There’s been debate about the rise of institutional single-family owners and the implications for overall affordability and stability, especially among households with lower incomes. But these investors could play a unique role in supporting households with HCVs. What would that look like?

Many landlords refuse to rent to voucher holders

Eligible households can use HCVs to subsidize the gap between the renter’s payment of 30 percent of their monthly adjusted income and the rental amount for a unit up to a certain set payment standard. A landlord then receives the guaranteed amount directly from the public housing authority (PHA).

Despite this guaranteed payment, many landlords reject HCV recipients. One major reason is bureaucratic (PDF); units in the HVC programs must pass US Department of Housing and Urban Development (HUD) inspections each year or when a new tenant moves in to ensure habitability standards. Landlords have noted that inspections can take a long time to schedule, and then the landlord must address needed repairs (PDF). Moreover, the threshold for repairs can be inconsistent, varying by area and inspector. Either during or after the inspection process, the unit must pass an additional rent reasonableness (PDF) test, which compares the rent for the potential HCV unit with rent for similar unsubsidized units in the area and requires approval from the PHA for future rent increases. If the unit fails the test, the unit cannot be rented until the landlord lowers the asking rent. The unit must remain vacant during these inspections and tests.

Landlord frustration, in addition to tight rental markets that push rental prices up, has meant many eligible households forfeit their voucher or remain in areas of high poverty; 40 percent of voucher recipients can’t find housing withing the required period, and 50 percent of voucher recipients live in areas of concentrated poverty. The HUD Office of Inspector General has found the voucher utilization rate has decreased, and in November 2020, there were 191,000 authorized vouchers that were unused and unfunded.

Can institutional investors and the Housing Choice Voucher program be mutually beneficial?

Large institutional single-family rental owners may be well suited to create new opportunities for HCV tenants for the following reasons.

1. Institutional investors’ large rental portfolios and teams could help them surmount administrative hurdles. The large number of units in their portfolios makes it so they can afford to let a small number of units sit vacant for longer during the inspections and rent reasonableness tests. 
   Their large footprints in specific metropolitan areas and organizational structures, which allow for specialized outreach and renovation teams, also put them in a position to develop expertise on the inspection process, build relationships with local HUD PHAs, and address renovations quickly. This could allow them to better predict timelines to schedule inspections and work proactively with local HUD officials. Meanwhile, their in-house renovation and repair teams may allow them to more quickly conduct repairs surfaced by inspections.
2. Institutional investor properties are located in slightly higher-priced neighborhoods and in slightly higher-priced homes than similar noninstitutionally owned rentals within the same metropolitan statistical area. This provides a potential new source of housing that could allow HCV households to enter housing markets that provide more opportunities, such as access to higher-ranked schools. Given the large number of units—especially in areas like the Southeast and Sunbelt—this could help many voucher holders who would otherwise be unable to find housing.

And the HCV program presents advantages to institutional investors. Investors could partner with PHAs and benefit from the large number of vouchers that go unused every year. Partnerships could help PHAs generate a flow of applicants at a low cost, reduce showings, and theoretically reduce vacancies. Institutional owners also benefit from a steady flow of reliable income from the HCV program.

Potential pitfalls of increasing institutional ownership in the Housing Choice Voucher program

Though institutionally owned properties may provide new pathways for HCV households, they don’t come without risks.

Institutional investors’ management and renovation strategies could place residents at higher risk for eviction filings or being screened out of properties. Studies have found larger landlords—especially corporate owners—are more likely than smaller landlords to file evictions. One study in Boston found large landlords filed 186 percent more evictions than small landlords and were more likely to file serial evictions. Other studies in Georgia also showed higher rates of filings and serial filing among corporate landlords, suggesting they may use eviction filing as a management strategy. This is particularly concerning given that an eviction filing—even if the eviction is not completed—can have a critical impact on households with low incomes (PDF) and their ability to find housing. Filing an eviction against a household with low income may provide long-term barriers to obtaining housing.

Studies have also shown that landlords often rely on tenant screening reports that include information on eviction filings, criminal history, credit scores, and income, despite the fact many of these criteria don’t necessarily correlate with adhering to lease terms and may disproportionately screen outrenters of color and renters with low incomes, making it challenging for people with HCVs to access housing.

Although these conditions may be challenging to contend with, larger owners also provide clearer pathways for enforcement. Small mom-and-pop landlords are notoriously challenging to monitor and bring enforcement cases against, while larger property owners may be slightly easier to monitor because of their large footprints.

What would it take for institutionally owned single-family homes to successfully partner with HCV households?

Some large institutional rental operators have realized their comparative advantage to absorb the longer vacancy period and uncertain outcomes and are looking to provide housing units to HCV holders at scale. To support partnerships, housing authorities, HUD, and other related organizations can consider the followning:

• Expand the use of Small Area Fair Market Rent (SAFMR). Institutional investors may rely on SAFMR calculations to make vouchers viable. SAFMR is calculated using a smaller geographic area, allowing rents to be slightly higher in areas with high incomes. Currently, not all metropolitan areas use SAFMRS, which could limit the flexibility in where households with HCVs can locate.
• Be clear about expectations for management. Ensuring there are clear, enforceable guidelines around tenant screening and property management standards, such as when evictions are filed, how tenants are screened, and more, is a critical part of ensuring institutional investors aren’t engaging in harmful practices that lead to long-term destabilization for households. Ensuring property owners revise screening criteria to screen people into housing, rather than out of housing, may help support households with HCVs.

To increase their engagement with the HCV program, it may be necessary for institutional investors to take the following steps:

• Consider more flexibility in management practice: Especially if most of the rent is coming from the HCV program, owners should consider modifying practices related to late payment and eviction filing, in particular, reducing serial filing and automatic filing and problematic tenant screening practices.
• Expand relationships with local PHAs and local housing organizations: Building relationships with select local PHAs and organizations that support housing searches can help institutional investors increase visibility among households with vouchers who may be interested in renting their units, help property managers better identify HCV applicants as they come through the pipeline, and better understand inspection processes and build stronger relationships with PHA staff and property managers.
• Consider how their market rent relates to HUD’s rent caps: Voucher amounts are based on HUD-established Fair Market Rent (FMR). Local FMR for properties may be out of reach for households with HCVs. Better understanding how unit pricing compares with the FMR is critical, as households won’t be able to afford units if they cost substantially more than the payment standard set by HUD.