Section 8: Why Investors Rent to Subsidized Tenants in the USA

When people hear "tenants on welfare," many think of difficult clients, missed payments or trouble with the neighbors. But in the USA the system is set up differently, and it is very attractive for investors.

The Section 8 program gives people on low incomes help with their rent. The government pays most of the rent directly to the landlord. For owners, that means:

• Secure payment from the government, usually right on time at the start of the month

• Long-term tenants, since many recipients stay for years

• Attractive rent levels, often higher than the open market in weaker areas

• Low vacancy risk, because demand stays consistently high

Especially in "cash-flow markets" such as Indiana, Ohio, Michigan or parts of Georgia, renting to subsidized tenants is a real insider tip.

What sets European investors apart from their American counterparts is a combination of:

• Long-term thinking

• Solid financing without leverage

• Doing renovation work themselves

• International tax optimization

Many of them buy houses for cash, with no bank financing. Often we are talking about $30,000 to $80,000 per property. The houses are usually in poor condition but solidly built. Some come from foreclosures or auctions.

The recipe for success? Renovate yourself or with your own crews. New windows, new wiring, fresh paint, sometimes a new kitchen, and the place is "Section 8 ready."

An investor from Zurich told me: "Twice a year I fly to Cleveland with my brother-in-law. We renovate three or four houses. For us it's like a vacation, just more profitable."

The numbers speak for themselves. Take an example:

• Purchase price: $40,000

• Renovation: $20,000

• Total cost: $60,000

• Monthly rent: $1,000 (from the government)

• Annual rent: $12,000

• Running costs (insurance, tax, maintenance): $2,500

Net income: $9,500 per year
Return on capital invested: 15.8%

And all that without credit risk, without vacancy and with government-guaranteed payments.

This kind of investment is not for snobs in seersucker suits looking for a marble-floored condo in Florida. It is for hands-on entrepreneurs who can roll up their sleeves or have the right people.

If you expect everything to take care of itself, you will be disappointed. But if you are willing to get to grips with American landlord-tenant law, renovation costs and the subsidized housing market, you will be rewarded.

The most successful clients in this field have three things in common:

1. They are not squeamish.

2. They know their numbers.

3. They have a good local team.

Of course, not everything that glitters is gold. There are pitfalls too:

• The wrong locations: Some neighborhoods are simply no-go zones. Driving through the area by day and by night helps.

• Bad managers: Property managers make or break your success. Go for the cheapest and you pay twice.

• No Section 8 experience: Not every management company knows its way around the paperwork. And it is bureaucratic. But once it is done, everything runs smoothly.

• Poor tax planning: If you earn income in the USA, you pay tax there too, but there are legal ways to optimize it.

One crucial point many European investors underestimate: US income is taxable in the USA, whether you live there or not. If you earn regular rental income, you fall under the Internal Revenue Code and must apply for a US taxpayer number (ITIN) and file a tax return every year (Form 1040-NR or 1120, depending on the structure).

In practice, that often means:

• 10 to 15% effective tax burden in the USA

• Credit or exemption in your home country (based on the tax treaty)

• No social security contributions, since this is not active employment

And that's not all. Three more issues are often overlooked, with potentially expensive consequences:

1. FIRPTA: the sales trap for foreigners

The Foreign Investment in Real Property Tax Act (FIRPTA) requires that when a foreign owner sells a property, a flat 15% of the sale price is withheld, and by the buyer, not the seller!

This can mean a large sum is tied up even on a small sale or one at a loss. Example:

• Sale price: $200,000

• FIRPTA withholding: $30,000, regardless of profit!

With the right structure (e.g. a tax-transparent LLC, a structured transfer of interests or advance certification with the IRS), this withholding can be avoided or minimized.

2. US estate tax: the silent killer

The United States levies a federal estate tax (Estate Tax) on assets located in the US (real estate, for example), even when the deceased was a foreigner. The shock comes when you look at the exemption:

• Only $60,000 exemption for nonresidents

• Anything above that can be taxed at up to 40%

A simple $180,000 multifamily house meant to pass to your children can trigger a $48,000 tax bill.

The solution: never hold US real estate directly. Hold it through a corporation based outside the US instead. For tax purposes it counts as a non-US person, so no US estate tax applies.

3. The optimal structure: LLC + foreign holding company

The most proven structure for European investors, such as a blocker structure for US real estate, has two levels:

1. US LLC (for example in Texas, Indiana or Georgia)
   → Taxed transparently at the US level

2. Foreign holding company (for example a Liechtenstein foundation)
   → Owns the LLC

This structure gives you the following advantages:

• Full limited liability

• No FIRPTA withholding when the structure is sold

• Out of reach of US estate tax

• Transparent US taxation with an effective tax burden of 10 to 15%

• Possibility of a credit or exemption in your home country

It also provides asset protection, succession planning and a clear separation between private and business assets.

But be careful: the structure has to be set up correctly, with tax numbers, bookkeeping, a withholding agent where needed, and a proper tax assessment by advisors in both the US and your home country.

5. No social security taxes, but no hands-on involvement either

A real advantage: passive rental income carries no social security taxes in the US, unlike active work. The condition: you do not act personally as site manager, broker or property manager, and leave that to third parties.

If you get actively involved in operations, you can quickly be treated as self-employed, with the tax obligations that come with it.

What this means for your tax structure

US real estate is complex for tax purposes, but very plannable. The key rules:

• Never buy directly, always through a structure

• Think about estate and sale taxation early

• Take no unnecessary risks, structure it professionally

If you are interested in an investment, we are happy to help with planning and execution. But as always: no free initial consultations.

The timing for these investments is good:

• The US dollar is weaker against the euro, which makes purchase prices more attractive

• Interest rates are falling again in many areas

• Demand for affordable housing is at a historic high

• Many large investors avoid social housing, which opens the market to private individuals

In short: little competition, plenty of potential.

In 2019, a client from Munich bought five vacant row houses in Detroit on a street where 60% of the buildings had fallen into ruin. The bank no longer wanted to deal with the properties. He got the whole block for $100,000.

He invested another $150,000 in renovations, hired a local pastor who knew the community as property manager, had the houses certified for Section 8, and rented out all five within two months.

Today the government transfers around $5,300 in rent every month. His running costs? About $1,000. Net? $4,300 a month. Every year he renovates and rents out another unit.

In his words: “I’m saving a neighborhood and getting a pension for it.”

US real estate rented to people on public assistance is not a glamorous investment. It is a down-to-earth, honest and often extremely lucrative way to build wealth, especially for European investors who are willing to roll up their sleeves and get to know a new market.

You help people who need a home and receive reliable rental income in return. It is an investment that delivers not just returns, but meaning.

And let’s be honest: anyone in Europe who buys an apartment today for €250,000 and rents it out for €800 a month may have the better image, but certainly not the better return. You’ll find more articles on US taxes and US investments in our News, for example on the taxation of vacation homes in Florida.

Interested?

If you are seriously interested in this investment model, we are happy to help you with:

• Structuring with a tax-optimized US LLC

• The legally sound acquisition of property

• Advice on Section 8 rentals and property management

• Long-term support for your US investments

But: we do not offer free initial consultations. Book a consultation: professional, tailored and solution-focused.

Consultation & implementation

If you'd like to find out what this means for your own situation, the best step is to book a consultation.