In these uncertain times, many real estate investors may feel a sense of paralysis and doom where their real estate portfolio is concerned. I understand. I have been here before. In fact, I’ve been through four economic downturns in my real estate career, and I am here to tell you first and foremost: for better or worse, we will get through these challenges. (Hopefully for better rather than for worse.)
It is understandable to have a period of abject panic and for your mind to race a bit at everything that is going on. But when you’re done with that (please be done with that), I would urge you to put your game face on and consider some new strategies and ways to pivot with the changes coming in the markets.
One strategy I employ that has proven to be fairly recession-resistant is my “Tier 1” model for Section 8 housing.
What do I mean by that?
I mean rolling out the red carpet for the crème de la crème of Section 8 voucher holders. Believe it or not, in times of crisis and uncertainty, voucher holders are actually one of the most reliable, stable tenants to have, so I am here to tell you that you should take very good care of them.
Finding Holy Grail Tenants
Any seasoned buy and hold investor/landlord will tell you without a doubt that the biggest profit killer is turnover and vacancy. In my market, every lost tenant can cost me upwards of $5,000-$8,000 in cleaning, repairs, vacancy, time, and lost income. (FYI, I’m in a high-priced market where single-family rents range from $3,500-$5,000 per month.)
I want to avoid that at all costs by finding long-term tenants who would never dream of leaving. That is the only way, in the long run, that I generate positive cash flow and stay in business. I regularly and consistently get 10 to 15-year tenants.
In fact, I have one tenant who has been with me for 23 years—on a 15-year mortgage. Do that math!
Tenants like these are the Holy Grail, and I am here to help you find them.
First of all, please put aside your preconceived notions about Section 8 tenants. Sure, there are some difficult ones out there (just like there are difficult market renters). However, please know that many voucher holders are just like you and me. They want to raise their kids in a safe area. They want to live in a nice home. They know a slumlord when they see one.
They deserve to be treated with dignity and respect. They are human beings and can be amazing if you know how to screen tenants properly and nurture your relationship with them. They bring a lot of advantages and stability with them that you can capitalize on if you do it right.
There is huge demand and long waitlists, usually, for Section 8 vouchers and housing—in good times and bad. Many landlords overlook these tenants, to their own detriment, but it creates an enormous opportunity for me and my student investors if a certain formula is followed, which I will give a free primer on now.
I follow the BRRRR strategy with my rentals—buy, renovate, rent, refinance, repeat.
Investing in Real Estate: The BRRRR Strategy
I am looking for properties that I can add value to through my high-quality renovations. The biggest value-add I can do is to add bedrooms, which increases the Section 8 rent I am eligible for. In my area, a Section 8 voucher for three bedrooms ranges from $2,500-$3,500 per month, which is usually cash-flow negative.
Four bedrooms range from $3,200-$4,500 per month, which is typically a break-even point. However, if I can turn a three-bedroom into five bedrooms, I can rent it for $3,800-$5,000 and be cash-flow positive. And because there are hardly any five-bedroom houses available to Section 8 voucher holders, demand for my product is huge—meaning I can be picky.
I’ll get to that below.
Typically, the best place to add bedrooms is in basements. So I teach my students to look for a three-bedroom home with a suitable basement or similar floor plan flexibility in a nice area for a good price that can be renovated into five bedrooms. If a prospective house doesn’t meet these criteria, then I’m not interested in buying it.
My renovations are HGTV quality. I do hardwood floors, granite countertops, and stainless steel appliances. I wouldn’t mind living in any of my properties, and I make sure they can compete with any of the changing competition out there—even if I suddenly have to compete with flippers as unwitting landlords, which I have had to do!
I always advertise “Section 8 welcome.” At eight pages long, my rental application is daunting. In it, I let the applicant know I will be pulling credit, I will be talking to their previous landlord(s), and I will be going to their current home to see how they live.
No one else does this, but I do. How they live now will be how my house will look in three months. Why would I not?
Is it intrusive and extra thorough? Of course! But for the quality of my product, I have no shortage of applicants who don’t mind at all. I am offering them a once-in-a-lifetime opportunity and a living situation that may be a dream come true. For this reason, I can be as picky as I want.
The truth is your real asset is your tenant. That is where the money is coming from, and you should bear this in mind when choosing them.
The next part is nurturing the relationship and taking care of them so that they would never dream of moving. My tenants become part of my family, and they feel it. I send flowers to all my tenants on Mother’s Day. I send Christmas presents, and I give a $50 gift certificate for kids who can show me a report card with all As.
I also own a timeshare that allows guests, so for good measure, all my tenants get a free vacation there, three days and two nights free of charge every year. All of this costs me maybe $150 per tenant per year. But if you roll out the red carpet for your Section 8 tenants in this way, they will take care of you in four ways:
- They will pay you rent, without fail
- They will take care of your investment and show “pride of rentership”
- They will be pleasant to deal with
- They will stay a long time
Keep in mind that if they lose their job, the Department of Housing and Urban Development (HUD) will make up the difference in rent. Their portion is based on their income, so while your total rent might be $4,000, their portion might only be $500. If they can’t pay that, they tell HUD, and the HUD portion goes up. This is a degree of stability a non-voucher holder simply cannot guarantee you.
Are you seeing the benefit yet?
Honestly, I don’t know why more landlords aren’t adopting this strategy. But if you’ve read this far and you see how this could work for you, I would encourage you to put some mental energy into considering it.
So, stop panicking and pivot!
BRRRR Before & After Photos
What strategies are you putting in place to make it through the economic downturn?
Let us know in the comments below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.