Have a lead on home that currently has a section 8 tenant. The tenant has been there 7 years, owner says not likely to leave. Rent is $600, he wants $32,000. If I should rehab ARV = $78,000, rehab=$17,500. Would you buy and keep the cash flow or rehab and raise rent or resell? Home is 1600 sqft.
It's not what somebody else would do but what would make the most sense to YOU. If you buy and rehab you will be into it for about $50K for $600 rent; does that work for you? Since it already has an occupant, does it really need any of the rehab? If none of the rehab is needed, then you are into it for $32K for $600 rent and that's pretty close to the 2% rule. If some of the rehab repairs are definitely needed, add that amount to purchase price and see if that works for you as a rental. If none of the above work for you as a rental, then you know to sell.
@Steve Babiak , if I rehab, the rent will go up to cover that cost. As I understand it, as long as the tenant agrees to the extra rent and is approved by the HA, I would be Ok. The other option would be for the HA to find the tenant a new home and I would need a new tenant at the new rent.
In regards to the rehab, it only needs about $3000 for it to be in "inspection approved" condition. I believe he will go for $30,000, so that would be 1.8%. The rest is to bring it up to current standards for a resell.
@Mark Ainley, any thoughts?
Sounds like a good buy with great potential either way you go.
About the option... "HA to find the tenant a new home"... I never knew of a HA case manager doing the looking for the client. I have good experiences with Section 8. Here's how it works here:
If you do the rehab and raise the rent, you will need to give the proper notice to both the tenant and their case manager. For us that is 60 days. The case manager will do a review of their client's financial situation and if they deem the unit is still affordable for the client they will notify you with a "subsidy change notice." This letter will show you the new amount of rent portion that Section 8 will pay and the new amount of rent portion that the tenant is expected to pay. These amounts combined will equal the amount of your new rent. If you raise the rent too high for Section 8 affordability, the case manager will notify you that the unit will no longer meet their criteria and their client (your tenant) will need to find a different place to live.
Most landlords think if it is section 8, they can jack the rent up and section 8 will agree, but section 8 has rules, and they know the rent market better than anyone.
Thanks Marcia, very good info. @Joe Gore
I wouldn't be asking section 8 to change the amount, only the tenant to pay more.
@Wes Brumit Follow the procedure that I mentioned and you won't be asking either one party to pay more. Section 8 will determine if they will pay the difference or the tenant will pay the difference or if they both will pay some of the difference, or if the new rent is out of the market for both of them. Just focus on establishing fair market rent and the rest will take care of itself.
If you haven't worked with S-8 before, you will need to establish a relationship with them and there are contracts to sign and procedures to follow. It is actually quite simple. Stop by your local housing authority and find out how to participate. One of our S-8 tenants has lived in our unit for 26 years, another for 22 years, another for 13 years. Nothing beats having good long term tenants and rent paid on time!
Thanks again everyone. Info has sure helped. The owner agreed to a price of $28,500 (even better than before) Gonna look first to wholesale. If I can't find a buyer, I will be a landlord soon.
@Wes Brumit If the tenant either doesn't pay currently or is used to what they pay I would not recommend raising their rent. Do whatever makes the most sense for you with the rent of $600. From personal experience, Section 8 tenants do not deal well with increases in the amount of money they pay each month.
Actually @Michael Noto, the HA pays the rent. The tenant is not responsible for it. Either way, if I end up being the landlord, I don't plan on raising the rent. The numbers are good by themselves.
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