owner occupy triplex under contract, need help with section 8

12 Replies

For the last year I have been searching for a small multi-family property to purchase so I can owner occupy one of the units...House hack it, as Brandon would say. I have been looking in some specific areas of Duluth, Minnesota, where I currently live and work. One triplex came on the market recently which I now have under contract. 

The question(s) I want pose here today is around the current tenant situation at the triplex and get some feedback on what to look for and how to proceed in due diligence. 

Currently two of the units are vacant in the property. One is gutted and needs about 10k worth of work and the other is nice enough for my daughter and I to move into right away. Pretty much the ideal situation in those two units.

The third unit has a long term (4+ years from what I understand) section 8 tenant paying lower than market rate rent with all utilities paid by the owner. I found out about the tenants section 8 status and current lease (which was just resigned on June 1) when I was touring the property.

So with the current tenant, is there anything I need to watch out for or dig into? To be honest I have a little bit of a negative view of section 8 just from what I have read and heard from others. I understand how it works but I am not sure I would want to owner occupy and be stuck with that for a year. I would assume that I could not renew when the lease is up next year based on income requirements, but I am not sure of the normal terms that go along with section 8.

Well, with all that, I appreciate any and all advice, feedback, questions, etc. Thanks!

I’ll never understand why people sign leases while a property is on the market for sale. Who wants to inherit tenants?

Congratulations on your pending purchase.

You have a whole year to decide about that tenant while you rehab and rent one and rehab the other unit. Don’t sweat anything that far out. Best to focus your energy on what you can accomplish in the coming days and weeks.

Thanks @Dan Vleck , good points.  I guess she has been there for a number of years and the place is still standing so can't be that bad...  Thanks for reminding me what is important.  

And on your note about signing leases while on the market.  I just shake my head...I have had to cancel two deals on single family homes that I was going to live in while renovating because of the same issue.  

Keep them until you have the other units up and going.  She is helping offset your payment which will lead to more rehab funds.  Then if you have a better use for the 3rd unit when at full capacity they you can look to remover them.

Curious - whey loan product are you using for a owner occupant that needs a gut job?  203k loan?

@John Woodrich , good points for reason to keep the tenant around.  I am hoping to see the lease today or tomorrow so I should be able to confirm some figures soon.  I still need to learn a little more about the Section 8 process though.

For the financing, I am currently working with a local bank on a 90/10 interest only construction loan. It makes me nervous to be honest, as the refi within 12 months will go to a 75/25. My goal was to leave the refi with no or very little cash in the place but I am not sure the ARV will hit the price point I am thinking. The only saving grace I have right now, for that plan anyway, is that I have a friend who is an appraiser in the area and has agreed to look at comps to get a good since of what the ARV will be.

Have you used the 203k loan or have any experience with it?  It was a consideration but this bank seems to be pushing their product and I have had a lot of good feedback from others in Duluth who have used it. 

@Keith McKenzie the reason I was asking is because after all the work you are doing you are going to owner occupy a triplex at the same rates I could purchase one at. Normally people owner occupy to get in for lower down payments, this is just putting a crunch on you making ARV.

I asked if you were using the 203k loan as it may be a way to get into the property and bundle in your construction cost into one loan. This is a little different as you are at the mercy of ARV on the front end instead of the back end. Probably hard to make significant improvements though. If you haven't I would talk to @Tim Swierczek , he is an expert in financing.

Duluth is an interesting area, I imagine multi-family properties aren't as easy to comp as there are so many cheap ones available.  I have been following the market for a while, can get some good cash flowing properties but there are so many junkers up there they don't seem to appreciate much.

Get smarter on section 8.

Make no assumptions.

Your Tenant is your client.

She’s a human being, say hello and meet her. Things are often it as they seem.

We have a responsibility and obligation to create he world that we want to live in.

I currently don't accept Section 8 but that is only because I don't have to.  There are some upsides but the inspections, etc are a little more of a hassle than renting to a tenant not on Section 8 and I have had some prior issues.  If I bought a place tomorrow with a Section 8 renter I would keep them if the terms, etc were fine.

Don’t be scared . She’s just poor bro , she’s probably not a serial killer ! Did you tour the unit ? How does she keep the place ? Is it tidy and organized ? I inherited an older lady on section 8 program in a triplex recently and oddly enough she just resigned the lease on June 1st too .

I'm purchasing my first Triplex in Bemidji this week. I'm also inheriting a Section 8 tenant. It was very easy to go down to Bi-cap and talk to the person that handles my tenant.

I'd go talk to them, and they can educate you on what all needs to be done.  They'll get you an application, and contract you need to fill out with your tennant.

Everything I've heard about mine is she has a stable job, 2 kids, and when I walked through the place looked and smelled great.

Don't stereo type to quickly.  She's been there for 4 years, maybe she'll be alright and stay 4 more.  After rent increases to market rate of course.

Thanks for the replies.  This week will tell me a lot more about both the financing and the tenant.  

I should have added more about my walk through and first interaction with the tenant to give a little more info.  The unit was pretty rough. A lot of stuff in every room with some areas stacked pretty high with garbage bags.  Not sure what the bags contained but there were a lot.  There were cats, not sure how many, and you could smell them along with a strong smoke smell.  The tenant was pleasant when we spoke during the walk-through but it has been a different story when we tried to secure times for walk-throughs and for the inspection.   I am not sure if there are other reasons behind the issues but I hope to have some more time with her during the inspection.  

I am waiting for a response from a lender in Duluth regarding a 203k loan.  I hope to get a clear picture of my financing options in the next few days.  Any additional advice on how to proceed would be much appreciated.  I do want to have as little out of pocket money in this place once done but I do want to do a lot of the rehab myself.   

Just keep in mind inherited tenants usually are a headache for the new landlord and dont last .your case is not unique in this regard . It is frustrating to inherit idiot tenants however Don’t let a bad tenant keep you from buying if it’s a good deal !!! The house is forever , the tenant is temporary.

Well, besides the tough tenant it is starting to look like a bad deal as well.  We had the inspection today which came up with 10 immediate concerns.  a number of them were issues I did not count for which tells me i did not evaluate it very well during the initial walk-throughs.  My next step is to go through the inspection report when I receive it later today and determine what I will send back to the seller.  I am sure it could be a good deal at the right price.  However, with numerous structure issues, electrical and heating issues, it may be a dead deal.  We shall see.  

Question:  when I submit it back to the seller would you typically ask the seller to take care of the larger issues, like structural issues, new furnaces and new electrical service or do you ask for a price reduction?  All the major items will need to be handled by licensed contractors or technicians so I do not see saving any money if I did a price reduction and handled it myself after closing.  I like to have control in most situations to ensure the right people are hired and the right solutions are implemented but I can see a benefit to asking the seller to deal with it.  Any thoughts?