I'm looking at a four bedroom SFR that has sat for a while, with a price reduction. Seems like it could be a great deal, what's the catch? It has a section 8 tenant paying far below market rates: $702 per month, when rent should be $1000.
It seems like it could be a great opportunity: Let the Section 8 tenant's lease expire, then raise rent (Either continue with section 8, or leave that program).
BP community, please enlighten me: What could go wrong?
I often find that landlords will take a Section 8 because that's all they can get for the unit without doing a ton of upgrades to attract higher rents. That also means other renters in the area are likely Section 8 and you're not going to get much more rental income.
@Jason D. No I'm not sure why it's so low. The neighborhood is B/C, Swissvale in Pittsburgh, but a 4 bedroom should be much more than that. I'll ask my realtor to try to get some color on that.
@Christopher Phillips Ok thanks - this deal working out hinges on getting better rent, I'll do more research and try to make sure that's actually possible.
maybe the landlord is lazy/unorganized etc about the paperwork for the rent increase. ask them when was the last time they asked for a increase? this could be a potential gain area for you, ripe for rent increase requests (every 12 Months?) there is no reason why it can't be brought up to market IMO, but I'm not a section 8 expert (yet).
Well... It's not really possible to get much more rent out of Section 8.
So, landlords take them if that's all they can get for their area.
You can put in a request for an increase, but the local authority has to approve it and you can't get the increase from the tenant.
@Stefan D. have you been there? Swissvale has a lot of variation in it as far as A/b/c type areas
You do not have to renew a section 8 lease, but like I mentioned already, if the owner has a section 8 tenant, that's likely what's available for the area.
Don't plan on evicting the tenant just yet. Once you find out why the rent is so low (Section 8 pays market rent - if the owner asks for it) you'll know what to do. Might be the best tenant you'll have if you find out you can get it to market, assuming actual market is what you're hoping for.
Not sure if this is the case here, but what sometimes happens is that a landlord will keep a tenant month to month after a lease expires so there are no increases in rent (usualky 3%, which happens at lease renewal). That might explain the low rent - lazy landlord who didn't renew lease.
I wouldn't let a lower rent turn you away. You could always get a new tenant and then be able to request current rates that the rates the housing authority posts (which can be a much higher amount than what you're currently receiving).
@Stefan D. Section 8 does not do automatic increase, any increase has to be requested by the landlord in writting at least 60 days prior to the lease expiration. So if the current owner didn't ask for an increase the rate paid by HUD/Section 8 would remain as it was set, even it its been 10 years.
Additionally, HUD had a change in the way the determine Section 8 fair market rates and they are now by zip code, this link will allow you to look up what the 2019 fair market rent would be based on what I can tell
Studio 1BR 2BR 3BR 4BR
You can view the 2019 FMR here: https://www.huduser.gov/portal/datasets/fmr.html
Edited to add that is an assumption on which area code the property is in, I used whatever came up on a google search for the town but even in the town I live and invest in the rates vary dramitically in the 3 zip codes we have.
I've succeeded with the same situation in Pittsburgh, but you are leaving some things to luck. The current owner might have just been too lazy to make the increase on time because there is only a small window each year when they will enable the owner to do that based on their lease with the tenant.
1. Section 8 in Pittsburgh used to more lenient than they are now. The inspectors seem incentivized to find violations (not saying that they are but...). I advise to check the last 3 years of inspection reports to see if they are clear. You might find out that they are requiring expensive repairs that would not be required if you had a section 8 tenant. For example, they would repeatedly cite a violation for now having GFCI outlets when I had them to code. But that was one of the smaller things. Other times it would be for larger items like a crack in the concrete somewhere that was always there. I dropped my participation in the program because they kept finding ridiculous problems and then they stop payment if you don't fix all of them on time. Since then it has been a relief not having to deal with that stress every year. If you have regular tenants you get a fair price and I never had problems finding good tenants in Pittsburgh.
2. I would consider how long the Section 8 tenants have been in the property and find out what portion of the rent and utilities that they are responsible for. They may not be 100% paid by Section 8. So if Section 8 is only accountable to pay 50% of their rent you will still have to collect the rest from them - regardless of how much Section 8 recognizes the comparable rents, the tenant may not be able to pay the difference and only you lose - Section 8 and the tenant will likely not really care about your loss.
3. You still get to pick your tenants on Section 8 and you need to be especially careful because ... well, I have some crazy stories when I made the mistake of not participating in the quality control and interviews there. One of my tenants was harboring escaped felons and was raided by the federal marshals. You don't know who that tenant is that is in there so... yeah be careful!
@John G. great advice
@Stefan D. - Regarding the inspection reports I don't know but here are some ideas:
The seller has to give some specific disclosure in PA from what I remember and so maybe you can ask them for the reports are part of the disclosure. I believe the tenant also gets a copy.
I'm not sure if Housing Authority (HACP) will give you copies, but it won't hurt to call them and ask. Tell the receptionist that you would like a copy of inspection reports and see where it takes you.
Thanks for the input everyone. Once my realtor took a look at the property we decided against it: the roof has been leaking through the bathroom and into the 1st floor kitchen. This is probably the reason the property has sat - more so than the section 8 tenant with low rent.
Might still be a deal, but more than I could execute as an amateur and remote investor.
@Stefan D. - My guess is the currents landlord doesn’t know what they are doing, and this makes for a good opportunity to get a good deal. My guest guess on why the rent would be so low is that the current tenant 1) has a voucher size lower than 4 bedroom and 2) has no income. If you want to get the strongest rents from SEC 8 you need to have a voucher holder with the right number of bedrooms and one that has income. I find that it has to be income of at least one times the rent in order for me to get approved for my market rents.