Section 8 subsidies dilemma.

[Pat Foy]

I am looking to purchase a 50 unit multi-family property that has nearly all renters on Section 8 subsidies. The seller has provided the rent rolls and previous year (2017) Income Statement. I noticed that the expenses of this property are 80% of the gross revenue (yes, eighty percent!). The reason for this I have discovered is because the property has a live-in manager and 2 staff, which accounts for a large portion of the expenses. At the current state the property does not cash flow. Now if I am able to reduce the expenses to say 50%, by replacing resident management and staff with external property management, the property will cash flow nicely.

However here lies the rub: in order to maintain the Section 8 subsidies there is apparently a budget which gets submitted to the Dept. of Housing and Urban Development (HUD), which accounts for all these expenses in their calculation of the Section 8 subsidies. So if I reduce the expenses to get the property cash flowing I will get penalized by the HUD who I am told will account for these reduced expenses thus reducing the Section 8 subsidies I receive, possibly cutting rental income by about 70% !!

Does anyone out there in the BP universe have experience with this dilemma and perhaps have advice and/or a work around?

Thanks.