Section 8 subsidies dilemma.

4 Replies

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.

Whew....that's interesting.  I've learned something new today: in the past I always thought Sec 8 calculated rent based purely on local market rents, but what you're saying is they consider the expenses.  So if you do a good job and LOWER expenses, they thank you by lowering your rents.  How nice of them....how Govt bureaucratic!

A few thoughts:
1) Have you ever done Section 8 before?  I have.  Your local office makes or breaks the deal.  If they are typical Govt workers who are just hanging on until they can draw a pension, do NOT buy into any deal that keeps you in bed with them.

2) How long are the leases?  The reason I ask is, what if you started non-renewing the Sec 8....granted you lose that "guaranteed rent" (heh, ask me about THAT sometime), but if you can get it up to market rent gradually while reducing expenses, this deal may still work.

3) Cash flow & NOI are key components that determine the market value of multi-unit/commercial property. A property with 80% expenses should be DIRT CHEAP almost to the point of being free, seriously. Are CapEx and vacancy factored in already? If not, there's almost nothing left. Is this property dirt cheap, and if not, why not?

I have never owned anything this large, but the fundamentals apply.  This is one weird deal, for sure.  But it could still be a deal.  What can you do to get rents up and expenses down, thereby creating value?

Thanks Erik, you make some good points, particularly about the valuation. The property is way over priced for the NOI. They want 1.6m, but at a 7% CAP it works out to be worth about 900K. That will give something for the seller to think about.

My next steps are to have discussions with the HUD office, as to how the expenses really play into the rental subsidies.

More to come.

Unless those expenses were paying him and other family members to reduce his " profit" keeping within the bounds set by HUD .

Who says my brother in law isnt worth $125,000 a year to change light bulbs . 

To me this sounds more like some of the other government assistance programs more than section 8.

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