Section 8

23 Replies

Morning BP,

My question today is about section 8. I picked up the S8 Bible VI&II the other day and found it to be a rather interesting read.  A local investor turned me on to it saying that he's followed the same methodology as McLean and absolutely loves it.  He buys homes on the cheap... 15-20K fixes them up to the minimum standard for S8 and pulls a check from the gov for the next year.  He claims that he's had very little issues with the properties because he screens his tenants thoroughly.

All that being said, I don't really see much on BP about this strategy.  As a beginning B&H investor, wouldn't this be a decent way to start off, especially if you paid cash. 

For example:

Buy a home at 15k put 5-8k into it for repairs. Rent the home for 600. Lets say S8 give yous 500 of that. The tenant is responsible for the other $100. Assuming 100/month for taxes 10% vacancy rate, and 5% repair costs thats roughly 330 Net a month or 19% CoC. If the tenant doesn't pay, you're not out an entire months rent because you've got the check from the governement. You can still go after the tenant for the money and you have a little more leverage because you can use the Voucher to your advantage (evictions= tenant loses the voucher).

If you've gone through and done some due diligence in regards to removing "problem areas" for repairs (ceiling fans, etc..), wouldn't the likelyhood of repairs be reduced?

So what am I missing on Section 8? I've always gone by the old adage of "if it sounds too good to be true it probably is". So what are the serious Cons? I know about the potential terror tenants who destroy the property, but that can occur anywhere right? Proper screening takes care of that issues. What about financially? Are banks less likely to do a LTV on a property with S8? Some of the home I've looked at here in my are are distressed, selling for 15k or so, but rehabed values is ~40K. So what am I missing? Why would this be a less desirable option than "traditional" renting?

As always, you guys are great and thanks for your responses!

-Drew

Hi Drew-

I don't think the adage of "if it sounds to good to be true it probably is" is applicable here. You will have to do more work screening applicants, dealing with the local government on inspections/paperwork and by most accounts you could have a more challenging tenant base when dealing in section 8 versus other tenants. In addition to all that, your property may not appreciate as fast (or at all) comparative to areas where homes are more affordable. 

Now, with that being said, your payback is a timely check from the section 8 program. It seems this path is for some investors and not for others. I think its a personal strategy and personality alignment decision, good luck.

Paul

I'm very glad you asked this, because I have been wondering the same thing.  There are a ton of duplexes and large houses in my area for sale for less than the cost of a decent vehicle and I don't know enough about the section 8 program to know all the ins and outs.  Hopefully someone here has some insight.

@Paul Chase  Understood on the appreciation portion. However, as a beginning investor, wouldn't the guaranteed cash flow be a good deal? Considering the rehab costs can be kept (potentially) low and you can get into the market at a relatively cheap pricepoint? 

Andrew thank you for this comment. I am currently in a similar position, 50K for a duplex that has been renovated completely. area is not the best, so Section 8 has come to mind as far as finding tenants. 

Like Andrew, Appreciation is not something I am too concerned with, the cash flow from the property is my focus. 

If bought cash - AND THE PROPERTY HAS BEEN RENOVATED COMPLETELY - What downside may I be looking at. This will be my first property I invest in, so I too feel like this may be too good to be true. 

Thanks again

@andrew Martel - I totally agree. In many cases appreciation is a guess. Get some cash flow and build a business!

I've never heard of the Section 8 Bible, so I'll have to check that out.  I have two rentals that are section 8 and surprisingly they run a lot smoother that my other rental property that's in a much more expensive area.  My plan is to buy a lot more them.  I am very careful of the location and condition when I buy them which is very important.  I don't think this strategy would work well if you bought in hard to rent areas.

Originally posted by @Andrew Martel:

... wouldn't the guaranteed cash flow be a good deal? ...

There is an underlying assumption at work here: that your bought cheaply property will actually be desirable to a Section 8 tenant. Many times the Section 8 tenant is looking to NOT be in those kinds of locations ... No tenant means no guarantee of that cash flow ...

Originally posted by @Steve Babiak:
Originally posted by @Andrew Martel:

... wouldn't the guaranteed cash flow be a good deal? ...

There is an underlying assumption at work here: that your bought cheaply property will actually be desirable to a Section 8 tenant. Many times the Section 8 tenant is looking to NOT be in those kinds of locations ... No tenant means no guarantee of that cash flow ...

 Steve, could you please elaborate?  It is my understanding that in many markets, there is such a shortage of housing accepting Section 8 vouchers that lack of tenants is rarely an issue.  I'd love to learn more.

There are tons of good posts on BP about Section 8, pro and con.  It will be worth your time to do a BP search for this topic!

@Kate Horrell  - I don't think there is too much to elaborate on. Section 8 tenants are like most other tenants in that they want good houses in good school districts in lower crime areas; it's just they have to choose based on what they can afford. If you buy in the war zone, it might be cheap but it might not even appeal to those on Section 8. 

Make sense?

Section 8's are a great way to go. I have had 100's of them and only had a very few problems. 

@Sydney Chase  you say you "have had" which leads me to believe you're no longer holding any.   Why did you get out of it?  How did you learn about qualifying a house for the program, screening tenants, etc?  If you've had that many, surely you have some powerful insight.

Originally posted by @Andrew Martel:

Morning BP,

 I know about the potential terror tenants who destroy the property, but that can occur anywhere right? Proper screening takes care of that issues.  

 I cringe a little when I read people heavily depending on "proper screening."  Yes you can check credit, criminal background, and past evictions.  However as a financial prospectus often warns "past performance does not guarantee future results."  Landlord tenant relationships go bad just as marriages end in messy divorces. You just can not be sure that a tenant who checks out or seems conscientious  will stay that way.  I had tenants who had professional jobs and had decent credit who after two years allowed their dogs to defecate and urinate on my nice wood floors. 

A seasoned Section 8 tenant is no match for a new landlord; they know far more than you do - ask me how I know ;) We had one S8 tenant and she had no fear of losing her voucher. An S8 tenant is only as good as the program manager/caseworker. 

As for proper screening, well, you can't screen for personality, and our first (and only) S8 tenant had an entitlement attitude that turned us off to the program. Guaranteed rent yes - and guaranteed demands and headaches. 

I have to agree with Mr. Babiak's assessment. There seems to be the assumption that if you are on Section 8, you want to or will live in the hood. Just about all of us want to live somewhere nice, safe, and with good schools, even the people currently in the hood. I have Section 8 and Non-Section 8 tenants. As for tenant screening, we screen them all the same, look at the all of the underlying factors, and try to make the best selection based on the information available. There is no 100% great tenant formula that will guarantee zero vacancy or property damage. You don't get that with Section 8 and you don't get that with Non-Section 8. The only issue I have had with the program is the first payment. It took about 3 months to get paid by Section 8. After that, I have never had a problem.

Remember , section 8 tenants arent assigned to you , you need to find them and have them want to live in your property . Buying a cheap property in a bad area doesnt mean somebody will want to live in it even if you fix it up .

I'm delving back in after a while out of rentals. $50k buy, $4k repairs, should get $1200+ rent. Those numbers work. I've owned it since Jan, though. Busted pipes, workers not showing up, lost a tenant or two after wasting plenty of time to get them in, then two full months of doing mandatory classes, getting my LLC's approved, getting the inspector happy, etc...

It's a bit of a headache, but Atlanta AHA is pretty great. By the book, but very on point. The second one won't be anywhere near as bad, I was learning and running 4 rehabs, and I play more than most, so...

Prob buy a few a year like that moving forward. It's a depressed part of a high dollar area, so cost vs. rent on their scale works well. Gonna target that stuff.

I get nervous on the lower end stuff. The cost of repairs vs. rent makes them harder to swallow. Plus, the lower end units are where all my headaches came from when I had 50+. Never heard from anybody that was in anything over $250k. $550/mo? They call you to change a lightbulb. I was self managed after going through about 7 management companies. Be better if you paid someone to deal with the BS.

I only had a few Sec8 back in the day, most were fine. Some were great, some not, but none were terrible. around here they're terrified of losing their voucher.

Did have a yearly inspection fail because there was mold in the shower. I was like "I'm responsible for cleaning her shower?" Pretty crazy.

Direct deposit that always shows up is pretty damn nice, though! If I go back to rentals that's all Ill do.

Originally posted by @Andrew Martel:

For example:

Buy a home at 15k put 5-8k into it for repairs. Rent the home for 600. Lets say S8 give yous 500 of that. The tenant is responsible for the other $100. Assuming 100/month for taxes 10% vacancy rate, and 5% repair costs thats roughly 330 Net a month or 19% CoC. If the tenant doesn't pay, you're not out an entire months rent because you've got the check from the governement. You can still go after the tenant for the money and you have a little more leverage because you can use the Voucher to your advantage (evictions= tenant loses the voucher).

If you've gone through and done some due diligence in regards to removing "problem areas" for repairs (ceiling fans, etc..), wouldn't the likelyhood of repairs be reduced?

So what am I missing on Section 8? I've always gone by the old adage of "if it sounds too good to be true it probably is". So what are the serious Cons? I know about the potential terror tenants who destroy the property, but that can occur anywhere right? Proper screening takes care of that issues. What about financially? Are banks less likely to do a LTV on a property with S8? Some of the home I've looked at here in my are are distressed, selling for 15k or so, but rehabed values is ~40K. So what am I missing? Why would this be a less desirable option than "traditional" renting?

As always, you guys are great and thanks for your responses!

-Drew

 Hi @Andrew Martel (for some reason won't do the linky thing),

Sorry to be a bit late to the party, I just joined the BP forum, but a late response is better than never, yes? :-)

I can't speak to the financing of your properties, as my experience has been primarily in helping connect folks with vouchers to landlords with rentals. Since you've already convinced yourself of the upsides, and are asking for the downsides, let me give you my short list of things that could dissuade you:

#1 You will have to keep your rentals simple and durable, as you've already cited. Not everyone wants to have rentals that look all function and no flair. It can be tough to take pride in that rental that looks more like ex-soviet bloc housing than a beautifully landscaped addition to your portfolio. Obviously I'm slightly exaggerating here, but no frills is a different mindset. 

#2 Make sure you will be able to achieve the rents you are expecting. The FMR is a complicated thing, make sure you know there are comps nearby that rent at the rate you're expecting that are on Section 8 vouchers as well.

#3 Make sure people want to live where you're buying. Just because the rents there are below FMR doesn't mean people want to live there, they'll shoot for the best they can get.

#4 #3 will be much more of a slam dunk if housing in your area is tight. If you're in a big and vibrant city, it probably is. If you're in a depressed city, it probably isn't. 

#5 To achieve low vacancy rates, you'll have to know where to advertise and probably lower your expectations of applicants a bit. Its not reasonable to expect low income tenants to have great credit and the most stable employment. That said, find a level of tenant you're comfortable with, I literally have a landlord I work with at both extreme ends of the screening spectrum

#6 It will be tough to get high deposits, but you should. Low income folks obviously don't have much to put down, Section 8 doesn't provide assistance for deposits, but there are often Rapid Rehousing an Housing Stabilization programs in urban areas that can help. It would behoove you to know them well before renting. 

#7 Find someone who is an expert in Section 8 housing in your area to show you the ropes of your local PHA. Like any big organization, its as important to know the rules as to know the people who enforce them. Making a few good friends and knowing the rules of the program inside and out aren't necessarily quick and easy tasks, but they'll set you up with all the info you'll need to succeed. 

Hope this helps! :-)

-Brad

@Bradley Bogdan ,

To make the @ work, do the following:
Hold down the shift key and type @?
Look below this Window, and you will see a list of names of people that have posted in this thread.
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Raymond

@Raymond B.  Thanks for the tip! Exactly what I needed.

@Andrew Martel  I goofed on mentioning you above, but see my post above for my take on your question.

While different markets and individual experiences will differ, in general catering to the low income market will be less passive, with more headaches and more damage to units.  Fixing up a property the first time is the just the beginning of doing the same fixes over and over and over.  The number of vouchers and percentage of rent covered is probably at risk to shrink as well over time.  If you haven't listened to podcast #79, it may provide some more perspective, although we don't participate in Section 8.

Most landlords will gouge the section 8 tenants for a few extra dollars instead just take the section 8 voucher because it is guaranteed rent. I wonder which guru wrote the section 8 bible.

Joe Gore

I would avoid section 8 unless you are having problems with vacancy. Around here the housing office won't allow landlords to charge more than market rents or more than they are charging for other units in the building. 

And even if you find a tenant with a criminal free background chances are their friends/relatives they associate with have scary backgrounds. My experience is they take a lot more management, cause more issues with their neighbors and cause more damage to their apartment. And they are much harder to get money out later on than somebody with garnishable wages.

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