Need Help! Duplex Deal Evaluation and Section 8 Question

15 Replies

Sorry, this is long, but there's a lot going on here...

Tenant Issue/ Section 8 Question:

I'm in escrow on a duplex that I will live in one of the units on. I am still in my due diligince period, which ends on 11/26. The back unit is occupied by a long term tenant who has been there for 15 years. They currently pay $440, which is way below market rent. Market rent for that unit should be $750, it's a 2 bed/ 1 bath with a backyard. Under consent of the owner and agent, I met with the current tenant to discuss their plans and to collect a rental application and income verification from them. They currently struggle to pay the $440 a month. Because of this, I am led to believe their income is not very much. After reviewing their income, my assumptions are correct. As a family of five, their 2011 tax return shows about $14,000 gross income for the year. He is self-employeed with an insurance/securities company, so has no pay stubs as he is paid on commission. My assumption is that his income this year is even worse than his income last year, as he did not write in a current income amount on his application, but rather just gave me last years 1040.

My concern is this, there is no way he can afford $750, he can hardly afford $440 and his income proves this. If I follow through with this purchase I am basically signing up for an eviction. I know he is not going to be able to pay and I ask the family to leave, they likely will not be able to. Where would they go, since no one will let him sign a lease with that kind of income? Eviction is inevitable.

One way out of this I am thinking would be Section 8. Is it feasible to get them to go apply for section 8, list the unit as section 8 and then get them to rent under section 8. They seem to be great tenants and take care of the property, so no problem there, they just can't afford it. How would I go about doing this and how long would it take? I'm assuming it will take longer than I have before my inpspection period is over. Are there any requirements regarding the condition of the property for section 8. If I went this route and they qualified for section 8, we would sign a new rental agreement at the higher rent and I would also ask for a larger security depost than what is transferable to me from when they first moved in back in 1997, which was $200.

Or should I just leave it as is and once I take ownership of the property give him a 30 day notice, hope he complies and if he doesn't take it to an eviction?

The seller is giving me a $3,000 credit to deal with this tenant issue by the way. Not that I want to deal with it.

Deal Evaluation:

Purchase Price: $130,000
Gross Rents: $17,700 ($750 and $725 for each unit respectively)
Expenses: $8,500 (50%)
Repairs/Renovations: $10,000
20% Down at 3.5% APR for 30 years = Debt Service at $467.01
3.5% closing costs

Cash on Cash Return = 8% (not stellar)
Cash Flow per door = $135

This is obviously not a killer deal, but at least its better than throwing away $715 a month on rent in a one bedroom upstairs apartment which is what I'm currently doing.

Considering all... what do you guys think? Should I follow through with it and pull the trigger? Let me know if I forgot any details or if you have any question. This will be my wife and I's first rental property and home. We plan to purchase another multi-family property a year after this one.

If you are emotionally prepared to evict if needed, then go for it. It seems the economics work and that you have thought this out adequately.

Don't take things too personal. People are having bad time, but business is business. Offer them 3 choices, First is move out. Second have them get selection 8. Third Raise the rent every few month with notice, till it reaches the $700 rent.

Hell, The second I heard my rent increase, I move out.

@Tom C. : I think I will be fine with the emotional aspect of it. It may be difficult since I will be living righ next door to them for a bit.

@Shuai Zeng : I will definitely offer them the choices, but I think it will inevitably turn into an eviction. He won't be able to move out. There will be no one who will lease him an apartment with his income. Unless we go section 8 of course. My concern with that would be, will section 8 allow someone who is already in the unit to go section 8 if they were not already section 8. Kind of an odd situation.

A quick call to the local Section 8 office may end this option. MANY areas are closed to new applicants for the time being.

I know it is tough but you probably need to prepare to evict or walk from this deal. Nothing wrong with either option.

Perhaps offer cash for keys. Some moving money. They will find shelter. Relatives, church, homeless shelter placement worker, etc. Do some home work with them looking for housing together. Maybe give them 60 days.

I second what @Jon Klaus said offer them some money to help them move. It may be uncomfortable for a little bit living next to them but it will be over in a relatively short period of time. It's never been a huge deal to me at my home. I have asked two people to leave so far and it's a little awkward but still amicable. I'm friendly but firm. Nice job getting the seller credit for it by the way.

The deal itself looks like a decent property since your going to be living in it. That makes all the difference I try to get a 25% cash on cash return for properties I finance but I wouldn't live in any of them personally. I live in a quad where my mortgage is covered and it has been great but it sounds like you'll be doing even better. It's a great way to get started.

Most areas the waiting list to get on section 8 is years.
My area with the 3 different offices it averages about 7 years.

Does the current tenant have a lease with the the current property owner? If so, you may not be able to evict once you take ownership because the lease goes with the property. And the wait time to apply and get approved for Section 8 is often YEARS, so that plan isn't feasible at all.

@Kyle J. and @Account Closed : Good points on the time to get approved for Section 8. I guess that's probably out of the question....

There is a lease in place with the current property owner, however it is currently month to month, the last lease they have is from 2000. I assumed I can just put a new lease in place. Is this a bad assumption?

If the current agreement is just month to month, then you could have the tenant sign a new lease for a higher amount (if they're willing). If not, you'll likely have to terminate the lease agreement and give the tenant notice to move once you own the property.

@Kyle J. : The problem is they are willing to sign an agreement at the higher amount, but according to their income I know they will not be able to afford it. If I have them sign it with my fingers crossed hoping they can pay, which he would have to get a full time job to be able to do that, then now I'm in an agreeement with him, albiet monthly, that may delay me getting him out sooner than later. I think I may have to go with your second option, unfortunately.

If a family of five has been there that long 2000 the place will likely need a total rehab to get rent ready.

If that's the case 10,000 repair will be higher for both units total if yours is not in excellent shape.

California is one of those tenant friendly states so you need to look at local landlord tenant law for rights of full lease versus month to month.

You can forget section 8 as that process takes forever and sometimes section 8 does not pay market rent for an area anyways.

The tenant might have much more income than what is being reported as self-employed. Many people write down or hide additional income than what is put on personal taxes.

Why not take an additional security deposit and go month to month with a higher amount?? It doesn't have to be right at the top of the market but much higher than what they are currently paying.

Originally posted by Joel Owens:
California is one of those tenant friendly states so you need to look at local landlord tenant law for rights of full lease versus month to month.

It'd be a 60-day notice since they've been in there for over one year.

I just had a tenant get Section 8. She was on the waiting list for over ten years.

It sounds like this guy needs a new job and/or a second and maybe a third job. Family of five in a 2/1? $14,000 income? These people have a major income crisis. Sounds like he needs to man up and start earning. The wife needs at least one job also.

I would explain to them in a nice way that you're not Santa Claus and things need to change. Show them what other places are renting for and explain that you need to stay competitive.

Well you know Rob it is getting close to Christmas! LOL Maybe the tenant is thinking the new landlord will give him his present early in the form of below market rent (sarcasm) .......................... : )

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