Need Help! Duplex Deal Evaluation and Section 8 Question
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.