Buying 4-plex with Section 8 tenants, waiting for eviction end?

Question

Hi all,

I am looking on my first deal -- in Quincy, MA. It is a four-plex, 1x 4bd/1ba, 1x 2bd/1ba, 2x 1bd/1ba. It is with section 8 tenants, and I have already walked through the property. It seems to be in a good condition, just the roofs need repairs. Owner has to pay all utilities since it is not separately metered, though. One tenant will stay there whom I met, two units need to be rented to new section 8 tenants who were already screened by the old owner, and one unit i will need to live in for a year since I am doing FHA. Given the area, the housing departments supports very good above-market rents. The owner is about to retire so probably willing to negotiate.

He is having trouble getting rid of the property since he did a favor to a friend of his more than a year ago, and he moved in market rate tenants (friends of his friend, which he now really regrets) who stopped paying last year -- it is the 4bd apartment and it has been in eviction process since last June (2019). Given Covid and MA renters protection (e.g., not evicting in winter, now the moratorium), the non-paying tenants are still in the unit 14 months later. The owner says he had secured a judgment for eviction before Covid, which is now set for October 17.

I am thinking of putting an offer below asking contingent on the tenant eviction process completion.

Here are the property financials:

Rents:

• 1bd/1ba $1,743/mo
• 1bd/1ba $1,460/mo
• 4bd/1ba $3,400/mo
• 2bd/1ba $2,386/mo
• Total: $8,989/mo or $107,868/yr
•

Laundry: $2k/ year

2 story-garage on property, est. rent to a contractor $300/mo or $3,600/yr

Sum Total less 5%vacancy: $108,154/yr

Expenses:

Assume $5k/yr in repairs

Taxes, Insurance, Electrical, Heat Oil, Snow Removal, Water & Sewer

Total $37,726/yr

NOI: $70,428/yr

Debt service: $55k (FHA 3.5% down @ 3% interest rate + PMI)

Est. Cash Flow: $12-14K. If I live in one unit, my cost of living will be about $200/mo vs current $1,300)

Asking: $1M (I am going to offer, say, $940K)

There is a lot of love & hate for Section 8 from what I have seen here, but I think a high-price market like Boston (with section 8 wait list and suspended new applications given the size of current wait list) supports it well.

Would love to hear your feedback!

Lior Rozhansky · Answer

I'm all about Section 8 (of all my units I only have one market tenant). It seems like a decent deal on paper here based on the numbers, those are pretty solid rent projections. Of course it does depend on where in Quincy this as well--if its in one of the more desirable sections then pretty solid. Only concern would be the non split utilities, your bills are going to be pretty high for gas and electricity for all those units. Also depends on condition of the property and how much work it is, but overall sounds like it has decent potential.

Filip M. · Answer

Hi Steve,

Thanks a lot for your reply! Wow, that large of rollback on annual median income fair market rent? That is quite shocking. I cannot imagine that happening in Boston, where rent has been rising consistently. It is possible I might not be able to raise as much in the next few years.

I would be putting $35K down & $15K roughy in closing costs, since I am doing an FHA with 3.5% down. so I believe that would be 40%+ cash-on-cash. As I will need to live in one of the units, it would be -8% cash-on-cash, but my living expenses would be reduced significantly. Then pick up Year 2 on.

The owner did offer to put 3 months of rent for that tenant into escrow, but as my first deal, I am not comfortable with taking on the eviction process right on... The risk of second wave and extended moratorium is too big for me.

Steve Morris · Answer

Well, HUD has been able to bump Sec 8 rents a lot the past 4 years. However, since it's a trailing 3 year average to set them, I don't think I'd count on that rent growth the next few years (there have been years when HUD rolled back 60% AMI FMRs).

Sounds like you're making $14K on about $300K down or about 5.2% cash-cash. Is that about average for MA?

On the tenant you want out, if your seller blaks on price reduction, how about a rent reserve and draws until the leave. Sometimes lenders won't go for that, but it's an option.

Buying 4-plex with Section 8 tenants, waiting for eviction end?

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