All Forum Posts by: Michael Smythe

Section 8 rentals are not the "perfect solution"!

Seems you know the pros, but what about the following cons

- Not wise to include utilities as can lead to tenant abuse
- Tenants may not pay their portion of the rent and utilities
- If you start eviction process, S8 payments stop
- Caseworkers don't always hold tenants accountable for damages they cause. Even if they do, if tenant doesn't make the required repairs the payments will be abated.
- Many S8 tenants move in family & friends in violation of HAP contract. If landlord reports to caseworker, payments stop. If landlord doesn't report, the extra people in the property often leads to more damages.

S8 can be a great program for landlords, just make sure you FULLY understand it.

@Jenny Kao

You might want to follow the "Deep Dive" series we're doing on our BiggerPockets blog about Metro Detroit cities, City of Detroit Neighborhoods and comparing Metro Detroit to other hotspots investors usually consider:

https://www.biggerpockets.com/member-blogs/3094/99854-deep-dive-into-metro-detroit-cities-ecorse

(BP search feature can be problematic, so we’ve also added links @ our website under View Cities & Neighborhoods We Service)

Doubt you'll find this much info for any other market in the country. So, why would you invest remotely anywhere else?

How fast do you want to grow?

Paying cash means you don't have to worry about mortgage payments if tenants don't pay, or you have unexpected expenses.

Getting mortgages leverages your $400k, allowing it to grow faster if you invest in the right properties.

Another issue many newer investors overlook when starting out is understanding what they are investing in and the related pros & cons.

In our OPINION (always verify yourself!):

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenants: Majority will have FICO scores of 680+.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenants: Majority will have FICO scores of 620+, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should often be used to also cover nonpayment & evictions.
Tenants: majority will have FICO scores of 560-600, many blemishes, but should have no evictions in last 2 years. Verifying previous 2-years of rental history very important!

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenants: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Run it through the applicable BP calculators

Start with a Property Management Company that does NOT sell Turnkey rentals. 

Everyone is transaction based except a PMC.

What does your market research show for the value and rents?

The challenge with EVERY PM software is putting in the time to actually learn how to use it.

Have seen many posts slamming certain softwares, but the usual problem is the user not using it correctly.

Would be careful with portfolio loans that use DSR for qualifying.

Most will NOT allow you to owner-occupy the property.

@Rasheed-mass Ali see you reached out to us already.

Finding reliable & honest contractors is probably the toughest part of owner properties.

Where did the tenants move to? How astute did they seem to be?

Bottom line: what do you think the chances are the will legally challenge your keeping of their security deposit?