Author Topic: Section 8 Housing and Cap Rates  (Read 13847 times)

legaleagle

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Section 8 Housing and Cap Rates
« on: June 19, 2013, 11:43:38 AM »
Here is a copy of the email I just sent MMM,

I have an investment in very cheap homes for section 8 rental. I have them for $13,500 each. They will get $700 each for the Section 8 vouchers. Assuming no appreciation (a safe assumption for these) the cap rate is, after taxes and insurance, 57%. Why do you feel it is better to invest in expensive properties than something that returns this type of ROI?

I also own a $200,000 home that only cash flows at $500 after mortgage, taxes and insurance. This only gives me a cap rate of 3%. The more expensive one has appreciated in value and will continue to do so, gets me much more manageable renters, and is only 3 blocks away from my current home but I donít think those factors outweigh the sheer cash flow of the first two.

For the same amount of money as the expensive home I can get (even assuming the more reasonable price of $25,000 for comparable section 8 housing in a nicer area) 8 homes. This would net $56,000 of cash flow per year after expenses before income taxes (assume 25% rate) for a total of $42,000 per year. $6,000 vs $42,000. I think almost any amount of inconvenience is worth that. Take out vacancy and repairs and we are still easily covering your yearly expenses with 8 homes.

Thoughts?  I'd really like to hear from you on this since I am very excited to get towards financial independence.

Thanks,
Mike

legaleagle

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Section 8 Housing and Cap Rates
« Reply #1 on: June 19, 2013, 11:50:32 AM »
I would love to hear from other MMers regarding this strategy. 

I would eventually diversify with index funds and eventually sell the homes for ones in nicer areas after I build up enough cash to buy the nicer houses free and clear.  It will reduce my cash flow, but also my presumed headaches. 

I'm a young guy with some rental and repair experience so I think I can handle the hustle that will come with owning 8 homes.

Coneal

  • 5 O'Clock Shadow
  • *
  • Posts: 26
  • Location: Charlotte
Re: Section 8 Housing and Cap Rates
« Reply #2 on: June 19, 2013, 12:15:37 PM »
Here is a copy of the email I just sent MMM,

I have an investment in very cheap homes for section 8 rental. I have them for $13,500 each. They will get $700 each for the Section 8 vouchers. Assuming no appreciation (a safe assumption for these) the cap rate is, after taxes and insurance, 57%. Why do you feel it is better to invest in expensive properties than something that returns this type of ROI?

I also own a $200,000 home that only cash flows at $500 after mortgage, taxes and insurance. This only gives me a cap rate of 3%. The more expensive one has appreciated in value and will continue to do so, gets me much more manageable renters, and is only 3 blocks away from my current home but I donít think those factors outweigh the sheer cash flow of the first two.

For the same amount of money as the expensive home I can get (even assuming the more reasonable price of $25,000 for comparable section 8 housing in a nicer area) 8 homes. This would net $56,000 of cash flow per year after expenses before income taxes (assume 25% rate) for a total of $42,000 per year. $6,000 vs $42,000. I think almost any amount of inconvenience is worth that. Take out vacancy and repairs and we are still easily covering your yearly expenses with 8 homes.

Thoughts?  I'd really like to hear from you on this since I am very excited to get towards financial independence.

Thanks,
Mike

The goverment dicates how you run your houses (when has the goverment ever been good at running a business).  I believe you have to have it inspected every so often.   The inspector will tell you what repairs have to be done with the house and you actually have to comply.  Not matter how much bs it is. 

How much do you plan to get out of the houses if you tried to sell them?  Would you even be able to sell them? 

Your not really attracting the cream of the crop in tennets.  ie drug users more headaches for you.  Your tennets could drop the housing prices in the area.

It may work in some cases but it never was for me.  A tennet wanted us to move to section 8 and all the benefits that we could gain from doing it.  Told him if he wanted a section 8 house that he could leave and find one, we were not going to do it. 

Coneal

  • 5 O'Clock Shadow
  • *
  • Posts: 26
  • Location: Charlotte
Re: Section 8 Housing and Cap Rates
« Reply #3 on: June 19, 2013, 12:17:40 PM »
Also if I remember correctly the govt check will only cover half the rent.  The renter has to come up with the other half.  The govt will tell you how much you can rent your house out for.

legaleagle

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Section 8 Housing and Cap Rates
« Reply #4 on: June 19, 2013, 12:27:45 PM »
Thanks for the reply. 
1) The government inspectors do have to come through and do a move-in inspection but the houses were sold to me with an occupancy permit already issued and fully rehabbed.  It will be simple to get it government approved.  Other "inspections" involve visits by case workers who will actually work in my favor because they make sure that the correct number of tenants are in the home, no pets, etc.

2)  I already have offers for the properties at $17,000.  It would fetch $20,000 rented.   I regularly flip these cheap houses to investors for quick 50%-75% returns.  They in turn sell them to people from out of town who package them for international REITs.

3) I understand that the tenants aren't the best, but the Section 8 is a privilege not a right.  They will lose these vouchers and not be able to get them back any time soon or at all.  They'll be back in public housing or on the street.

4)  The government covers the rent the renter cannot afford according to their financials.  Sometimes it can be 100%.  I'd shoot for the people above 75% to make sure I have a stable income flow.  The govt can tell me what I can rent my house for all they want if I'm getting a 57% cap rate.  Market rates will actually be lower in some cases, especially in these areas.

NumberCruncher

  • Pencil Stache
  • ****
  • Posts: 612
Re: Section 8 Housing and Cap Rates
« Reply #5 on: June 19, 2013, 12:38:12 PM »
For my uncle, section 8 tenants are his favorite due to the stable income flow. Others that he rents to...those are the horror stories (complaining about every little thing, sometimes just stop paying, trashing the place, etc).

Granted, he is a landlord by necessity rather than choice as he got badly burned flipping houses in the housing bubble. He could probably learn a lot about screening tenants from this forum.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27947
  • Age: -999
  • Location: Seattle, WA
Re: Section 8 Housing and Cap Rates
« Reply #6 on: June 19, 2013, 01:03:15 PM »
Speaking as a landlord that has done Section 8 in the past (though I don't currently have any Section 8 tenants, I list my vacancies on their website), let me clear up some incorrect things.

The goverment dicates how you run your houses (when has the goverment ever been good at running a business).  I believe you have to have it inspected every so often.   The inspector will tell you what repairs have to be done with the house and you actually have to comply.  Not matter how much bs it is. 

I don't know what you mean by the government "dictating" how I run my houses.  They have no say in my landlording practices.  They do an inspection, but I've never once had even a single repair item come up in a section 8 inspection, they always pass with flying colors.  I keep my properties in excellent shape to attract excellent tenants.  Slum lords, I've heard have an issue with the inspections.  I don't worry about them.

Your not really attracting the cream of the crop in tennets.  ie drug users more headaches for you.  Your tennets could drop the housing prices in the area.

More FUD.  Section 8 is generally for single women with children. They need the government assistance, but saying that they're drug users, come on.

Also if I remember correctly the govt check will only cover half the rent.  The renter has to come up with the other half.

False.  It's a case by case basis, usually at least 75% is covered, and often 100%. Normally my tenants never pay me anything.

The govt will tell you how much you can rent your house out for.

False.  I set the rents.  They can tell me if they think it should be lower, in which case I decline to rent to the section 8 tenant and find a regular one, but I've actually found I can rent it for higher to section 8 tenants than I can a regular tenant.  I've not had the government try to pay me below market rent.

3) I understand that the tenants aren't the best, but the Section 8 is a privilege not a right.  They will lose these vouchers and not be able to get them back any time soon or at all.  They'll be back in public housing or on the street.

While the above items were false rumors against section 8, this one is one spread by pro section 8 people that generally isn't true.  The government is loathe to take away section 8 from a qualifying family, despite them violating your lease, not paying their portion of the rent, etc.  Even getting evicted.  Pro section 8 people say the line of "oh I can tell the tenant they'd better do X, Y, and Z or they'll risk losing their section 8 voucher, so they have to follow the lease," but it's frankly not true.  Often they'll just let them move to a new place despite what they did at yours.  Their vouchers are pretty secure.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27947
  • Age: -999
  • Location: Seattle, WA
Re: Section 8 Housing and Cap Rates
« Reply #7 on: June 19, 2013, 01:04:14 PM »
Now that the previous post addressed some FUD, hopefully, let's address the first post:
If it sounds too good to be true....

57% return, starting with only 50k and never adding any money in will make you 1MM in about 6 and 1/2 years.  Might as well keep doing it though, as you'll hit 1 billion dollars in 22 years.  40 years from now you could have 3 trillion dollars.  Clearly 57% return isn't realistic, right?

The reason those are geetting that kind of cap rate is that no other investors want to touch them.  If they did, the prices would rise, and the cap rate would lower.

The fact of the matter is, you can often find 20%+ ROI on paper.  You will never get it.  At those prices one big repair wipes out the whole return, because the dollar value of a water heater is the same, but your gross rents are so much less.  You will experience higher vacancy.  More turnover.

It works great on paper, it doesn't in real life.

I'll take a solid 10-15% return with no hassle over something offering a 57% return on paper.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

legaleagle

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Section 8 Housing and Cap Rates
« Reply #8 on: June 19, 2013, 01:31:37 PM »
Thanks for your responses. 

"Now that the previous post addressed some FUD, hopefully, let's address the first post:
If it sounds too good to be true...."


I think you're confusing cap rate with a compounding return because in 6.5 years I'd make $195,000 with taxes, insurance, and repairs (assuming $12,000 year repairs, remember they were gut rehabbed and are slab properties).

"The reason those are geetting that kind of cap rate is that no other investors want to touch them.  If they did, the prices would rise, and the cap rate would lower."

I mentioned before that I have a persistent investor offering me 17K.  He calls me once a week to make sure I don't want to sell.  Sounds like some investors want to buy them.

"At those prices one big repair wipes out the whole return, because the dollar value of a water heater is the same, but your gross rents are so much less."

You're correct, the water heater price is the same.  One house gets me $500 net rent and one gets me $700, which one covers more of the cost of repair?  The Section 8.  Citing gross rents is pointless if you have more expenses with one house.  It's net rent that matters.  Am I missing something?  Admittedly I'm not a financial wizard, but it's pretty simple to figure out cash flow.

"While the above items were false rumors against section 8, this one is one spread by pro section 8 people that generally isn't true.  The government is loathe to take away section 8 from a qualifying family, despite them violating your lease, not paying their portion of the rent, etc.  Even getting evicted."


I had assumed this was more the case than my statement, but I was assured otherwise by similar investors and took it with a grain of salt.  Maybe our county is more ruthless than some.  I would never use their vouchers as leverage anyway because they are people, not indentured servants.

Love to hear criticism of the plan!  Keep it coming!  I consider this peer review!  Tear apart my numbers.  I want to have a valid, stable plan for my future.
« Last Edit: June 19, 2013, 01:33:28 PM by legaleagle »

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Section 8 Housing and Cap Rates
« Reply #9 on: June 19, 2013, 02:02:37 PM »

I have an investment in very cheap homes for section 8 rental. I have them for $13,500 each.

Wait, there are actual houses that can be purchased for $13k?  This is in the USA?


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27947
  • Age: -999
  • Location: Seattle, WA
Re: Section 8 Housing and Cap Rates
« Reply #10 on: June 19, 2013, 02:04:19 PM »
I think you're confusing cap rate with a compounding return because in 6.5 years I'd make $195,000 with taxes, insurance, and repairs (assuming $12,000 year repairs, remember they were gut rehabbed and are slab properties).

I'm not, I'm just assuming you can reinvest the gains into more properties like this.  Or is this a one time only thing?

I mentioned before that I have a persistent investor offering me 17K.  He calls me once a week to make sure I don't want to sell.  Sounds like some investors want to buy them.

Then the price would go up accordingly and the cap rate would drop.  An investor also looking to speculate on high cap rates does not make a market.

If an investment is a good one, it will be priced accordingly.  It is priced correctly currently based on its risk.

You're correct, the water heater price is the same.  One house gets me $500 net rent and one gets me $700, which one covers more of the cost of repair?  The Section 8.  Citing gross rents is pointless if you have more expenses with one house.  It's net rent that matters.  Am I missing something?  Admittedly I'm not a financial wizard, but it's pretty simple to figure out cash flow.

I'm comparing it to a more expensive house.  In a cheaper house, one repair can eat up all your rent.  In a more expensive house, it's a fraction of the rent.  The repair costs are the same, but since you have lower rents, the percentage that the repairs take up of your rents is much higher.

Make sense now?

I want to have a valid, stable plan for my future.

You may want to start reading and learning more about Real Estate and educating yourself. 

Here's the bottom line, try to answer this question honestly: why do you think the return is so high?

Did you find some secret gem no one knows about?

Or is it that others don't want to touch this investment, leaving the prices low compared to the rents, leading to high cap rates?  If that's the case, why don't they?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27947
  • Age: -999
  • Location: Seattle, WA
Re: Section 8 Housing and Cap Rates
« Reply #11 on: June 19, 2013, 02:05:27 PM »
Wait, there are actual houses that can be purchased for $13k?  This is in the USA?

There are houses that can be purchased for $1!

..you don't want them.

There are properties you can get for free.

They are priced correctly.

(Actually those aren't, as there are clearly no takers.  You'd have to pay someone to take them.)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5048
Re: Section 8 Housing and Cap Rates
« Reply #12 on: June 19, 2013, 02:20:32 PM »
In general, I agree with Arebelspy's comments.  I do not have Section 8 tenants, nor would I, based on the experiences of other landlords I know.  If the tenant trashes the house, you get to fix it or lose your Section 8 certification.  The tenants seem never to lose the vouchers, no matter what they do.

However, I'm intrigued by legaleagle's business model.  Are the $13,500 houses in a warzone?  Do you have to have a concealed carry permit to visit?  Does moving up to $25,000 houses improve your clientele and your personal safety?    Some people are successful in this segment of the market.  Maybe with the rental and rehab experience, he/she can make a go of this.   Legaleagle seems confident, so I think a case study is warranted.

My proposal is that legaleagle, if he/she moves forward with this plan, report back periodically.  Maybe even start a journal.  My guess is the 57 percent cap rate is going to turn into the lower double digits, but that's a guess.  Success or failure, we can all learn something from this experiment.

mpbaker22

  • Handlebar Stache
  • *****
  • Posts: 1095
Re: Section 8 Housing and Cap Rates
« Reply #13 on: June 19, 2013, 02:44:13 PM »

I have an investment in very cheap homes for section 8 rental. I have them for $13,500 each.

Wait, there are actual houses that can be purchased for $13k?  This is in the USA?



St. Louis population in 1950 - 856,796
St. Louis population in 2010 - 319,294

What do you think happened to housing prices.  I've seen places in the ghettos with running water and working electricity for under $10K

legaleagle

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Section 8 Housing and Cap Rates
« Reply #14 on: June 19, 2013, 03:16:22 PM »
I plan on reinvesting the money, but I want to climb the ladder up to more quality properties as my cash flow increases and I can buy houses more frequently.  This will reduce my cap rate as I go up but get me out of the rough areas.

13.5K house baby.  All the way.  Again, with an occupancy permit, complete rehab done by the seller.  North St. Louis County is a beautiful place to invest if you don't visit outside of the hours of 11am-3pm.

I have a CCW permit for sure and I am well trained.  However, I find you get the treatment you give.  Be kind and you will get kindness in return.  Get to know your renters and treat them right, they'll tell their neighbors that you're good people.

$25,000 will get houses in slightly nicer areas which are slightly safer.  Then up to the $50,000 for a little better renters and area, and on and on till I own my block and have to walk 100 feet to the next rental. 

I do have experience in this field.  I have rehabbed for a profit and have made a significant return on my flip investments.   I rehabbed a house in Crestwood and spent a year doing it.  It made me ~$16,500 not a good hourly rate but I learned a ton which was part of my goal going in as well as expensing the purchase of the tools.

As far as flips, I have a finder that is absolute GOLD.   Our partnership (my finder and I) have made $18,000 in the past three and a half months on an initial investment of ~$22,500.  I do nothing but put up the cash, he does all the finding, negotiating, and selling.  We haven't even troubled ourselves with fixing them up yet.  I have no idea how he does this but I have all of my assets insured and i have everything in a LLC so my personal liability is limited to my initial investment.  He is the one who found the investor that wants to buy the houses that are the subject of this post for $17K cash.  The market is what someone will pay for it, and that investor will pay that.  You are correct, that since a buyer is willing to pay that, it would decrease the cap rate some since I will have an opportunity cost on the money I have locked into the house.

I have two properties that are already rented and cash flow me $950 a month (not counting equity and appreciation).   They are both in great condition with excellent renters.  My goal is to get $8,000 a month cash flow, pretax from these properties.  This will allow me to replace my current income with a 25% cushion for unexpected expenses.  After these 13.5K houses are rented, (i already have significant responses from a Craigslist ad... I know, I know... Craigslist :))  the cash flow will be ~$1,100 more a month putting me 25.6% ($2,050) of the way there off of investments that I acquired within the past 3.5 months.

I don't mean to boast about these accomplishments (Pride comes before destruction, and an arrogant spirit before a fall), I just want to let the skeptics out there (again, I love skepticism) know that this isn't a fantasy.  Other landlords in this area have fared well according to my research with people in the know.  I hope that this all works out as quickly as I hope and I'm FI in several years and continuing to invest!  Cautious optimism is the way to go.  I am not super excited about the section 8 renters but hope for the best and prepare for the worst is how I like to do business.  Worst case scenario, I don't like the Section 8ers, they trash the place and after a year I can sell the trashed house for $5,000 and it'd be a wash.  Meh, I TRIED!

I will gladly report back because I hope that some more resilient MMers who are more "type A" like me can use this route to invest less money at a higher rate of return and work their way to that nest egg invested in an index fund and carrying all of their costs of living.

I look forward tot he continued comments and potential pitfalls of this plan.  I'd LOVE to hear anecdotes (first hand) from other land lords.

Thanks,
Mike

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27947
  • Age: -999
  • Location: Seattle, WA
Re: Section 8 Housing and Cap Rates
« Reply #15 on: June 19, 2013, 03:21:56 PM »
I plan on reinvesting the money, but I want to climb the ladder up to more quality properties as my cash flow increases and I can buy houses more frequently.  This will reduce my cap rate as I go up but get me out of the rough areas.

Why would you do that if this works so well?

I have two properties that are already rented and cash flow me $950 a month (not counting equity and appreciation).   ...  This will allow me to replace my current income with a 25% cushion for unexpected expenses.

These are two examples of comments that make me think you're in over your head.

Will be interested to hear how it turns out.

I have no doubt you'll make money, but the stress and aggravation ..

/shrug

My properties are much less warzone, so anecdotes less useful.  Tryan's properties (though maybe not as bad) are probably more similar, you may want to read some of his posts here and on the E-R.org forums.

I wouldn't be surprised to hear you've completely exited and/or regretted them within 5 years.

Don't say we didn't warn you.  :)

Best of luck!
« Last Edit: June 19, 2013, 03:23:31 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

legaleagle

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Section 8 Housing and Cap Rates
« Reply #16 on: June 19, 2013, 03:45:44 PM »
I plan on exiting these properties in about 5 years as per the quote you mentioned ("climbing the ladder").  I will sell them.  I don't see the problem with that.  I am an attorney so I can handle a majority of the hassle myself, things such as evictions and corporate structures to protect my other assets.  I will do that because I don't want to be dealing with section 8 tenants past when it is necessary, just like MMers don't want to work past when it is necessary. 

I don't know how you are saying that quote shows I am in over my head. So I don't know what to say that.  Perhaps some details on why you doubt this plan so strongly?  I don't see any real quality critiques of my plan from you except that it will be a hassle and there may be damage.  Any renter can damage your homes and be a hassle, my houses have less to lose in them since they are bare bones and insured. 

"Don't say we didn't warn you" is not a critique.  Please give me a scenario where there is a net loss on this investment and I can't get out of it with a vast majority of my money intact.  I understand what you are saying and have accounted for that by being in a full time job as well... for now.

I will report back for better or for worse since I am endeavoring to contribute to this ongoing discussion of financial independence and offering options.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5048
Re: Section 8 Housing and Cap Rates
« Reply #17 on: June 19, 2013, 03:53:59 PM »
Some pictures of your rentals and rehabs would be helpful in understanding what you are doing.  In your world, what constitutes "rehabbed?"  What work do you do on flips? 

This kind of investing is not for the faint of heart.  It takes a very specific type of personality to be successful.  This is not "passive" income generation.  The job is hands on and you have to babysit everything.  You can't turn these properties over to a property manager.   These investments are risky, hence the high cap rates.  For most people, it would be a way to lose a lot of money quickly.

keepingmobens

  • 5 O'Clock Shadow
  • *
  • Posts: 38
  • Age: 43
Re: Section 8 Housing and Cap Rates
« Reply #18 on: June 19, 2013, 04:36:00 PM »
I have a friend who manages/owns a few section 8 properties. He's told me stories about how tenants will destroy things/punch holes in the walls, then call the gov't inspector to try to say he is a slum lord. Then he fixes it, then they break it again immediately before the inspector gets there the next time. The best story he had was how one tenant left the water running full blast in every faucet 24/7 after he filed for eviction, and he pays $1200/mo water bill because it is illegal to shut off the water. He expects to have to pay it for at least 6 more months until the eviction actually goes through.

No thanks. You lay with pigs you're going to get dirty. I'm sure a percentage of section 8 is single moms just looking to get by, but a lot of them aren't.

jenstill

  • 5 O'Clock Shadow
  • *
  • Posts: 68
  • Location: Vermont
Re: Section 8 Housing and Cap Rates
« Reply #19 on: June 19, 2013, 05:12:28 PM »
Quote
I have a friend who manages/owns a few section 8 properties. He's told me stories about how tenants will destroy things/punch holes in the walls, then call the gov't inspector to try to say he is a slum lord. Then he fixes it, then they break it again immediately before the inspector gets there the next time. The best story he had was how one tenant left the water running full blast in every faucet 24/7 after he filed for eviction, and he pays $1200/mo water bill because it is illegal to shut off the water. He expects to have to pay it for at least 6 more months until the eviction actually goes through.

Your friend needs much better tenant selection criteria, a lease clause that specifies tenant-caused damages are billed to the tenant and must be paid within 30 days, and if utilities are included with rent, that improper or excessive use/waste of utilities constitutes a breach of lease. He should also have a clause stating that all monies received are applied first to the oldest non-rent charges. The Section 8 inspector can require him to fix things in the apartment, certainly, but does not/cannot prevent him from passing those costs on to the tenant.

Due to sequestration, many (probably most but I don't have to the percentage so don't want to overstate) issuing housing authorities are being forced to lower the number of Section 8 vouchers under their issuance. Because of this, many housing authorities are increasing their vigilance in enforcing voucher requirements; this includes increased standards (or, at least enforcing their existing standards) for housekeeping and lease compliance. More & more, if tenants don't comply with the landlord's lease and the Section 8 requirements, their vouchers are being pulled and with fewer "second" chances to fix the problem.

Coneal

  • 5 O'Clock Shadow
  • *
  • Posts: 26
  • Location: Charlotte
Re: Section 8 Housing and Cap Rates
« Reply #20 on: June 19, 2013, 05:36:21 PM »
Quote
I have a friend who manages/owns a few section 8 properties. He's told me stories about how tenants will destroy things/punch holes in the walls, then call the gov't inspector to try to say he is a slum lord. Then he fixes it, then they break it again immediately before the inspector gets there the next time. The best story he had was how one tenant left the water running full blast in every faucet 24/7 after he filed for eviction, and he pays $1200/mo water bill because it is illegal to shut off the water. He expects to have to pay it for at least 6 more months until the eviction actually goes through.

Your friend needs much better tenant selection criteria, a lease clause that specifies tenant-caused damages are billed to the tenant and must be paid within 30 days, and if utilities are included with rent, that improper or excessive use/waste of utilities constitutes a breach of lease. He should also have a clause stating that all monies received are applied first to the oldest non-rent charges. The Section 8 inspector can require him to fix things in the apartment, certainly, but does not/cannot prevent him from passing those costs on to the tenant.

Due to sequestration, many (probably most but I don't have to the percentage so don't want to overstate) issuing housing authorities are being forced to lower the number of Section 8 vouchers under their issuance. Because of this, many housing authorities are increasing their vigilance in enforcing voucher requirements; this includes increased standards (or, at least enforcing their existing standards) for housekeeping and lease compliance. More & more, if tenants don't comply with the landlord's lease and the Section 8 requirements, their vouchers are being pulled and with fewer "second" chances to fix the problem.

So a tenant can damage your home and you think that you will get reimbursed b/c of what is says in the lease?  If you believe that I have some ocean front property in Arizona that's a great investment.  You can take them to court and the judge can rule in your favor but your still not going to get the money.  It;'s like you really expect to get blood from a turnip.  Your out even more money b/c of legal fees.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27947
  • Age: -999
  • Location: Seattle, WA
Re: Section 8 Housing and Cap Rates
« Reply #21 on: June 19, 2013, 05:41:35 PM »
I plan on exiting these properties in about 5 years as per the quote you mentioned ("climbing the ladder").  I will sell them.  I don't see the problem with that.  I am an attorney so I can handle a majority of the hassle myself, things such as evictions and corporate structures to protect my other assets.  I will do that because I don't want to be dealing with section 8 tenants past when it is necessary, just like MMers don't want to work past when it is necessary. 

That's fine, what you're taking on is a high stress job with decent pay, not a investment with a good return.

Your reluctance to "deal with" it longer than a few years shows exactly why most would avoid this plan.

I don't know how you are saying that quote shows I am in over my head. So I don't know what to say that.

Those statements, among other things, show you are.. new to the idea, to put it kindly.  :)


I don't see any real quality critiques of my plan from you except that it will be a hassle and there may be damage.  Any renter can damage your homes and be a hassle, my houses have less to lose in them since they are bare bones and insured.

Sure, but the type of tenant you're more likely to attract is more likely to cause those hassles, less likely to be stable, more likely to pay late or not at all, be more transient, etc.  You say any renter can damage your home, and that's true, but you say yours has less to lose, I say it has more - percentage wise.

Please give me a scenario where there is a net loss on this investment

Okay.  You buy lots of these properties.  Tenants tear them up, costing you more than you took in from rents from them.  They sit vacant, costing you carrying costs.  Finally, fed up with the situation, you dump them.

I'm just trying to caution you - if it looks to good to be true, it probably is.

There is a reason you were able to get these properties so cheap, and they didn't get bid up by other investors.

I notice you still haven't answered my question:
Quote
Here's the bottom line, try to answer this question honestly: why do you think the return is so high?

My money on what will actually end up happening is that you'll get a low double digit cap rate with a TON of work and stress.  You'll sure learn a lot though.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Nords

  • Magnum Stache
  • ******
  • Posts: 3196
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Section 8 Housing and Cap Rates
« Reply #22 on: June 19, 2013, 10:05:28 PM »
I have a CCW permit for sure and I am well trained.
A fantasy aspiration of every landlord for their properties, no doubt.

keepingmobens

  • 5 O'Clock Shadow
  • *
  • Posts: 38
  • Age: 43
Re: Section 8 Housing and Cap Rates
« Reply #23 on: June 20, 2013, 12:52:42 PM »
I have a CCW permit for sure and I am well trained.
A fantasy aspiration of every landlord for their properties, no doubt.

Don't forget that it's "a beautiful place to invest if you don't visit outside of the hours of 11am-3pm." That should really sweeten the pot.