Can you make money as a real estate investor by investing in the projects? What constitutes the word “projects?” You generally have an idea of what you think it is; parts of the area that have very low property value, are vacant or completely boarded up, an areas that have frightening crime rates. So, can you make money there? Are there opportunities? Section 8 housing is a very controversial topic among real estate investors.
You should know that cash flow rates are pretty high for real estate investors regarding the ghetto. Why? Property prices are usually pretty low when you compare them to the cost of rentals. It’s actually astonishing to see how high rent rates are in poor areas. This is why owning a rental property in the ghetto can actually be a huge money maker, generating profit each month.
“The area is coming back”
Know that these properties seldom increase in value, if they do at all. But, there are times where the city may “come back” in that area. What happens is that a once-upon-a-time ghetto is now an up and coming part of the city. In this case, the value of the property is going to rise. It may just be the next “big” area. What you should know ahead of time, is that you should never buy a property under the assumption that the neighborhood is about to make a come-back.
All to many newbie investors are afraid of being a landlord because they hear about all of the things that go wrong. They also likely have friends or family that are landlords and tell them never to do it, and how much they regret it. And they probably own properties in nice areas. Therefore, the idea of owning a property in the ghetto might be even more terrifying. Landlording is make up of three prime responsibilities
Pitfalls of owning a Section 8 property
It doesn’t matter where your property is located, collecting rent can be tough. Even if you have great tenants, you still might not get paid, and you’ll have to evict them. People that invest in the projects usually rent the houses to Section 8 individuals. What is Section 8? Section 8 is a (government) program that pays the tenants rent. This means that the government is paying you rent, rather than the tenant. Your property has to pass Section 8 inspections, as well as reach their standards when it comes to maintenance. When you rent to Section 8 tenants, you are almost eliminating the possibility of not getting paid rent.
Once you have a Section 8 tenant, you will begin receiving monthly payments from the government after a delay of 30-60 days for processing. And you’ll also receive rent from the tenant in most cases. Though there may be an occasional glitch receiving government payments, these payments are more reliable than payments from some private pay tenants.
Dealing with maintenance requests
People who are Section 8 generally have more maintenance requests than those who pay their own rent. You can expect to have your phone constantly ringing when you have a Section 8 rental property. Usually Section 8 investors will set up a twenty four hour phone number that their tenants can call if they have a maintenance request.
This means if a tenant wants the A/C fixed right then, the handyman will go there. This is obviously expensive. However, the government is paying and they’ve got the money for this expense. If the property is in excellent condition before a tenant moves in, the tenant does not have an excuse for excessive wear and tear. Also, the Section 8 program requires the tenant to maintain the property. In some cases, Section 8 tenants cause more wear and tear to a property than a private pay tenant.
Because their rent is subsidized and possibly completely free, a tenant may feel less invested in the property, which can result in irresponsible and careless behavior that increases wear, tear, and damage. Section 8 properties can therefore be more costly to maintain than private pay properties, which must be built into the monthly rent.Once a tenant damages a Section 8 investment property, the landlord has little effective recourse to recoup costs for damages. Ultimately, this raises overall maintenance costs, and landlords must charge higher rent to recoup their costs.
Visiting the property once in a while
You should regularly be checking up on your properties when you own one. If you’re uncomfortable driving around the projects on a regular basis, then you shouldn’t own a property there. Some investors are nervous regarding their safety. If you are, then just don’t invest there. It’s not a big deal; you’ve just got to know what you are comfortable with, and what you are not. If you don’t want to invest there, you can always turn the deal over to somebody else. Yet, if you do want to own there, it can be a great way to get a great deal of monthly, stable profit.
Dealing with delinquent tenants
Though the majority of the Section 8 rent is paid by the government, the tenant is usually responsible for paying a portion of the monthly rent. If the tenant doesn’t pay his portion of the rent, the landlord is forced to go through the Section 8 eviction process, settle for less profit, or possible even lose money after all maintenance and repair costs.
Sometimes, landlords are reluctant to report a tenant who is late on their rent payments. Reporting the tenant could lead to a long bureaucratic process to have the tenant removed. Then once the tenant is evicted, the landlord has to go through the Section 8 process of getting a new tenant.
Although landlords deal with both private pay and Section 8 delinquent tenants, Section 8 delinquencies are more costly due to bureaucratic regulations. Therefore, landlords should anticipate the non-payment of Section 8 tenants, and adjust the rent accordingly.
Benefit of Section 8
Larger pool of renters
Section 8 gives you a large pool of prospective tenants (about 2 million in the U.S.), as a result of the government subsidizing rent payments. This is extremely helpful, especially in geographic areas where there is a smaller pool of private pay tenants and with properties that are difficult to rent.
Section 8 doesn’t pay security deposits
Section 8 provides housing vouchers that pay the tenant’s monthly rent. These vouchers do not include an amount for the security deposit. If a landlord wishes to collect a security deposit, he or she has to get this deposit directly from the tenant. This could be an issue as the tenant has already shown to have income problems by being approved for a Section 8 voucher in the first place.
If they are not able to pay on their own, Section 8 tenants are often able to appeal to other agencies that will provide them with the money for the security deposit. As with any other tenant, you should never allow a Section 8 tenant to move in without first collecting a security deposit from them. The maximum amount you can collect is determined by your state security deposit limit.
- Contact your local housing authority and fill out the application form for the property, which will include details about the house, including address, available appliances and the number of bedrooms.
- Once the application has been approved, your property will be inspected by a Section 8 inspector to make sure everything in the building is up to code. Once your home is approved, it will need to be inspected on a yearly basis. Depending on the situation, this part of the process can cause some major pitfalls for landlords, so do your due diligence and prepare the property accordingly.
- After the property has been approved by an inspector, you can start accepting Section 8 housing vouchers from applicants who’ve qualified for the program. It’s important to note that Section 8 is not responsible for creating and upholding a lease. You’ll have to work that out with a prospective tenant.
- Once you’ve chosen a tenant and they’ve signed a lease, your local housing authority will mail you the percentage of the check agreed upon, while the tenant will be responsible for the rest.
Can you get a Section 8 loan?
It can be difficult to get a bank to buy or re-finance a home in the ghetto long-term. Generally, banks and mortgage companies that lend on property have “minimum loan origination thresholds.” Now, what does this mean? Well, usually homes in the projects simply sell for less than the minimum mortgage amounts. Because of this, you’re going to have to pay straight cash if you want to buy a property in the projects. Just about every investor that owns a Section 8 house paid all cash for the property.
Pros of owning a Section 8
They usually stay longer
Section 8 tenants are likely to stay for a longer time than private pay tenants, especially if they like the property and the management. As a result, the vacancy rate can be lower resulting in higher profits.
Another con to Section 8
It may prevent non-Section 8 renters from wanting to live there
Tenants who do not collect rental assistance may be turned off by the fact that you allow Section 8 tenants in your property. They may believe that you are a “slumlord,” that the property will be dirty or that the tenants will be disrespectful and noisy. In these situations, the only thing you can do is make sure you place quality tenants in your property and that you keep up with property maintenance. If non-Section 8 tenants see that your property is quiet and in pristine condition, they may change their beliefs about Section 8.
Should you renovate?
If a rental property is in a good location and well rehabbed, you can generally rent it out to a private pay tenant more quickly than you can obtain a Section 8 voucher. It’s often more profitable, therefore, to be more selective choosing investment properties and do a better job with the rehab, so you can more quickly rent to a private pay tenant. Fixing up, or flipping properties to Section 8 investors is generally a poor idea.
Mostly, because Section 8 real estate investors like to do their own renovations to be sure the property is up to standards. Also, you don’t usually want to renovate and re-sell the property to a retail buyer. This is because there are so little lending options for retail buyers in the projects. It makes more sense to get the property to closing, and then flip it to a new buyer.
Is investing in Section 8 housing worth it in the long run?
There are significant advantages to Section 8 housing that all real estate investors should consider. However, there are disadvantages and risks inherent in Section 8 investment properties.
If your property is in a good location and you do a great job with the rehab, you’ll probably make more money renting it to private individuals. But some of the best real estate investors take the negatives of Section 8 housing that warrant higher rents, and turn them into higher profits. If you decide to invest in Section 8 housing, make sure you understand the advantages and disadvantages, and have a solid plan to make a profit. While there are some challenges to renting your investment property to Section 8 tenants, the benefits are appealing to many landlords.
The Section 8 program has its benefits. You get free advertising, a range of potential tenants to choose from, and guaranteed rent every month. But you’ll have to do extra work for these privileges. Many landlords hop on the Section 8 bandwagon and love every minute of it, while others wouldn’t touch the program if you paid them to.
Deciding on whether to accept housing vouchers is really a matter of where your rental is, how popular it is, and your willingness to deal with the process and paperwork. For example, if you rent in a popular urban area with a high percentage of low to median income renters and don’t mind the extra work, then the Section 8 program may be the best thing for you. But if you rent in a suburban area with few low-income residents and really do not want the added stress, you’re probably better off leaving the program to someone else.