Advice for Financing a Low-Cost, High-Rent Property

[Justin Mason]

Hello BiggerPockets Community,

I've recently acquired a property through an auction, situated in a C area. My plan is to hold onto it as a rental property, targeting Section 8 tenants, as the rental income is quite attractive at nearly $1,500 per month.

Here's the challenge: The property's purchase price and labor is below $40,000, and I'm uncertain about my ability to secure a traditional mortgage for a property at this price point. I'm exploring alternative financing options and would greatly appreciate insights or experiences in similar scenarios.

Key Points:

• Property Location: Cahokia Heights
• Purchase Price: $17,000
• Rental Income: Approximately $1,500/month via Section 8
• Condition of Property: Updated plumbing, roof is in good shape, needs AC unit, paint, flooring and cabinets and counter top

I'm considering reaching out to private lenders but would like to gather opinions on:

1. Feasibility of securing a mortgage for a low-cost property.
2. Attractiveness of this deal to private lenders.
3. Any creative financing strategies that could be applicable here.
4. Legal and tax implications I should be aware of.
5. Potential risks and how to mitigate them effectively.

Any advice, suggestions, or contacts in the private lending space would be immensely helpful. Also, if you've had experience with Section 8 rentals in similar price brackets, I'd love to hear about your journey.

Thank you in advance for your time and insights!

[Travis Biziorek]

Hey Justin, there are a LOT of red flags here. And honestly, I think you're getting ahead of yourself.

An all in price of under $40,000 and renting for $1,500?! I've seen a lot of crazy stuff, but that may just take the cake. 

I don't think it happens even if you are seeing Section 8 FMR's that support that number. FMR's are not guarantees and they are going to base the actual rent on the market rents. Is the market rent actually $1,500 in that area? I'll say it's most definitely not.

Second, you're planning on putting AC in this home? That seems wildly out of touch with what this area probably demands in terms of amenities. You'll probably lose the AC unit to theft.

You're correct you will not be able to get conventional financing for this property today. I see lenders going down to $50,000 loans today which comes out to an ARV of about $67,000. Aim for a $75,000 ARV to play it "safe".

As far as private money you would probably have to find someone local that knows the area and wouldn't have a problem taking ownership of a property like this if things go sideways.

My guess is you'll have a tough time finding an individual that wants to loan on it.