Use HCVP (Sec. 8) Sub Market Rents to analyze deals (DC area)

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Use HCVP (Sec. 8) Sub Market Rents to analyze deals (DC area)

Antwoine McCoyPro Member
Real Estate Consultant · Washington, DC · Member since 2017 · 15 posts · 16 votes

This post is for my DC area (DC, PG, MoCo, Alexandria, etc.) investors and interested investors. I have been using the HCVP Small Area Fair Market Rents as a basis to running my numbers when analyzing possible investment property deals. In short, for the expense side I identify my assumptions outside of Principle, Interest, Taxes & Insurance (PITI) to determine the bills or payments due. For the revenue, I basically use the HCVP Payment standards, specifically the small area fair market rents to determine the potential rent revenues for a property. I use a multiple to either add or subtract the established rent amounts based on the neighborhood, specifics and circumstances of the property I am analyzing. For instance, in the Old City II neighborhood of DC I know that below are the rents for each unit bedroom type:

Now depending on the property I either add or subtract an identified multiple to get a gauge for what rents potentially are in the community.  For example here is a quick analysis of a property for sale in the neighborhood using the rents above as a gauge.

https://www.realtor.com/reales...

The property is a 3BDR/2.5BA home selling for $827K and I am assuming that the prospective tenant pays all utilities.  Below is the snapshot of my monthly rent analysis that tells me the property isn't cash flow sustainable using a 20% down mortgage at 3.5% investor interest rate.  I confirmed the current Real Estate taxes and Maintenance and Replacement Reserves are 5% of the rent.  I have 0% for vacancy rate due to the fact that it is a single family and I have to assume the my HCVP tenant will stay for at least the 1st year (I have had shorter but for the purpose of the convo...).  Basically the property would lose about $408 per month.  Below is my monthly snapshot and I welcome peoples thoughts on the perspective revenue (and expense) numbers they use to analyze a deal.  I hope this helps someone out there and at least initiates dialogue.  

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
6y
Originally posted by @James Mc Ree:

You may be in too high of a price range for a Section 8 tenancy to work for you. Keep in mind that Section 8 FMRs are not what Section 8 automatically pays. They pay local market rents, usually up to the FMR. I've seen it as more of a ceiling than a floor, but it is really a transition point at which the tenant starts to pay more of their own rent. That's difficult for tenants with limited incomes, the essential qualification for Section 8.

Vacancy is a long term projection. Model your investment for your intended hold period and apply vacancy over time.

Your approach is generally on track. Consider getting out of percentages for costs and use actual dollars. Billing yourself 5% for replacement reserves on an $800,000 property is costing you $40,000/yr. You won't need to replace the whole property in 20 years! You may need to replace the water heater, appliances, etc over 10-20 years; and other components. Most of the big components will probably outlast you (foundation, walls, electrical, plumbing, windows, etc).

 Not in DC. In fact, that particular neighborhood the section 8 rents far exceed fair market value, as they do in some other neighborhoods. That particular neighborhood is one that many section 8 investors target for that particular reason. 

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  • James Mc Ree
    Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 936 votes
    6y

    You may be in too high of a price range for a Section 8 tenancy to work for you. Keep in mind that Section 8 FMRs are not what Section 8 automatically pays. They pay local market rents, usually up to the FMR. I've seen it as more of a ceiling than a floor, but it is really a transition point at which the tenant starts to pay more of their own rent. That's difficult for tenants with limited incomes, the essential qualification for Section 8.

    Vacancy is a long term projection. Model your investment for your intended hold period and apply vacancy over time.

    Your approach is generally on track. Consider getting out of percentages for costs and use actual dollars. Billing yourself 5% for replacement reserves on an $800,000 property is costing you $40,000/yr. You won't need to replace the whole property in 20 years! You may need to replace the water heater, appliances, etc over 10-20 years; and other components. Most of the big components will probably outlast you (foundation, walls, electrical, plumbing, windows, etc).

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    6y
    Originally posted by @James Mc Ree:

    You may be in too high of a price range for a Section 8 tenancy to work for you. Keep in mind that Section 8 FMRs are not what Section 8 automatically pays. They pay local market rents, usually up to the FMR. I've seen it as more of a ceiling than a floor, but it is really a transition point at which the tenant starts to pay more of their own rent. That's difficult for tenants with limited incomes, the essential qualification for Section 8.

    Vacancy is a long term projection. Model your investment for your intended hold period and apply vacancy over time.

    Your approach is generally on track. Consider getting out of percentages for costs and use actual dollars. Billing yourself 5% for replacement reserves on an $800,000 property is costing you $40,000/yr. You won't need to replace the whole property in 20 years! You may need to replace the water heater, appliances, etc over 10-20 years; and other components. Most of the big components will probably outlast you (foundation, walls, electrical, plumbing, windows, etc).

     Not in DC. In fact, that particular neighborhood the section 8 rents far exceed fair market value, as they do in some other neighborhoods. That particular neighborhood is one that many section 8 investors target for that particular reason. 

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    2Reply
  • Eduardo Conde
    New to Real Estate · Alexandria, VA · Member since 2018 · 9 posts · 1 vote
    6y

    @Antwoine McCoy, as mentioned above, I think your maintenance and reserves need to be calculated using a yearly formula. So you may want to take the values column E and divide the percentage by 12 (unless you want to have your reserves build up fast. 

    Is your property management going to charge you a fixed percentage or 1 month of rent? 1/12 would be 8.333333%. You might be better off entering =1/12 and have excel display as a percentage if needed. You are off by $150 a month, if you use flat 8%

    Because you are including capex reserves, you may want to do a 5-year projection for profitability analysis.

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  • Antwoine McCoyPro Member
    OP
    Real Estate Consultant · Washington, DC · Member since 2017 · 15 posts · 16 votes
    6y

    @James Mc Ree I actually worked at the DC Housing Authority for 10 years and still perform consulting for HUD and focus on Affordable Housing financing initiatives. @Russell Brazil is correct, in DC proper the payment standards are based on the 60 neighborhood tract submarkets, if you know what submarket your property is in then you, in essence, know what it will rent for. For larger metro areas HUD has moved to a submarket FMR system that is driven by either neighborhoods or zip codes, in DC it is Neighborhoods and PG County it is zip codes. For example Old City I, Old City II, 16th Street Heights, Massachusetts Heights are just a few of the neighborhoods that pay 120% of the HUD FMR which is basically the chart I listed above. IN PG County the driver is zip codes and I know that in the 20720 zip code the max rent for a 4 BDR is $3,950 (PG is a little different than DC on the way final rents are approved). For those neighborhoods where the HCVP rent may be higher than the market rent I collect and if I am not going after a HCVP tenant, then I will discount the rents using a factor of 5%, 10% or 20% in my analysis. If the neighborhood gets higher market rate rents than HCVP then I will increase it by those same ratios. FOr example, I have a 2 unit in Old CIty II and one of the units is leased via HCVP and the listed paymnt standards was $3,113 (all utilities) and that was the number I advertised and that is the rent I received. @Eduardo Conde as for the expenses, I am conservative and prefer to analyze it using percentages upon initial purchase. To me if the deal looks good in Year 1 it should be good in Year 3, after that I adjust according to personal and market conditions. I self manage my units via my Real Estate consulting LLC and charge myself 5% of rent collected.

    2Reply
  • Eduardo Conde
    New to Real Estate · Alexandria, VA · Member since 2018 · 9 posts · 1 vote
    6y

    @Antwoine McCoy thank you so much for sharing your insights about Sec 8 in DC. This is really helpful.

    0Reply
  • Antwoine McCoyPro Member
    OP
    Real Estate Consultant · Washington, DC · Member since 2017 · 15 posts · 16 votes
    6y

    @Eduardo Conde reached out and asked for more information and since I had to follow-up I figured I would share with everyone on this thread.  Below is the HCVP (Section 8) Small Area Fair Market Rents (SMFMR) for Baltimore City for FY2021.   

    1Reply
  • Eduardo Conde
    New to Real Estate · Alexandria, VA · Member since 2018 · 9 posts · 1 vote
    6y

    Thank you so much for sharing @Antwoine McCoy! This is so helpful. 

    I'm bookmarking huduser.gov for future reference. Thank you so much for helping me out. 

    https://www.huduser.gov/portal...

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