Section 8 rentals in Alabama?

[Brian Garlington]

What are the pros and cons of investing in Section 8 rentals in Alabama? Looking at the idea of expanding into this market. I've heard some good things about Tuscaloosa, Mobile, Montgomery and Birmingham. It is my understanding that Birmingham is in Shelby County and Jefferson County. I know having a good property manager that is skilled at placing and working with tenants with a housing choice voucher is crucial as well as obviously working with an investor friendly. 

Has anyone had success in these markets?

[Spencer Sutton]

Hey Brian,

We're here in Birmingham and actually manage a large number of Section 8 properties. The biggest factors in making it a successful investment is going to be the age and design of the house and then understanding your ongoing maintenance costs.

Age matters here in Birmingham and the older the home, the more renovation and ongoing maintenance will be required. Also, I mentioned design simply because if you get an odd house or a house with a White Elephant (a defect you cannot correct such as a very steep driveway, on a busy road, next to railroad tracks, funky layout, etc..), it's going to take you longer to rent the home and you might not keep that resident long term. 

Ongoing maintenance will be higher on most S8 houses because they're lived in more than a home with a working resident that is gone up to 8 hours a day.

Hope that helps - there is a Birmingham based podcast (the Birmingham real estate investor) we put out where you can hear from a lot of local investors on topics like this.

Spencer

[Brian Garlington]

Thanks Spencer

[Jason Cory]

I've done Section 8 for years. It's what I prefer actually. It is important that you find the right tenant not the first one that shows up. That's where every landlord and management company makes their mistake. These companies don't make money constantly showing the house. It cost them money actually. That's what leads to bad experiences for landlords. 

The older the house the better your carrying costs will be. I know this is different than a previous comment so let me explain. If the rehab was done the right way (I stress done the right way) your maintenance request should be minimal. Older houses were built a lot better than houses even 50 years ago. When you go in a house look at the door frame of a bedroom for example. If the door frame is wider than what you typically see, it usually means you have a 2x6 cedar stud not the soft pine that has been used for the last 50 years. The old timers built these houses to last. That's why they are still standing. From the studs to the hardwoods, it's all old growth wood, i.e., strong. You have to actually put in the work to destroy these houses. The newer houses don't typically have real hardwoods. You're constantly changing the flooring. You can't sand prefab hardwoods. 

When you invest you have to essentially take the ability of the tenant to destroy the bones of the house away from them. That comes with old growth wood, brick, etc. Management companies don't survive by only charging 10% of rent. They keep their doors open by maintenance calls and tenant turnover rehabs. You have to essentially take away the ability of a management company to charge you for these items as well. If you do these 2 things, your expected return will be what you expect or at least close to it. The forums and comments on BP where you see people not making money come directly from these 2 things. 

[Brian Garlington]

Thank You Jason! You are on the money with that analysis. I definitely prefer Section 8 and when screened correctly they tend to be the most well mannered, grateful tenants. It's a source of disappointment with one of my PMs now in that I made it explicitly clear ...that I only want Section 8 tenants in my properties and the last three tenants they placed were "cash" tenants. As for the bones of the property being a big key to mitigating maintenance costs, etc.......that is what my experience has been as well. It looks to me like there are not as many multifamily properties in your part of the state, but there are plenty of SFR's? Generally speaking are folks able to get the 1% rule or 2% rule even in an SFR....again, I'm strictly talking about SFRs with Section 8 tenants in them.