6 unit section 8. what to know

[Mason B.]

There is a 6 unit multi-family building in Chicago's Douglas Park (subpar) neighborhood that advertises a "14%" cap rate as a "guaranteed subsidy." Aka section 8. It's also on the MLS. The building is $380k. Fully occupied. Annual rent collection is 55k, or around 4400 per month. The mortgage would be around $2k... too good to be true? There have been some smaller Improvements (furnaces, porch, Plumbing, Fence) but still room to value add.

Is section 8 that bad? If the income is “guaranteed” isn’t is less risky? Doesn’t it attract longer term tenants? Can’t i still pick and choose future tenants? How do you add value if you cant raise rent if the rent is based on averages? 

Aka, where can i learn EVERYTHING I’d need to know? 

[Crystal Smith]

Originally posted by @Mason B.:

There is a 6 unit multi-family building in Chicago's Douglas Park (subpar) neighborhood that advertises a "14%" cap rate as a "guaranteed subsidy." Aka section 8. It's also on the MLS. The building is $380k. Fully occupied. Annual rent collection is 55k, or around 4400 per month. The mortgage would be around $2k... too good to be true? There have been some smaller Improvements (furnaces, porch, Plumbing, Fence) but still room to value add.

Is section 8 that bad? - No.

If the income is “guaranteed” isn’t is less risky? The income is guaranteed as long as you maintain the building to the standards required by Section 8 & your tenants comply with the lease.

Doesn’t it attract longer term tenants? - Section 8 doesn't attract long term tenants, good landlords with quality products attract long term tenants. 

Can’t i still pick and choose future tenants? - Once a unit is vacant you can pick and choose tenant to fill that vacancy

How do you add value if you cant raise rent if the rent is based on averages? - I'm not sure why you believe you can't raise rent. CHA cannot dictate what rent you charge. CHA has established guidelines on what rent they will pay based on the location of a property. A tenant may have to pay the difference between what you charge and what CHA will pay.  

Aka, where can i learn EVERYTHING I’d need to know? 

• Review the Section 8 Housing Quality Standards. It's not just about the voucher; It's about the building & surrounding area. Voucher holders often have to move because the building and/or area around the building no longer meets Section 8 standards. Review the standards so that when you go look at the building you know what to look for & what you may have to fix or ask the seller to fix if you purchase the building. Here's an overview:  
• 1. Sanitary Facilities
  
  • The bathroom must be located in a private room within the residence.
  • The bathroom must contain a flushing toilet, a shower or tub and a sink.
  • The shower or tub and the sink must have functioning hot and cold water.
    
  2. Food Preparation and Refuse Disposal
  
  • The unit must have an oven and a stove or a range. A microwave oven can be substituted.
  • The unit must have a kitchen sink with hot and cold water and a proper sink trap.
    
  3. Space and Security
  
  • The unit must have a living room, a kitchen, and a bathroom.
  • Any doors or windows that are accessible from the outside must be able to be locked.
    
  4. Thermal Environment
  
  • The heating system must safely provide heat to each room. The local PHA will determine what temperature is considered adequate during each month of the year.
  • The cooling system must safely cool each room.
    
  5. Illumination and Electricity
  
  • The living room and each bedroom must have at least one window.
  • The kitchen must have at least one working outlet.
  • The living room and each bedroom must each have at least two working outlets.
    
  6. Structure and Materials
  
  • All ceilings, walls, and floors must not show any signs of bulging or buckling and must not contain large holes.
  • The roof must be structurally sound.
  • Handrails are required when there are four or more steps.
    
  7. Interior Air Quality
  
  • Bathrooms must have a window that can be opened or must have other adequate ventilation.
  • The unit must be free from dangerous pollutants, such as carbon monoxide.
    
  8. Water Supply
  
  • The water supply must be free from contamination.
  • Plumbing pipes and fixtures must be free from leaks.
    
  9. Lead-Based Paint
  
  • Units constructed before 1978 must be free from lead-based paint hazards.
  • There must be no chipping, cracking or peeling paint or other hazards.
    
  10. Access
  
  • There must be two ways to exit the unit. A fire escape is considered an alternate means of exit.
  • The fire escape or other emergency exit cannot be blocked.
    
  11. Site and Neighborhood
  
  • There must not be excessive noise or trash accumulation in the neighborhood.
  • There must not be an abnormal amount of air pollution.
    
  12. Sanitary Conditions
  
  • There must not be a rodent or vermin infestation
    
  13. Smoke Detectors
  
  • There must be at least one working smoke detector on each level of the unit, including the basement. Local codes may have stricter requirements, such as placing a smoke detector outside of each bedroom.
  • All smoke detectors must be operational.
    
• If you're not scared off after you see the building & you get it under contract then use your attorney review & inspection period & request rent role, deposits, leases, vouchers.....  Also, ask for copies of the original tenant applications. (If it's a long term tenant often they will not have the original application)  A seller should be prepared to turn all of this over within 24 hours of your request. You want to see the CHA rents going straight into a bank account. You also want evidence that the tenant is paying their portion of the rent. (By the way- This applies to all deals whether it's Section 8 or not) Ask your inspector to document anything that may be non-compliant with Section 8 housing quality standards.