What about buying highly depreciated SFR and renting them to Section 8? Thoughts?

Question

Hi,

So I ran across this portfolio, which is kind of interesting because I've been thinking of doing something similar.  Buying several properties that are highly depreciated and renting them to Section 8 tenants.  This guy is selling his portfolio:

http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=18328677&SRID=3730780398&StepID=101&LinkCode=20280

Obvious problems are making sure none of the properties are in high crime areas.  Other problems are quality of tenants.

Do you think these kind of profits are realistic?

Patrick L. · Answer

People always seem to think they can buy the crappiest houses in the worst neighborhoods and just assume that they can always get a Section 8 tenant.  Section 8 tenants have vouchers based on the number of bedrooms they are eligible for and they can use it on any property that will accept it.  Most are looking for high end finishes around here because their voucher will pay up to fair market rent for the property, so they can rent an $1,100 3/2 if it's determined to be reasonable rent for the area.  The landlords in my area compete for section 8 tenants and let them move in for $0 security deposit and give them questionable gift card bonuses for move in and renewals (which I believe violate the terms of the section 8 agreement).

The people that will settle for crappy houses in a crappy area are those with lengthy criminal and eviction records that can't get approved for nicer houses.

Brant Richardson · Answer

"low lifes"  is a little harsh.  If I got hit by a car and my back and legs were crushed I could end up section 8.  Are you saying they are picky or can't find anywhere else to rent and cant be picky?

From Wikipedia

David Krulac · Answer

@Ron Steckly

I don't get the "highly depreciated" part?

If you buy a property and the former owner/seller has even fully depreciated the property, you get to start all over again and begin depreciation again.  how much or how little the seller depreciated the properties has nothing to do with you if you buy the property.

Account Closed · Answer

Consider the reasons for depreciation. Job layoffs in the area, foreclosures, run down properties, crime, etc. And what could happen to the neighborhood years down the road - if you plan on holding those rental for a long time or at least until you've made enough profits to cover what you paid for on the properties.

Section 8 tenants have the options to choose where they want to live as long as they can find housing meeting the section 8's criteria. Will your neighborhood be attractive to tenants for years?

In addition, consider the maintaince cost and any repairs you have to do to make any of the properties up to code. Will what you spend on them be worth what you get in return...

If the worst case scenairo is tolerable to you, you might feel more comfortable moving forward.

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Ron Steckly · Answer

Hi John,

First, I don't own these houses..so they aren't 'my crappy' houses.  Given that they are already rented to section 8 tenants, my assumption was that if only criminals and deadbeats will rent them, that meant that section 8 tenants are criminals and deadbeats--given that they are already rented.

John Rooster · Answer

No one said that. Patrick L said section 8 people are not going to rent your crappy houses because they have other options. Thus..... only criminals and deadbeats will rent your crappy houses, because they don't have any other options.

Ron Steckly · Answer

I don't believe people with criminal records are allowed to do section 8.  I think there is an article about that somewhere...

John Rooster · Answer

You are misreading what I wrote. Patrick L said essentially the same thing I did, in a more detailed manner. Perhaps reading his post will clear things up.

John Rooster · Answer

You are working under the false premise that Sec 8 tenants are not picky. The reality is quite the opposite.  If I understand the condition properly, you will end up renting to bad credit low lifes that can't find anywhere else to rent. Might still be a good deal at the price, but it will be very time intensive

David Krulac · Answer

@Ron Steckly

If you can buy for less than market and get a great return on your investment, and have management in place if you are not managing then they purchase should be considered.

Section 8 provides a nice steady income.

However, in some areas that I'm familiar with that are like you describe there are potential 2 problems.  First is there may be little to no price appreciation in the future for the properties.  You could end up owning for 10 years and selling for the same that you bought.  And secondly, your point that its hard sometimes to sell this low end properties that have no appreciation but great cash flow.  no flippers will buy them, no owner occupants will buy them and the only potential buyer is an investor who understands the value of cash flow and foregoing appreciation.

What about buying highly depreciated SFR and renting them to Section 8? Thoughts?

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