Buying 4-plex with Section 8 tenants, waiting for eviction end?

[Filip M.]

Hi all,

I am looking on my first deal -- in Quincy, MA. It is a four-plex, 1x 4bd/1ba, 1x 2bd/1ba, 2x 1bd/1ba. It is with section 8 tenants, and I have already walked through the property. It seems to be in a good condition, just the roofs need repairs. Owner has to pay all utilities since it is not separately metered, though. One tenant will stay there whom I met, two units need to be rented to new section 8 tenants who were already screened by the old owner, and one unit i will need to live in for a year since I am doing FHA. Given the area, the housing departments supports very good above-market rents. The owner is about to retire so probably willing to negotiate.

He is having trouble getting rid of the property since he did a favor to a friend of his more than a year ago, and he moved in market rate tenants (friends of his friend, which he now really regrets) who stopped paying last year -- it is the 4bd apartment and it has been in eviction process since last June (2019). Given Covid and MA renters protection (e.g., not evicting in winter, now the moratorium), the non-paying tenants are still in the unit 14 months later. The owner says he had secured a judgment for eviction before Covid, which is now set for October 17.

I am thinking of putting an offer below asking contingent on the tenant eviction process completion.

Here are the property financials:

Rents: 

• 1bd/1ba $1,743/mo 
• 1bd/1ba $1,460/mo
• 4bd/1ba $3,400/mo
• 2bd/1ba $2,386/mo
• Total: $8,989/mo or $107,868/yr

Laundry: $2k/ year

2 story-garage on property, est. rent to a contractor $300/mo or $3,600/yr

Sum Total less 5%vacancy: $108,154/yr

Expenses:

Assume $5k/yr in repairs

Taxes, Insurance, Electrical, Heat Oil, Snow Removal, Water & Sewer

Total $37,726/yr

NOI: $70,428/yr

Debt service: $55k (FHA 3.5% down @ 3% interest rate + PMI)

Est. Cash Flow: $12-14K. If I live in one unit, my cost of living will be about $200/mo vs current $1,300)

Asking: $1M (I am going to offer, say, $940K)

There is a lot of love & hate for Section 8 from what I have seen here, but I think a high-price market like Boston (with section 8 wait list and suspended new applications given the size of current wait list) supports it well.

Would love to hear your feedback!