I am a newbie to Section 8. Been reading on it, but for some reason it is out of my comfort zone. I have 2 potential properties with the following: (numbers are same on both addresses)
Section 8. Renter in place. Paying $500 per month
Price on house is $26,000
20% down (5,200)
5% rate for 5 years.
I realize no great cash flow here, but looking at if it is a buy and hold for 5 years.
Thanks!
Stanfield, Since no one has replied yet, I’ll take a stab. I’m a newbie myself. So take what I say with a grain of salt. Crunching the numbers does not come out very well. If you can’t change the amounts or terms, I’d say wait for the next one. Don’t know where you are, but nationwide we are going to be flooded pretty shortly with TONS 'O DEALS. So you should be able to be a bit more picky real soon. Anyway according to the “50% rule” (If you don’t know what that is just do a search in this forum about it) your max debt service should be less than $250 anything over that could put you in a negative cash flow situation for the 5 years. In the setup you provided you could be something like $75 a month negative. So after 60 months thats about $4500. If you have the reserves fine, otherwise renegotiate until max debt service is below that number. The 50% rule is based on some pretty in depth analysis. On a case by case basis it could be higher or lower, But do you want to gamble that “your” case is the good one. FWIW, Section 8 can be higher repair cost. As a group, They tend to be more abusive on rentals. BTW, I think the rule presumes a properly rehabbed unit coming out of the gate. If the house “needs” things then costs could exceed 50%. Also two respected members on this forum say that you should not pay more than X time monthly rent. PropertyManager says 50X with less being better, Hooch says 30-35X max. Either way your numbers don’t work as they sit. Just know for most places there are deals coming down the pike every week/month, so just be patient.
Hope this Helps
AltCap
Is this a loan that’s fixed @ 5% for 5 yrs, but amortized over 10 or 15 yrs? Your rent is almost at 2% of purchase price. If the properties are in good shape and don’t require lots of repairs, these wouldn’t be that bad. The numbers you have are similar to what I’m seeing in my area. I’ve got a couple deals better than this, but your numbers seem pretty standard.
No Amortized at 5% for 5 years.
Remember that this is an investor owner financing. He wants his money back pretty fast.
Also, no credit check on my part. It is just the downpayment and go!
So again. This isn’t really a cash flow property, but more of a wealth building property.
Thanks for the section 8 tip.
But the key for you is to at least break even for those 5 years with no cash flow.
Gross Income: $500/mth = $6,000 annual
Expenses (50% rule of thumb) -3,000
NOI: $3,000
26k@5%/5yrs: -$5,887
Yearly Cash Flow $-2,887
You will lose $2,887 each year if you consider that you should be paid back what you put into it which investors factor in since it is not wise to pump money into a house just to make the math work.
Here it is not considering what you put into the place.
Gross Income: $500/mth = $6,000 annual
Expenses (50% rule of thumb) -3,000
NOI: $3,000
20,800k@5%/5yrs: -$4,710
Yearly Cash Flow $-1,710 Negative cash flow per year.
I would like to see you renegotiate that deal so you can at least break even.
So really need to extended the terms of the loan or lower the purchase price accordingly!
Thanks!
You’ve got it! :biggrin
is there a place on the reiclub.com website that discusses Section 8 in depth - I know that the program must vary from state to state and I will be looking into going to the local housing authority in my area to learn about the program. But I wondered if there was something on this forum where I could read through threads/questions re: Section 8 without repeating the same questions posted in the past.
You really just need to visit your local office and establish a rapport with them. Our office is very easy to work with so far. Others on here have horror stories. Your local office is going to have specific requirements and procedures so whatever I tell you works for me probably won’t work for you. Basically you let them know you have a property for rent and you’ll accept sect. 8. You’re probably going to have to have it inspected. I say probably because we just got a place listed with our local office and they haven’t looked at it yet. Then they’ll figure out what your house rates for an amount based on size/bed/bath/etc. We set up direct deposit for here. They make all the LLs on the program do that.
Don’t let THEM fully decide what you will rent it for because they will be more than willing to do so. With section 8 I always give them a higher amount than what I really want. I let them talk me down. It is their JOB to NEGOTIATE rent! They will be happy to give you virtually nothing.
I would stay away from crap like sct oucho unless it was multifamily and it was a commercial type building and the whole thing was sectioned out. Otherwise you could be asking for problems.
Even though it’s “guaranteed rent” - or a portion thereof - I’d love to stay away from Section 8 but in the area I am in (metro DC area), property is still very expensive and many deals fall in low-income housing areas where a sizable portion of people are on S-8 OR people that are not are 1) trying to get out of said area) or 2) wouldn’t live there to begin with.
can’t flip in this market unless you get it for free, basically, so I’m looking at what I can do with buy and hold properties.