Real Estate 013: Pros and Cons of Section 8 Rentals

When placing a tenant in your newly rehabbed or purchased rental property, finding a suitable candidate may often depend on various factors such as neighborhood, schools, type of home (single family, duplex, bedroom/bath count), and time of year (winter vs spring). The US government has a housing assistance program called “Section 8” that is funded by the Federal government but administered by the local authorities. This may present an opportunity for real estate investors to tap into a different kind of pool of tenants. Potential candidates for Section 8 assistance must submit an application and become accepted into the program. Typically these spots are reserved for low income families, disabled persons, and/or senior citizens. As a landlord, you can legally choose to participate or not participate in the Section 8 program. As I have two Section 8 properties, I wanted to share with you my experience with the program and dispel some myths:

Advantages of Section 8

1. Tenant Pool

By choosing to accept Section 8 applicants, you are “widening the net” to include both market rate tenants and Section 8 applicants with vouchers. This will allow you to be more selective in your tenant placement and technically have more candidates that meet your pre-defined criteria.

2. Guaranteed Monthly Income & Higher Rent Rates

One of my favorite parts about participating in the Section 8 program is that a portion of the rents (70-80% average for my rentals) is being paid on the 1st of each month by the Government. As long as the tenants do not lose their voucher or you, as the landlord, do not fail multiple Section 8 inspections, you should be receiving these checks via ACH like clockwork.

Further, as the Government determines the appropriate rent range in a given market for the type of house (3 bedroom 1 bath $750-850 vs 4 bedroom 2 bath $900-1,050), the landlord is able to select the higher rate of the range as long as the tenant has the voucher to support the rent (3 bedroom vouchers vs 4 bedroom vouchers).

3. Lower Vacancy

Tenant turnover is one of the single biggest expense an investor faces. When your property sits vacant, it generates no income, but there are many fixed expenses such as the mortgage, taxes, and other fees that occur monthly. Based on conversations with other investors who have done Section 8 for 10+ years, if the Section 8 tenant is happy with the property and landlord, they will stay put for a longer time than their market rent counterparts who often move more frequently for their children’s schooling, new job opportunities, and to find a larger home/purchase their residence.

Disadvantages of Section 8

1. Section 8 Inspections

On an annual basis, you are required to undergo a Section 8 inspection with the housing authority’s designee. This may cause you to make some rehabs sooner than later if the inspector feels that updates need be made immediately. There is not cost involved for the landlord (other than your property manager potentially charging you for their time to meet the inspection and perform the updates).

My take: I personally feel that having an annual inspection at no charge is a benefit for real estate investors as it forces me to take a look at my property and ensure everything is up to code, there is an liability exposure, and preventive maintenance items are taken care of. As the inspector is not looking to make cosmetic improvements, but make sure the property is functionally sound, it serves as an additional line of defense.

2. Wider selection, but “rougher” tenants?

Generally speaking, it appears to be widely accepted by real estate investors that Section 8 tenants are rougher on the homes and cause more wear and tear on their properties. This idea stems from the fact that since they are receiving assistance, and not pouring all of their own hard earned cash into the rent, they have less skin in the game to care about what happens to the property.

My take: I think that regardless of market tenant, or Section 8, you still need to do your due diligence and be thorough in your tenant selection process. Contrarily, as tenants may lose their voucher if they cause excess damage than normal wear and tear, and as Government funding gets tighter, Section 8 tenants will think twice before “trashing a property” that they live in. I’ve had B class market rate tenants trash a unit, and also had C class Section 8 tenants who were very clean and left my property in great condition.

3. Dealing w/ a Government Agency

As this is a Government program, you will have to work with local authorities when issues arise and that may mean time lost. Some counties are notorious for not responding to an email for weeks and taking up to two or three months to setup a new tenant in the system for payout. However, all strategies have their pros and cons, risk and rewards. As for Section 8, after it has been initially setup, it has been on autopilot, and I have received the Government’s ACH and tenants money order every month without issues along with an addition $100-200 what I would have received with a market rent rate tenant.

In conclusion, I think there are different strokes for different folks and some may not see the benefit of working with Section 8 tenants. I personally feel like in the markets which I invest in have a great Section 8 tenant pool, with above market rents that will allow me to cash flow a minimum 5% higher with little to no additional risk. Furthermore, on a personal level, it gives me a sense of pride that I am providing a roof over the heads of those who need it most: senior citizens, disabled persons, and/or low-income families.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Real Estate 012: 4 traits of successful real estate investors

For real estate investors who have recently taken the plunge and picked up rental properties, its very easy to be excited about this new venture and idea of financial freedom. My personal method of achieving success in anything I do is first seek out mentors and experienced investors who may have walked down a similar path, had failures, but overcame them to reach their goals. This way, I shorten the distance between a new and experienced real estate investor and also can save myself from costly mistakes. Below are 4 traits of successful real estate investors that I have met throughout my journey:

1. Continuous education

Knowledge is a powerful tool. Brandon Turner, Host of the BiggerPockets podcast frequently says, “you need multiple tools in your toolbelt to meet the needs of different problems that you will encounter as a real estate investor. To an investor who only has a hammer, every problem will appear to be a nail.” You will often hear from other investors that real estate is simply about solving other people’s problems. Whether it be buying a rental from a seller going through personal life issues, financial struggles, or a wholesaler who is looking to unload/assign their rights to a property, or an investor with a great deal but needs capital or a partner to walk them through the process. If you continue to educate yourself in this field you can become more creative with deals (e.g. seller financing, subject-to, land contracts, BRRRR, commercial financing, partnerships, syndication). Do your due diligence and become your own best adviser.

2. Maintain control of your investments

One thing that I really appreciate about real estate is that it is tangible, easy to understand, and you have control of your decisions. Prior to investing in real estate, I invested in stocks and bonds for over 7 years, and although I knew how to read financial statements, proformas, and general fee structure. I never once remember who my portfolio manager was, how exactly they are being paid and incentivized to take care of my hard earned cash. Nor did I understand the detail behind market fundamentals that drove a stock price up and down. As a direct real estate investor, I get to control who I work with in terms of acquisitions (e.g brokers, wholesalers, agents), rehabs (e.g. contractors), property managers, and lenders and the buck stops with me. These people have been coined the “core 4” by investor David Greene (check out his book “Long distance real estate investing” for more valuable information on investing out of state). Once I have my core 4 in place, you have more control in terms of running your numbers to fit your cash on cash criteria, as well as getting creative to create even more equity or cash flow (e.g. adding an extra bedroom or bath, going section 8 in certain markets, etc.)

3. Invest with the end in mind

A prudent investor will set goals and stick to his/her predefined criteria. Of course, you are free to update your criteria as markets change and you gain more knowledge into the subject matter at hand. However, do not get “trigger happy” and fudge the numbers to take down a deal. If you start compromising (e.g. 14% CoC → 9% CoC as this house is “well rehabbed”), it will become a slippery slope and you may find yourself holding a bag of loser rental properties that are difficult to unload in a downward market. Real estate is a long game, so think of your exit strategies whether it be 1031 exchanging into bigger, nicer neighborhoods, getting into multifamily apartments or private lending, you want to understand what you are purchasing instead of going for quantity in the short run. In other words, be a prudent, long-term value investor, never a get-rich-quick gambler, speculator, or flipper. Invest only in properties that make good financial sense the day you buy them.

4. Use leverage to create wealth

Many successful investors will tell you the one word that build them their wealth: leverage. Leverage can come in many forms such as other people’s money (e.g. banks, private lenders, hard money lenders), other people’s time (e.g. wholesalers, brokers, contractors), and lastly, other people’s knowledge (e.g. partners, mentors). You may run into student’s of Dave Ramsey’s teachings who proclaim debt is bad and you should make purchases all cash. However, this advice, while safe, is not going to get you to financial freedom anytime soon. There is a reason why Dave’s teachings focus on saving your first $1K, creating reserves, debt snowball methods, and budgeting to create a better financial future. I agree the aforementioned strategies are important if you are heavily drowning in consumer debt. The debt I am referring to relates to good debt, which is used to create assets that positively cash flow. There is a difference between a person who has $5k on their credit card from purchasing clothing, jewelry, and the latest electronics and pay a minimum balance with 22.58% interest vs an investor who obtains a 80K loan at 6% interest amortized of 30 years for a rental property in the midwest that cash flows $350/month after all expenses and debt payment.

I personally have debt on my personal residence as well as my 10 other rental properties. However, my 10 rental properties all cash flow positive a minimum of $200/unit and my primary residence was used to obtain a HELOC (home equity line of credit) that creates even more cash flow through the use of leverage. By simply using leverage, I have been able to add $100K to my net worth during the past year and this is all through use of other people’s time, money, and knowledge. Let other people’s money work for you, reduce your risk, and make you wealthy.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Book Review 005: Max Out your life - Ed Mylett

Max Out Your Life

Max out your life by Ed Mylett is a short, no-nonsense, step-by-step strategy book aimed to help you #MAXOUT Your Life and become an elite performer. Ed is one of America’s top 50 wealthiest under the age of 50, and is acknowledged for building one of the largest financial organizations in America today. Ed has been sought after, and privately mentored many of the top professional athletes, entertainers and business executives in the world for over two decades helping them to perform at #MAXOUT levels of their lives.

Think about this, the average person lives for about 78 years. Of those years, 28 is spent sleeping, 15 years working and commuting, 7 years spent worrying about life, many years on mundane activities, eating, getting dressed, surfing the internet, etc. , which leaves you with approximately 8 years to life your life. If you were told you had 8 years to life your life, how would that change your perspective, would that ignite urgency in your day to day habits and allow you to take more action and less time thinking?

Ed shares this example to depict how each of us do not really know exactly how much time will be given to us. You often hear of people who are older speak of regrets, and the opportunities missed, and chances not taken. Whether this be a dream audition, interviewing for a new job position, or asking out someone on a date. You hear less from people who gave it their all trying out something that eventually may have not worked out, as they will have no regrets, and will have learned from their actions.

In his book, Ed shares his strategies for the following:

1. Creating Strong Habits and Rituals

Ed shares how we as humans, are what we do, and not who we say we are. Habits and rituals allow us to stay motivated when the going gets tough. When we are weak, tired, and under pressure, our mind and body goes into habit mode. That is why it is so important to create habits that serve us and keep us on track even when we aren’t “feeling it”. Some of Ed’s daily morning rituals include waking up before sun rise, taking a cold shower (waking up the body), quick breathing and stretching exercises, meditation, review of goals, eating well, and working out. Ed reminds us that the two most important questions you must ask yourself are 1) why are you doing the things that you do and 2) how you will reach your goals

2. What is the RAS & How to Program

The average person has 75,000 thoughts everyday and 91% are exactly the same as the day before. This is why it isn't hard to see why people plateau and are in the same situation that they were in regards to their relationships, career, finances, fitness, etc. Do you have stop to think about your thoughts? Your thoughts are like magnets and they attract/filter the world you see. There is a bundle of our nerves at our brainstem called the Reticular Activating System (RAS) and it acts as the gatekeeper, filtering out irrelevant information and allowing only relevant information to enter our awareness. Your RAS takes what you focus on and creates a filter for it. Then it takes all the data that is received through your brain and unconsciously filters only pertinent information to you. Have you ever thought about making a purchase (e.g. car, clothing, electronics), and afterwards, you keep seeing those items again and again? They have been there all along, but your RAS is now creating a filter allowing it to enter your awareness. By understanding this and using it in a positive way, you will be able to take control of your life by controlling your thoughts and believing that the outcomes you desire will happen.

3. Raising and Shifting Your Identity

Ed explains how our self-confidence, or what we believe we are worth, equals our identity. Our identity is how we see ourselves, and we can never succeed beyond our identity. So the most powerful force in the human spirit is to live in connection with the ideas and beliefs that we hold true. Identity is like a thermostat with a pre-set temperature. As you are the one who controls the temperature, this is an internal game, not external and how you react to those change to temperatures. As you are in control, regardless of the external elements that may temporarily drop the temperature, you will find a way to bring it back up. You may have heard the term, you are the average of the 5 people around you. As such, the people you associate yourself with may influence what temperature you decide to set your thermostat. Know that you can’t skip the work and be ready to roll up your sleeves and get your clothes dirty as you strive towards success.

4. Goal Setting Strategies

Ed shares how we should set goals as if we already have possession. Be very specific with your goals and remember the three main ingredients: specificity, accountability, and visualization. Being specific is important as saying “I want to be rich” is vague and not a real goal. By identifying the amount of wealth you want, when you will achieve it, and what it will look like, creates an actual target you can it. The clearer it is, the more likely that your mind, body, and soul, will go to work on creating those things in your life. The second part is accountability. There is a reason why people share their goals with people who hold you accountable. When you become distracted by happenings in your life, having another person outside of those distractions can help connect you back to those goals. Lastly, visualization of your goals is wildly important. By focusing on these goals repeatedly in your mind, your brain will become more familiar with it to help identify the paths, people, and tasks needed to achieve them. Your “why” is seventy times more powerful than your “how”.

5. Developing Your Will to Win

As you strive towards your goals, you want to ask yourself if you can be bought. Most people allow their will to win to have a set price. With enough rejection, pain, and setbacks, people will relent and sell their way to win. Most people are not willing to put in the extra work to better themselves. They fall into the pattern of working for a job they don’t like for just enough money to pay for a handful of bills and a modest lifestyle (A salary is nothing but a bribe a business owner has paid someone to work on his/her dream instead of their own). If you have truly committed to your dreams, there is no obstacle or price to high. Your will to win is not for sale. As you progress and achieve milestones, do not allow that progress to cloud the vision to your ultimate goal. Small wins create the illusion that you are successful and you may take the foot of the gas pedal. Eventually, you may start telling yourself, “this is good enough” and compromise. You settle for less than your goals and dreams. This is why your identity is important and making sure you don't re-set the thermostat to settle for short term success and accolades.

Favorite Book Quote: “The average person has 75,000 thoughts every day, and 91% are exactly the same as the day before. It isn't hard to see why so many people stay in the exact spot in life as it relates to relationships, careers, finance, fitness, etc. Do you ever think about what you think about? Thoughts are like magnets; they draw to you that which you think about regularly. They also create the filters you see the world through. If you want real change, you must first change what you are thinking about.”

Become the ultimate and best version of you. The YOU that you were BORN TO BE.

Good Luck!

Click below to get your own copy. See our affiliate disclosure here

Max Out Your Life