Our founder, Frank Cava, was recently a guest on the Get Rich Education Podcast with Keith Weinhold where they discussed the rising interest in “section 8” properties and the benefits and costs of getting paid a permanent government housing subsidiary.
What is “Section 8?”
So to begin, what is “Section 8?” It’s the primary federal government program that subsidizes three groups: low income, elderly, and disabled. It’s long-term government paid housing, regardless of how the economy is doing. It’s run by the Department of Housing and Urban Development.
The reason investors are becoming more interested in this program is because it’s guaranteed rent month to month which removes a measure of uncertainty for you as the investor. We’ve been dialed into suiting properties and tenants through section 8 for a long time, so let’s look at some of the pros and cons of owning section 8 property.
Quality of Tenants
The biggest concern we get from investors is in regard to the quality of tenants you get through section 8.
This is probably the biggest con of going through section 8 because yes, there is a chance your place could get trashed. We’ve had a few horror stories, but it’s been a small percentage compared to the 500-1,000 units we have through section 8. However, it’s important to remember that no two section 8 applicants are the same.
Tenant Screening is Vital
This is why it’s so important to screen each applicant that comes through by looking at their rental history, state of current residence, etc. When someone applies for government housing, they already have to go through a screening process that includes a criminal background check, drug testing, verification of income, etc.
If they pass this screening, they get a voucher (what we like to call a golden ticket. This will be important later).
How to Create a Sense of Pride in Rentorship
While you may get a bad tenant every once in a while, there are a lot of great people who come through the system. At Cava Companies, we like to create a sense of pride in rentorship through our properties.
We fix up the homes to make them safe and affordable for our tenants. Usually when it comes to government housing, the bar is pretty low. We want our homes to exceed this standard to attract good tenants and create a place where tenants actually want to take care of the property.
Maintaining a Voucher is Key
There will be situations that go wrong though. For example, a tenant may bring in their nephew to live with them and he might trash the place. If this tenant has a voucher though, they will want to do anything necessary to keep that voucher.
The last thing we want to do is evict somebody and make them lose that golden ticket, so we’ll negotiate with them in these situations to find a solution to leaving the house decent without losing that voucher. Because we take the time to talk and work with them, we’re helping them preserve that asset which goes a really long way.
Property Inspections
When you rent a property through section 8, a case manager will come take a look at the property before anyone ever moves in to make sure everything is up to code (like plumbing and electric) along with checking appliances, etc. The pro is that it’s like getting a free safety inspection. The con, however, is you may have to do work on the property before someone can move in.
There’s usually an annual inspection that takes place to make sure the property remains in working order.
How We Got Started Investing in Section 8 Properties
The first reason we decided to launch into this space is because we wanted to do a good service for a very real need. We know these programs help and we want to do it the right way for people.
Secondly, we’re a business and recognize that you can get paid a fair amount of money each month through government subsidiaries. We can make about 120% of normal rents.
We bought a portfolio of 3 bedroom properties that were generating maybe $799 a month. We renovated them and are now generating $1,300 a month through section 8 as investors. Our returns are great because we’re able to navigate the system.
We have a great relationship with our local authorities, specifically the RHA that handles section 8. They know we respect our tenants and provide them with good properties. We pass our inspections and normally only get inspections every two years because of our long track record.
Why Invest in Richmond, VA?
We’ve been investing in the Richmond VA area for a long time because there is always an evergreen supply of investment properties. You can find homes for under $100k and over $1M. We get the majority of ours under $300k because there’s a lot of properties that have fallen into disrepair.
Unlike other cities like Nashville or Austin, whose city value has driven up housing prices, Richmond remains an affordable city. Lots of people are beginning to move to Richmond because of its affordability and proximity to D.C. It’s a growing and diverse city with a strong middle class with multiple Fortune 500 company headquarters.
Strong Cash on Cash Return
When it comes to where we invest in the Richmond area, we avoid the red spots with high crime, and instead focus on the fringes where we can find 700, 800, 900 blocks for $300-$400k. These properties make for great rentals and are on what we like to call the path to progress.
A $1,300/month rental unit might sell for $140k or $150k (0.9% RV). The cash on cash return is strong because energy bills are low and taxes are really low. You can find these types of properties throughout Richmond, making them great single-family residences suited for section 8.
To hear the full podcast visit https://www.getricheducation.com/episode/297-guaranteed-rent-income-with-section-8-housing/.