5 STRONG REASONS to consider "Section 8" | Episode 144 - a podcast by Bryan Ellis - SelfDirected.org
from 2015-10-07T13:48:38
What do you think when you hear the term “SECTION 8”? For most of us, thoughts of this government assistance program that provides housing to low income people sends chills down our spines. And that may be exactly the right response… but is it really? Today we look at the Section 8 program from an objective point of view and learn 5 solid reasons rental property owners shouldn’t write off this program. I’m Bryan Ellis. This is Episode 144.
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Hello, SDI Nation! Welcome to the podcast of record for savvy self-directed investors like you!
I had the pleasure of spending yesterday with a brand new client named Mike from Delaware. Mike is a brand new listener to this show, having discovered us just last week. But he was bright enough to see the opportunity in the cash flow properties I’ve mentioned to you during the past week, and he came for a visit to make a purchase. Mike, it was great to meet you, and I look forward to serving you well!
By the way, folks, for those of you who may be interested… all 19 of the properties I mentioned in last week’s podcast are now sold. Every single one of them. Thank you to those of you who responded so immediately… you folks are amazing and I’m so grateful to you.
The rest of you… don’t despair. I’ll soon – very, very soon – have more great cash flow deals to share with you. But the lesson here is this: Don’t delay! They never last long because one thing I can tell you for certain: If you hear ME talking about a deal, you can bet on it that that deal is very, very attractive. Thus, they go quickly. So listen in for announcements about more in the future, or you can even get on my notification list right now by texting the word TOPPICKS to 33444.
So, Section 8. Section 8 is a government assistance program for low-income earners. The gist of the program is that the federal government pays some or all a low-income person’s rent for them, directly to the landlord. In exchange, the tenant is required to respect the property.
Now, my friends, I’ve got to be honest with you: I have a bias against giving things away for free. People who expect things for free are generally people who expect EVERYTHING for free… the very essence of the entitlement mentality… and I can’t begin to express how thoroughly I despise people who believe their entitled to things they’ve not earned.
And I still feel that way. No question about it.
That’s why this Section 8 thing has historically been a huge conflict for me. On the one hand, as a landlord, you get something very, very valuable: You essentially get a guarantee from the federal government that you will receive the rent you’re due on time, every time, each month. And typically, the rents offered through Section 8 are very competitive, if not slightly above the market rate. But on the other hand, my assumption has always been that if you give someone the right to live in your house for free, then what you’re asking for is serious property damage and endless property management headaches.
And you know, that definitely can happen. It’s not difficult to find horror stories about Section 8 tenants who have damaged properties in a terrible way. There’s no doubt about that.
But my friends, there’s more to the story, which I only recently learned.
A colleague of mine is a Section 8 guru of sorts. He’s managed over 1,000 Section 8 properties. He’s the kind of guy who knows the in’s and out’s of the business very well. I was discussing my biases with him about the Section 8 program, and he looked at me a bit incredulously. He actually said “I thought you were smarter than that”. Hehehehehe! And I’ll admit, he gave me a bit of a schooling.
He specified 5 big reasons he likes Section 8 properties… 5 big advantages that the section 8 property has over the non-section 8 property.
First: Section 8 pays rental rates that are competitive, and frequently a bit above market rates. Your gross income under Section 8 quite certainly won’t be less, and may be more, with Section 8.
Second: That rent is absolutely guaranteed to arrive on time, every time, every month. What this means is that payment is direct-deposited… there isn’t even any waiting for a check. It happens automatically and totally reliably.
Third: In my colleague’s market, the average duration of tenant he’s had is 3-4 years. 3-4 YEARS! Think about that! The single biggest issue for many landlords is turnover… and the 1-2 months it takes between each tenant to ready the property and remarket for the next tenant. Imagine if you only had to replace tenants once every 3-4 years on average! That’s huge!
Fourth: He says that it’s downright easy to find tenants, because there’s such a massive backlog of people who have rental vouchers from Section 8, but who have nowhere to live. That’s simply because there’s a pretty severe shortage of supply of these properties in most markets.
And the Fifth reason he likes Section 8: Leverage over tenants. My colleague explained it to me like this: He said: “Bryan, if you have a conventional tenant who doesn’t pay or who damages your property, what recourse do you have?” Of course, I know that the answer is that I can take that tenant to court and probably get a judgment against them. That’s when he smiled and said: “Do you know what it’s actually worth to have a judgment? Sure, it’s possible to collect against a bad tenant if you have a judgment, but it’s not automatic at all, and frankly it’s not worth the time it takes in many cases, after you factor in the need to hire someone to do the collection for you. So sure, you can get a judgment, but it’s really not worth much. But I’ve got a much bigger “STICK” to use with a Section 8 tenant… one with far more influence on them.”
Of course, he had my attention at this point. He went on to explain that if a Section 8 tenant damages his property outside of normal wear and tear, that that tenant is required by the Section 8 program to pay for those damages.
And, of course, I immediately said there’s no way that they’ll ever pay… they have no money… that’s why they’re on Section 8 to begin with.
He laughed again and said: “You’re right… most of them won’t pay. But that’s because most of them won’t actually damage the property unreasonably for two reasons: First, you have the full right to screen your tenants in Section 8 just like you do otherwise. And Second, and far more importantly: If a section 8 tenant damages your property and doesn’t pay, you can absolutely have them kicked out of the Section 8 program. That means they lose their voucher and they no longer get free rent in the future. And in my area, once they’re kicked out of the program, they can’t get back in. It’s a big deal to lose a housing voucher. In my area, there’s a 2-5 year WAITING LIST for people to get into this program, and once you have it, it’s like gold. These people don’t want to lose their voucher. And if they mistreat you or your property, losing their voucher is a very real risk.”
Well, my friends… I’ve got to admit… he changed my bias. I still don’t think it’s smart to default to Section 8. Here’s what I’ve concluded so far: It probably only works well in areas where there’s a severe imbalance of supply and demand, meaning that there are far more Section 8 tenants than Section 8 properties. That way, market dynamics work in your favor.
You shouldn’t consider this to be a full-throated endorsement of the Section 8 program. It is not that. But my friends, this I can say with confidence: I had an absolute bias against Section 8, and I was wrong. And being wrong probably cost me a whole lot of money over the years. So I hope you can learn from my experience on this.
My friends: Invest wisely today, and live well forever!
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