From the stand-point of stability of income and resulting appreciation of value, it is absolutely crucial that the units we choose to hold long-term are desirable today and remain desirable in the future – period. If not, you are going to have the hardest sales job ever…
However, simply owning desirable units is not enough. My attorney has a favorite saying that he tells with both sarcasm and sadness from time to time, and it goes like this:
“Jesus Christ himself couldn’t pay you if he were broke…”
Should you rent to Section 8 tenants? This article will dive into affordability, rental qualifications, and how to analyze affordability.
Rental Affordability and Desirability
That’s right – the most honest, descent, respectable people could not pay you if they don’t have the money. You could own the most attractive Taj Mahal of a building with granite floors and gold-plated toilets in the most romantic setting, and yet if people can’t afford it then what’s the use…
As such, the issue of affordability certainly plays an important role in what we do. It’s important to have a product that many people want, but it is equally important that they can afford it! This is why I’ve always said that successful real estate investing exists at the intersection of Desirability and Affordability.
The Challenge of Pricing
Most of us are used to thinking of this issue of affordability as strictly a pricing thing. I teach students that when considering an acquisition, the questions that we ask ourselves are the following:
1. Would I want to live here as is? And if not,
2. Can I afford to spend what I need to spend to revitalize this building’s affordability and still not be upside down on my investment metrics from a standpoint of cash flow and equity?
The first question establishes the desirability threshold, while the follow-up question takes care of affordability to both us and our perspective tenants. We certainly do not want to buy a unit that requires so much capital upfront in order to make it desirable that we are forced to charge rent that is higher than the market can support. This is one of the most common mistakes noobs make – charging too much for rent because they paid too much for the property…
However, recently I am becoming more and more aware that it is possible for the unit to be unaffordable due to structural macro-economic problems that we have no control over. In other words, having done everything right; having bought a perfectly attractive unit in a desirable location; having priced our rental exactly where it should be, it is possible that the unit is unaffordable due to issues that we have no control over – problem.
An Affordability Analysis of My Rentals
In my marketplace, rents range from $375/month to $1,200/month. On the lower end are the rentals that I would be afraid to come into after dark, and on the upper end are the corporate single family rental houses.
My entire portfolio is positioned within the range of $600/month – $850/month. I did this for several reasons:
1. NOI in this price range affords significant cash flow.
2. The units are not too expensive, but are nice enough to be attractive to widest cross-section of people.
3. The tenants who can afford to live in my units typically have stable employment and are in a stable economic and social circumstance. They are not rich or highly-paid people in search for every bell and whistle, but they are either, hard-working young people, young families doing what needs to be done, or retirees – great tenants to do business with by and large.
Well – I just came face to face with an underlying economic issue which is causing my rentals to become unaffordable.
Income Qualifications for My Tenants
My rental qualifications stipulate that in order to qualify for tenancy the applicant must prove income in the amount of at least three times the rent. This is what it takes to be in one of my properties. As such, in order to qualify for a $650/month unit the applicant (household) needs to show income of plus or minus $2,000. Thus, a single person working full time would need to make about $12/hr. – $13/hr.
An Example Section 8 Applicant
Well – yesterday I received an application for one of the units in the 10-Plex I bought in February, which I wrote about here. I am asking $615/month for this unit. She filled out an application and it turns out that she works full time, but she only brings-in $1,300/month before withholdings, meaning that she earns a bit over $8/hr (the minimum wage in Ohio is currently $7.70).
Now, let me ask you – how it’s possible to live on that? More importantly, how is it that in America today working honestly 40 hours per week, passing drug tests (her job requires her to), being on time every day of the 3 years that she’s been with this employer – how is it that she does not make enough money to afford the basic decency in life of a roof over her head in a place other than the drug-infested slum? She indicated to me that she currently pays $450/month for rent and she said – “I am trying to get out of there as soon as I can”…
She applied for my unit because I told her I would consider Section 8; I have never had any of my units qualified on Section 8. I’ve always assumed that an honest day’s work would be enough to put people into my attractive but mid-range units, and I’ve always been found right. I’ve never had a shortage of qualified renters.
Today’s Economy and Section 8
Things are different in today’s world and getting worse every day. We have huge structural problems in our economy that our politicians seem incapable of addressing. So, instead of an economy that allows rich to be rich, but also allows the minimum wage earners to earn enough to be able to live with decency, we now force someone who works 40-hour weeks to look to government (tax dollars) to fill the gaps.
Look – I will never have any patience or sympathy for the lazy among us who take, and take, and take without contributing to the society around them. However, someone who picks herself up by her shoe-straps and claws her way toward a better life for herself and her kid – yes, I absolutely want to help.
It would be best if the economy we live in facilitated her earning enough minimum wages so that she could afford her rent without needing to rely on a handout – I think that she would rather it this way as well. But, this would require some fundamental shifts in our economy – it would require a minimum wage in Ohio of $13/hour.
Why I Allow Section 8 Applicants
Do you think that this is going to happen any time soon? Can it happen? If businesses paid more to their employees, then this cost would have to be passed along to the consumers – can we afford that? Can we afford to pay $5 more for pizza and McDonald’s…?
I am not holding my breath, but we will need to make some painful changes in this economy before too long. In the mean time, I am open for business with Section 8.