Today’s REI Classroom Lesson
Joe Lieber weighs the pros and cons of having rental properties for Section 8 when compared to tenants for rent to own.
REI Classroom Summary
Section 8 tenants can long-term and easy to work while rent-to-own tenants provide larger down payments and have a vested interest in keeping the property in good condition.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Joe: Hey, I’m Joe Leiber. I’m from Cleveland, Ohio and today we’re going to talk about Section 8 versus private pay. Please pause for a few minutes, be right back with you.
Mike: This REI classroom real estate lesson is sponsored by UglyOpportunities.com.
Joe: Okay. Welcome to the show. So I am your host for the REI Classroom and here’s what we’re going to talk about today: Section 8 versus private pay. The pros, the cons, the downfalls, the pitfalls, the upsides, the downsides, everything.
So here we are, Section 8. Is it more work? Yeah, especially, to get it up and running. It’s a little bit more work. You’ve got to make sure that GFIs work, and there are handrails in place, and there’s no chipped paint, and the carpets are fresh, and the door handles work. Everything has to be perfect, but there are a couple positive things. One is you’re guaranteed rent, which can be very nice to have, as well as a longer-term tenant. So a lot of people think, “Oh, Section 8, they’re going to come in here, they’re going to destroy my house.” Wrong. Take it from a guy who knows. I have 160 of these things, about 30 of them are on Section 8, been dealing with it for over 17 years, okay? Wrong.
So, here in . . . I’m in Cleveland, Ohio, the county is Cuyahoga. So in Cuyahoga County, and don’t hold me to these numbers perfectly, it’s been a little while since I’ve looked at them, but there are about 14,000 voucher recipients who get a Section 8 voucher. What that means, that voucher pays your rent. They pay your rent! But there are 100,000 people who need Section 8. So every year, the local housing authority does a lottery and they randomly select maybe 1,000 out of 100,000 people that need it to get on this program, Section 8.
So just think how you would feel if you got a call that you got the golden ticket and your mortgage or rent payment is now completely covered. Life-changing, right? You’d probably be pretty nice to your landlord or your bank if they were paying your mortgage. And that’s how it is for these tenants. And the honest truth is, is out of all my tenants, they’re the only ones that call me Mr. Leiber. They are. They’re not . . . They don’t destroy my houses. Sure, have I had a tenant destroy my house? Yeah, but no different than a private pay. So I think the tenants are great. They’re very appreciative, they stay a long time, I’m going to say on average five years in my properties, and I like Section 8.
Now, there is another system that I do as well and it’s private pay, regular rents. But I don’t just do regular rentals. I do rent-to-own and there are a few reasons why I do that. So number one is I get a larger down payment on the property. It’s not a security deposit anymore, it’s now a down payment and it’s usually two to three times what a security deposit is. It’s non-refundable and, most importantly, it vests the tenant to the house.
See, in order to get tenants to pay, you have to vest them to the property. Now, you can do it one of two ways. You can go over there and make them work and clean the house up, paint, carpet, do minor repairs, or you can get a large down payment. See, what I do on my rent-to-own properties is I do a little bit of both. I might get $1,500 to $2,000 down and I’ll deliberately not paint a few bedrooms, maybe leave a little tear in the kitchen floor so they can go to Home Depot and get a new tile and fix it, because I have to vest them. Nobody wants to go work their butt off at a house all weekend and then not pay their rent next month. So I’ve been using that system, that [inaudible 00:04:09] system for the better part of, I don’t know, 10 years, and it works very, very well.
There’s no right or wrong, they’re both phenomenal programs, and the cool thing with the rent-to-own too is they are responsible for all repairs to the property. It’s not foolproof. You’re still going to get a furnace call in December, but you can try to deflect the call, number one, and if you do have to pay for it, I just work something out with them. Hey, let’s split it, Mr. Tenant Buyer, or how about if I finance it to you at 0%. Just a couple great tips today about Section 8 versus private pay. Thank you for tuning in.
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