How to Invest in Section 8 Housing Step by Step (2023)

Hi, I'm Joseph Kateri, realtor in the state of Virginia, and today I will tell you step-by-step how to buy a property worth under $100k and then rent it out to the government for Section 8, all done with little to no money. I'm making this video since I've gotten probably about a million views about Section 8 on my TikTok and thousands of comments asking what websites I'm using, what process I'm doing, how to do it step-by-step, so here we are. This video should cover every step from start to finish and answer any and all questions. Just a disclaimer, I have never bought in a course and have learned all of this knowledge based off of free information from podcasts, books, TikToks, and articles. I would also keep in mind that it is your duty as a landlord, your responsibility to make both safe and comfortable housing, so don't just be a slumlord. These are real people you're dealing with, it's not just numbers. I also want to say that this process may be slightly different depending on what county or state you're in. I am just saying how it generally works, so don't go in my comments saying, oh it's actually a 5% fee instead of 6% and this, this, and this. Doesn't matter. As an investor, you need to learn to adapt sometimes. Policies change constantly and the world just isn't a ROI calculator. So before we get to step one, what is the Section 8 strategy that I'm talking about? I'll keep this short. Basically, you buy a sub-100k home and renovate it or just keep it as is in good condition. Once the property is in good condition, you roll in the Government Housing Assistance Program, and the government puts tenants into your home for you that you can choose. The tenant usually pays around 0-20% of the total rent and the government pays you the rest. Okay, now onto the first step. The first step is to save money. I know this is a contradiction to the title, but keep watching. The more money you save, the easier this process gets. You can still do this strategy with little to no money, it'll just take a lot more patience and time, as well as some potential labor and luck. And what better way to illustrate this than with an actual example. Let's go with a traditional purchase of an ADK property with a 20% down payment from a bank. So a 20% down payment would be around $16,000. A real estate agent, maybe around a $400 fee, seller usually pays the commission. Inspections, maybe around $1,000 total for a home inspection, I don't think you would need an appraisal, but maybe something like a termite inspection as well, or radon. Closing costs are roughly 3-5% of the total home value. So let's go with a $3,000 closing cost, as well as light rehab of around $10,000. Let's say you found a property, but it could use some new paint as well as brand new carpets, $10,000. An ADK house will now cost you $30,400 in order to make it ready to rent to Section 8. That's a lot of money. It is very contradictory to the title. That is an entire year of college education. So now let's go over how to make that cost to almost $0. In order to pay the least amount of money possible, for example the down payment, you need to use something called seller financing, which basically means that the seller will act as the bank in this scenario. This makes things a lot more flexible, and if you offer good enough terms, you might even be able to get a 0% down payment. Your real estate agent can even negotiate closing costs for you and get the seller to pay for them, or to lump them in with the total loan amount. And if you're worried about something like renovations, you can actually go looking for a property called turnkey properties, which basically means that they're ready to go immediately. Will all these steps make it much more difficult to find and buy a property? Of course, but it is doable. Again, to make things easier, it's always better if you have money starting out, but let's pretend you're a broke college student like me. If we factor in every potential saving and budgeting, you can bring the cost to purchase an ADK property from $30,000 to around $1,400 at the minimum. Now personally, I would recommend a loan starting out, but if you can't get one like me because I have no income history, seller financing is your way to go. I'd also recommend finding homes that are ready to go that are turnkey properties. This gets rid of both the down payment as well as the rehab costs, but there's all the other fees still. So you'd probably need around $5,000 to start off. Once you start getting some regular rental income, then I would go to banks and try to get that 20% down payment from then on. Now that you know what kind of financing strategy you're going with, let's begin. Step two is pretty obvious, but it's time to go on some type of multi-listing service. An example of this is Zillow. Now I know, I'm a realtor, so I should be just sending you the listings instead. Well, that doesn't really work if you don't know what area you're looking for first. I personally am a Northern Virginia realtor, meaning I have an MLS system that is specific to Northern Virginia. If you contact me wanting listings from Mississippi, I'm not going to be able to help you. I'm going to see the exact same stuff as Zillow, no difference. In today's video, I'll be using Zillow. And guess what? I'm going to actually go through a real example for you guys. All right, now that we're on Zillow, you can actually see I'm in Fredericksburg right here. So if you ever need anything in this area, let me know, but we're not doing that for today. Instead, let's look at all of Virginia. I went ahead and typed in VA for sale, except we're going to uncheck all of these except by agent and by owner. For the price, we're going to go 40K. Anything below 40K, usually something like fire damage or flood damage, and a maximum of let's say 90. Now you're going to want to go above three bedrooms, and we're going to deselect all of these except for houses and multifamily. I doubt there's any multifamilies, but why not? All right, and now we have 109 agent listings and 16 for sale by owners. Now, I'm doing Virginia just because I'm licensed and I live here in Virginia, but I would recommend buying your first property in the state you live in. Now, an exception to this is, of course, if you live somewhere crazy expensive like Manhattan, but generally, let's say you live in Arkansas, your first place should be in Arkansas. All right, now it's time to actually pick out a property, so stick around to find out how. Pause, but before we go to the next step, please take a moment to subscribe. I currently have eight subscribers and they're literally all my other Google accounts. This is only my second video ever. If you want to buy, sell, or lease a place no matter where in the world you are, go ahead and DM me. You can DM me on Facebook, Instagram, or even LinkedIn. I check every single one of those daily. You found a Section 8 property that you want to purchase and put an offer on, but you need an agent? Contact me. You want to start looking for your dream home, but don't really know what to do? DM me. I work out of specifically Northern Virginia, but I have agent friends everywhere that I can refer you to, and I'm always able to give free advice. I also have another channel where I tour homes in virtual reality, so subscribe to that too. That's in the description. Okay, now back to the video. All right, so the next step is to pick a property. Well, probably multiple. Go through the hundreds of listings and find a property that is good enough for you. I would personally start out with for sale by owners first, since they're probably more open to negotiation terms. Now you're going to go through each one individually and look for a couple of things. We're going to use this home as an example. I found this in 10 seconds just looking. So first off, we want to look at nearby homes, check the neighborhood prices. The biggest thing that we don't want is to be the most expensive house in the neighborhood. Now it looks like if we click nearby homes other than this 38k, most of them are above 100k. Oh, here's another, but that's off market. 98k, 73k, either way, being the cheapest house in the neighborhood is actually a good thing. If you are pretty average among home prices in the area, that's fine. If you're on the cheaper end, even better. And the description, of course, is incredibly important. So anyway, this one seems to be pretty much turnkey. As you can tell, it looks gorgeous, and it even says in the description, great starter home, moving ready. It has been on the market for 162 days. It is 69,900, three bed, two bath, about a thousand square feet. And now it's time to research the neighborhood. You're going to go on this website, city-data.com. And it looks like this is somewhere called Pound, Virginia, a little bit weird. All right, and here it is, Pound, Virginia. So it seems to be an extremely small town. There actually is less than a thousand people here. Now this is where things get tricky for what I can and can't say. I do have an active real estate license in the state of Virginia, so I cannot dissuade or recommend certain areas over others. This is an extreme ethics violation, and I could lose my license. I'm just going to say that this website is available, and to form your own opinions on the city that you're researching. Again, form your own opinions, I cannot persuade you one way or another. All right, so at this point, you should have researched whatever place you're looking at, and all that's left is the numbers themselves. And this is probably the most important factor, so please pay attention to this next step. All right, step four, do the numbers. This is going to determine how much money you make, and if you're watching this video, chances are you want to make some money. Now there are two main calculators I use. One of them is calculator.net slash rental property calculator, and the other is dealcheck.io. Today I'll be using this one since dealcheck.io is definitely for more advanced investors, and I would actually only recommend using it after you've done a handful of deals already. To start off though, we're going to use this basic calculator. All right, I went ahead and split my screen, and we'll put in all the info. We can take all of this info directly from Zillow, and that includes stuff like the mortgage insurance, and property taxes, and home insurance. Now just to be clear, these values are not fully accurate. If you want the true values, I would actually call the local county or your real estate agent to find them out. I would also designate about $300 a month to utilities. So let's go ahead and plug in Let's do a 3.5% down payment, which is what I typically do personally. Add a 6.5% interest rate, and it actually seems like in this area it is a 4.126 average interest rate, so let's actually say around 6%. I am putting the interest rate higher than what it is in that area because when it's time to hand in my offer, a lot of people don't like seller financing, so that 6% is pretty attractive to them. And let's say a $3,000 closing cost with no repairs needed, since again this is pretty much turnkey. In all honesty, I probably would put aside a few thousand, maybe three to five, just in case something like a broken window happens, but all of that would come up in your inspections. So let's just say zero repairs. Now for your maintenance cost. This is really where it gets tricky. I'm going to up it to around $2,000 per year. If you screen your tenants properly, which I'll show you how later on in the video, as well as do your routine inspections and hire good people to take care of your properties and contract things out, then you shouldn't have a crazy high maintenance cost. So $2,000 is what I usually see. And if it's much more than that in your personal experience, chances are you're not picking the right tenants. All right, and utilities cost around $3,000 a year or $250 a month. Now this seems like a lot, and there are actually a lot of ways you can lower this cost even more. For example, you could add water efficient toilets, showerheads, sinks, in order to lower the water bill. For the energy bill, you could replace everything with fluorescent light bulbs, as well as add smart thermostats that can save on energy. I've even seen some people put a literal brick inside of the head of the toilet in order to reduce their water bill. And it works! You can make the tenant pay utilities, but then the government will not pay you as much rent. They'll probably lower their rent that they'll pay about 15%. That number is obviously very speculative and can change for pretty much everyone, but they will pay less. Technically, there's stuff like vouchers involved, and it's a weird process that they go through, but we're not going to get into that. I personally would recommend that the landlord pay the utilities. But you can add a clause in the contract stating that if the tenant uses more than the average amount in the area, then that they have to pay whatever difference it is. For example, if the average family uses 50 bucks of water per month, but they end up using 75, you can make it so you only cover the 50, and they cover the rest. This is to avoid stuff like overflowing bathtubs, where they just leave the water on or leave light bulbs on 24-7. Alright, back to the calculator. Monthly rent. How do you find that out? We're going to go to this website called FY 2022 Final Fair Market Rents. You're going to scroll down on Zillow until you find Virginia. It's in Wise County. So go to Virginia. We're going to go to Wise County, and a three-bedroom rents for roughly $1,000. Now, a tip is that if your house is in fairly good condition and very well upkept, then they could actually offer a little bit more than whatever this number says, because they can offer from 90% to 110% of whatever this number is. So if your property is in worse condition, they can offer a little bit lower, but in this case, I believe it'd be about 10% higher. So in this case, we're going to go with $1050. Now for the vacancy rate, there usually isn't one actually. There is a huge waitlist for Section 8 housing. For example, there are 69 counties in Virginia, and only five have open waitlists. And this isn't even to get in. This is for the waitlist. I mean, look at that. All of these down here are all closed, and only these five are open. One of them actually being Wise County. You can just call the local housing authority and say that you have tenants leaving on the 1st of December, and you can line up tenants to move in right away within a handful of days, as long as you can still pass your inspections. All right. So the management fee, I actually would personally recommend managing all of your properties on your own until you hit at least five units. But sometimes it's just necessary to hire property management, especially if you're in a different state or you have a full-time career. A property management company usually charges 10% of your rent. I'm going to leave it at zero since this is a beginner's guide, meaning you're probably going to personally manage the property on your own until you hit around five. And hopefully you're buying this first one in your state. But again, if you're hiring someone, put in around 10%. Now for the sale price, we obviously don't really know it, but as long as you buy in a decent neighborhood and keep the house in good condition, then chances are your house is going to go up in value. It is very, very difficult to lose money on a house that's already 60k unless you really trash the property or I don't know, a tsunami hits the neighborhood. It's going to be pretty hard to lose value. All right. And we're going to go ahead and calculate the values. And it seems like we have a 46.05 rate of return. This is unheard of. The S&P 500 in the stock market actually averages only 10%. Now you might wonder, oh wow, our cashflow is pretty slow. Only $200 per month. Yes, you're right. That's your net income, $200 a month. This is how much you get to take home at the end of every month. But there are ways to definitely make your net higher. For example, this $250 thing, that's utilities. Again, there are ways to cut the utilities down. Your maintenance cost, if you have really good tenants that you've properly screened, your maintenance isn't going to be very high. One of my good friends is in section eight and he's in a townhouse and takes care of it. I'm pretty sure that landlord probably spends about this much per year, just a bucket of paint and that's about it. And of course, these three things, well, they're pretty mandatory. It's your mortgage, taxes, and insurance. So your actual gross, I don't know why this says net, but your gross is around $570. And even if you do nothing, you're still netting $200 a month with only a 5.5k investment. After the 20 years of building equity in the house, when you sell it, you're going to make 161k and you only ever put 5k upfront. And again, this was just a random example I found in 10 seconds. If you find the right house, maybe it has one extra bedroom. Maybe you can negotiate the home price down 10k. This is $200 income from just a random house I found. I've seen sometimes it get to $500 to $600 per month. Now, another tip, this fair market rent right here, since this is in a pretty rural area, very small town, they'll pay a maximum of $1,000. If you go somewhere such as, let's say, Richmond, Virginia, you're going to get paid a lot more. The same property, if this was in Richmond, Virginia, would go for $1,400 that the government would pay you, which again, would increase your cashflow a crazy amount. Here's just an example. You ready? If we go to Fredericksburg city, which is where I live, a three bedroom, look at these numbers. Now, obviously not all of them are like that, but it seems like the lowest is $1,490. Can you find a house under a hundred K where I live? No, but you definitely can in the outskirts of cities, such as Pittsburgh, Richmond, you get the point. So now we picked a property. It is mainly turnkey. It is in a decent neighborhood and all of the numbers work out. What do you do now? Well, now we need to message the agent or landlord. You can almost always find their phone number somewhere on the listing right below the description, whether it be an agent or landlord doesn't really matter, but this is where you're going to start finding trouble. Now at properties of this price range, you're going to get a lot of lazy agents because they don't make that much money off of it. You're going to have agents who think, Oh my God, my commission is so tiny on this. I'm not going to put all my effort into this. And I'm just going to respond to this message when I can. It is extremely rude and unethical when this happens, but it does happen. You might only get around a 40% response rate from agents, but if messaging landlords like this one, it might be higher since it's their personal property. Now, if you're doing seller financing, which is what I'm showing in this video, your response rate might be even lower. They either leave you on red or they simply respond with a flat out no. And this happens around 95% of the time. It becomes a numbers game, the less money that you have to work with. So now that you've got this number, this is what message you're going to send them. Hello, I'm interested in the property at X address. I'm looking to purchase a property in the area and wanted to know if the owner was interested in taking monthly payments on the property. If I paid close to full price with a higher interest rate. If so, when can you speak? Thank you. And you can go ahead and just text them this phone number or send it via Zillow. Hopefully you get a response, but it might take a while depending on what type of financing offering you're giving, but let's say that they do accept it. Now, what do you do? Well, now it's time to make an offer. And for that, you will need a real estate agent. Most of the time, if you're more experienced, you might not need one since you're already familiar with the contracts. But if you're starting out, I would hire one, especially if you're in a state where the seller pays for the agent's commission. Now I'm a realtor and it is our job to get you the best terms and best offer on a property possible. It might cost you a few hundred dollars at maximum just for some fees, but most of the time sellers do pay the commission. Let your agent guide you through the process of making an offer and buying the property since it's literally our job to do so. So how do you find a good agent? Well, that's where I come in. When you're ready to get to this step of making an offer, contact me on Facebook, Instagram, or LinkedIn, and talk to me about the property. I have connections all over the U.S., so I will hook you up with an agent that I know that is closest to your property. Now here are some basic terms you want to follow. You want to make sure it is a 30-year fixed rate loan. Whatever the average interest rate is in the area, if you're doing seller financing, add one to it. A lot of homeowners watch the news and they kind of know what the general interest rates are. So if you offer something much higher, then it catches their attention. And the difference between a 6% interest rate and a 7% isn't a lot on a 70k property, so your numbers are probably going to be fine either way. And you should also do a home inspection and make sure your contract is contingent on it, but your agent can handle that part. Alright, step 7. Now that you've bought the property, it is time to convert it to section 8. The main method to make this happen? Just call your local housing authority and ask them. They're most likely going to hit you with a plethora of questions such as when did you purchase the property, what's the condition, blah blah blah, and want a lot of documentation. And they might even do an inspection beforehand. The housing authority will then ask for the number of bedrooms and then make an established rent payment based off of that. And again, it's usually within 10% of what the HUD website tells you. After they establish the rent, it's time to move on to the next step. Step 9. Getting tenants. Something that a lot of people tend to get confused about is they don't realize the tenant only pays 20% or less of the rent, and the government just picks up the rest. So if a house rents for $1,000 like the one we're using as an example, that means that the tenant will pay a maximum of about $200 or even up to $0 for the tenant. You are not charging a single mother of three $1,000 to rent a $70k home. That's just not what's happening. Anyways, here in Virginia, you typically need to pick your tenants and then submit something called a request for tenancy approval before the final inspection. Some states and counties may differ, but this is how you pick tenants. You're going to call the local housing authority and say, hey there, I have a Can you send over some potential applicants? They're going to go ahead and send over a ton of applicants that are potentially on the waitlist and say, hey, here you go, here's all their background, pick from these. You could also put it on Facebook Marketplace and just say you're accepting Section 8 vouchers, and that typically works really well. You don't really have to do any type of paid advertising. Section 8 usually advertises itself. So now that you have a list of tenants, how do you pick one? Well the first thing that I would do is I would ignore the credit check. Chances are they're going to have bad credit regardless. Unless there's something really, really important on there, chances are it doesn't matter. Instead, look at these things. Personality. I would interview them beforehand, see if they're a drug addict or maybe just a struggling mother. Call their existing landlord. If you call up the landlord and they say, hey, the tenant was pretty decent, they were quiet and cleaned up the place, but they just couldn't afford the rent, that's okay because guess what? They're not really paying the rent anymore. Look at their car. If it's an older car, maybe with some stains, that's fine. That's how my car is. Just glance at the inside and see if it's filthy or not. Is there trash everywhere? However, they take care of their car is usually how they take care of their home. Do an at-home interview. I always find this weird, but it is very effective. Call them up and say, hey there, you guys are one of the final applicants for my Section 8 home. I'd love to be able to talk with you and interview you. Would 6pm today at your current residence work? If they reject it and say no thank you, that's not a good sign, but if they accept it, then that's a good start. You go to their home, sit with them, get a general feel for their personality, trust your gut, and then look around a little bit. If the home is pretty trashed, there is drywall missing, the ceiling fan's broken, that is not a good sign. Yeah, maybe they could have cleaned up all of the laundry and vacuumed beforehand, but they can't get rid of huge structural issues. So maybe you can notice those things or ask an inspector what you should be looking out for. You can also check their records. Section 8 usually has their eviction records as well as criminal background available. You can check for income as well, or at least just ask them, but that isn't super important since again, they usually don't have to pay the rent, and the less money they make, the more the government actually covers for them, so that one's really up to you. At the end of the day, Section 8 tenants get a super bad reputation. Everyone thinks that they're just filthy criminals who trash your properties, or maybe a landlord had a really bad experience with a Section 8 tenant, but that's because they didn't screen them properly, and they kind of just one-offed the whole system. I don't think that they trash properties. A lot of the time, it's just a struggling family that needs to make ends meet. I personally have absolutely lovely friends who were in the Section 8 housing program, so I kind of have first-hand experience with some of this. And now we move on to step 8, passing the actual inspections. So while you were purchasing the property, I told you to do something called a home inspection. Now what I didn't tell you is that the home inspector you should use should be familiar with the Section 8 guidelines. And guess what? The Section 8 guidelines are actually publicly available right here. Here is the actual 8-page inspection checklist that they use. When it was time to purchase, you should have gone through the property with a home inspector, and they should at least be familiar with these guidelines. And I would go through that checklist again right after you pick tenants, because before they can move in, you bet your ass that they want to do another final inspection. I would make sure that every single thing on that list is up to date, everything is in working condition, since they will deny you even for stupid, stupid things. For example, a doorknob jiggles too much, or maybe the kitchen tiling has a small crack in it. They're gonna fail you. Now hopefully you did your due diligence during the home inspection and already know what needs to be worked on, but just make sure that everything is going to pass. On the day of inspection, show up with a box of donuts and start talking to the inspector. Let them know that you personally want to make sure that everything is in great shape and want to know how you can improve the property further. If you fail, you have to correct these issues within a few days and then get it re-inspected, but hopefully you pass the first time. This inspection happens every single year and it is scheduled, so it's not some type of surprise inspection type thing. I personally would do an inspection after every single quarter, so that when it is time for the inspector to roll around, there are no surprises. Alright, and now for the optional final step 10, hire property management and contractors. This is optional since I actually recommend everyone to handle their own property starting out, but there are two scenarios where that just isn't possible. The first is if you live ridiculously far away, like another state, you don't want to have to drive 15 hours if your tenant says that the water won't shut off. That just isn't a good idea. And the second reason is if you have too many properties already that you're handling. Now the other question is, how do you find these good local contractors and property management companies? Well, I would literally recommend going on Google Maps, typing in the address of the home you just bought, and looking at all of the companies surrounding it. Go with the best reviewed property management company and contractors within a few miles. Make sure that they are highly reviewed, make sure that they have good testimonials, and most important of all, make sure that they have dealt with Section 8 before. This applies to all types of management and contracting such as plumbers, electricians, roofers, etc. Now, I generally have a rule of thumb where if something can be done by a handyman, do it yourself, and everything else, hire the best people in that respective field. For example, a light bulb goes out, fix it yourself. Are you kidding me? Do it yourself. But if some tiles get loose on your roof, hire the best roofer within your budget that you can find because they will do it both much, much better than you, and also their work usually comes with some type of warranty, like a five-year warranty. Just make sure you're not being scammed in the process. You don't want to hire a roofer to make you a new roof and it costs you 50 grand. That just doesn't make sense. Anyways, I think that's everything. This is a damn long video. So by now, you should have every single step you need to find, finance, purchase, and rent out properties to Section 8. I want to leave this off by saying, don't be a slumlord, make these properties comfortable, be ethical, and just overall be a decent person with sympathy. The world isn't one big calculator. There are real people who have real troubles and real feelings. Anyways, this channel is all about making educational and entertaining finance content, so hit the bell to receive updates on when I upload and make sure to subscribe. And finally, don't forget to go down to the description below and go ahead and DM me on Instagram, Facebook, or even LinkedIn if you need to buy, sell, or rent a house no matter where in the world you are. And that's all I got. Have a nice day.