Maximizing Rental Income with Affordable Housing

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David:

So Rosalyn, thank you so much again for joining us.

Rosalyn:

Thank you for having me, David. I'm excited to be here.

David:

Yeah, yeah, me too. So tell everyone a bit about yourself and your journey and how you got started in real estate until today.

Rosalyn:

Yeah, so a little bit about myself. I'm based in New Jersey. I am a first generation Dominican American. My parents came here in the seventies, so I grew up in New York City, always wanting to get out and live, much more quality of life. So after spending 20 plus years in the hospitality industry, I decided to learn on my own how to invest in real estate. So I purchased my first multifamily property back in 2012.

David:

You have a partner for that first investment?

Rosalyn:

No, I did it on my own. I pretty much just got with a mortgage lender, figured out what I needed, used 401k funds for my down payments. Literally used every available dollar I had to get into that first property. I definitely knew that multifamily was the way to go. I knew I needed one unit for myself to stop paying rent and use the other unit's income to kind of pay the mortgage pretty much.

David:

Yep, exactly. And then when we spoke offline, you mentioned that you got more into section 8 housing, so how did that come about? Yeah,

Rosalyn:

So I grew up in Section 8 housing myself. My parents were low to mid income, so we qualified, so I kind of understood the program on that side of things. I knew that every year we had an inspection we had to get ready for, we had to fill out the forms for my mom. So then when I got into the business and I started looking for new tenants to rent, I figured, let me just check to see what the state is paying right now for this unit size. And to my surprise, it was at market rent for my area. So I was like, you know what? I think I should explore this option, right? It's 70 to 80% of the rent gets deposited into my account every month. I don't have to chase the tenant for it. The 20% or 30% that's left over is all I need to worry about. So I kind of just took that strategy and ran with it. I knew I had to kind of learn how to vet the tenant a little better, what to look for, what questions to ask. So through trial and error, I kind of had a system down packed and then I just decided that it would be the most or the least riskier way for me to build and still get income coming in. Yeah,

David:

I love it. So I love that you took your experience and used it. So I have a few questions on that. If it's so good and you're getting so much rent, even market rates from the government, why isn't everyone else doing this? They just dunno how. Yeah,

Rosalyn:

I feel like there's been a lot of bad stories out there when it comes to section 8 with the type of tenants that you're getting, what they do to your property. I was on the other side of that, so I know that they are good people out there that will take care of your unit, that will stay long. The story kind of deter the landlords from even accepting it. But more so maybe 10 years ago, not every market was paying market rent. So you would have certain markets that were paying a $100, $200, $300 below market rent. So of course that would need a landlord say, you know what? I need my money, why would I even bother? But as of 2018, 2019, the states realized that as these rents continue to go up at a faster rate and more folks were landing into that low to medium income level and they were handing out all these vouchers for families, but families were not able to find enough housing that kind of pushed the state to pull up that number. In some cases, even in New Jersey, there are some areas where they're paying above market just to get, just to incentivize landlords to actually buy rental properties there and rent to the program.

David:

Wow. So let me ask you, if the government in a certain area says, oh, we're only going to cover 80%, which is $200 less, can you get the tenant to cover the rest? Is that allowed? Is that legal?

Rosalyn:

Well, that's the way the program works. So the state actually determines based on the tenant income, how much of their income they can pay out of pocket. And then the state cover still remainder. So it's not determined by you, the landlord. The breakdown is determined by the program itself because it's based on how many people are living the unit, what the income is, and then other criteria, are they disabled, are they veterans? Is it a single parent household? So there's different criteria, but the state determines that you as a property owner just need to know what that max allowable rent is. What's that number that you have to play with? And then the state works out a breakdown and then lets you know pretty much.

David:

Okay, so let me ask you a question here. Hypothetically, let's say market rent is a thousand dollars a month for this unit, and this is a person that's, let's say, God forbid a widow, a veteran, has disability, many, many, many issues. This states says, okay, wow, we're going to take care of this person will cover 80%. Is that what they'll do? Something like that. So you'll get $800, but then this person needs to also pay $200 to make up a difference of market. Correct?

Rosalyn:

That's how it works. Oh

David:

Yes. So you're getting paid in full then? Yeah,

Rosalyn:

You're getting paid in full. It's just the majority of the payment comes directly from the state. So instead of chasing your tenant for a thousand dollars of the rent that they might not be able to pay that month, you're always going to get that 80% coming into your bank account.

David:

Got it, got it, got it. Now, if the tenant doesn't pay, can you evict

Rosalyn:

Them? Yes. So there's different rules by county. So I would suggest that for anyone that's interested in starting from scratch, they should ask that question to the local county office. Usually the housing authority that manages the Section 8 program for every county. So it's an easy quick Google search housing authority in the name of your county that will come up. So at least from my counties, yes, the tenant is responsible for their portion. If they accumulate over two months of nonpayment, then you can open up a case with the social worker in the county, then the social worker will be in charge of getting that payment resolved and you can evict, if they do fail to pay on the contract, they have to still do their part, which is that 20 30%. They still have to follow the leases guidelines. So you're still holding them to the rules pretty much.

David:

Got it. And I'm assuming most tenants don't want to get evicted because it's hard enough for them to find a good property and a good landlords, so they probably want to stick by the rules.

Rosalyn:

Exactly. And this is what I kind of teach about also is that as long as your vetting process is good and you get the right family in there, these folks, they want to have this voucher. They want to put it to use, they don't have the money to be bouncing around apartments every year. And historically, while the stats say that Section 8 tenants usually stay an average of seven years in your property, so these are tenants that if you have the right strategy, you can say, I'm just going to get 10 units, put 'em on section 8 every year. I'll increase three to 4% depending on what you're allowed to raise the rent for. And then you kind of just set it and forget it, and these folks got the right folk in there, they're going to take care of your property, they're going to want to stay longer. And as rents continue to go up, market rents in different areas, there's lease available supply for them to go out there and look. So it kind of works out.

David:

I mean, you might even make the argument then that hey, okay, even if they don't pay their extra 10 or 20%, they're supposed to pay. Imagine having a different tenant that you have to replace every year and you lose a month just to find them, it's already 10%, you're already breaking even. It's the same. Okay. Exactly. Interesting.

Rosalyn :

Absolutely. There's many different ways to look at it, but the goal here is to share those scenarios as opposed to someone just saying, I don't want a section 8 tenant, they're going to be a problem. It's like, okay, wait, let's slow down here. Let's think about the whole picture.

David:

Yeah, yeah. Okay. So you said something that I was going to ask also, you said, yeah, every year maybe I'll increase three to 4%, whatever the limits are. So from my understanding, in most states that are landlord friendly, you can increase it a lot more, but with section 8, it sounds like there's a max limit.

Rosalyn:

So by county, they will allow you to raise the rent for a fixed number for the existing tenant. So let's say I have a tenant that signed in 2018, that tenant already has been in place, so I can only raise that rent 4% every year. That's my max. Now, if that tenant was to leave this year, and let's say that the going rent for them was 1200, the FMRs, which are the numbers established by HUD every year, if that number is now 1500, because HUD has been raising it more than that 4% in the last three years, the number's 1500, once I get a new section 8 tenant into the same unit, I can charge them 1500 whatever the HUD FMR number is right now. But for an existing tenant, it is only 4% a year.

David:

So let me ask you this, how long are these leases? So if you have someone that's only paying 3% every year, but hey, if I get 'em out, I can make 20% more. Is that allowed?

Rosalyn:

You do that? Well, under section 8, you can't not renew a lease of a Section 8 tenant and take a new Section 8 tenant. So if you don't renew, it's got to be for another reason other than not accepting section 8. It's got to be for I'm selling the property, I'm rehabbing the property, I'm moving in myself, or I'm not accepting the program anymore. I just want,

David:

Or if that tenant leaves or

Rosalyn:

If that tenant leaves. Yeah, yeah, totally.

David:

Then you can get a new one with a higher rate,

Rosalyn:

Correct, yes.

David:

Okay, interesting.

Rosalyn:

Which you can't kick one out to get that extra 20% under the same program.

David:

Yep. Yeah, that's called a self-help eviction. You can't change the locks, you can't make their life miserable, you can't turn off their water. It's very, very illegal to do that. Yeah, totally. Okay. Have you noticed that they are allowing you to raise rents based in inflation? So in the last two or three years, have you been allowed to raise rents more? Yeah,

Rosalyn:

So there has been instances, yes. So if I had a tenant that rented, again five, six years ago where they're paying way below market, the county has made exceptions because again, their interest is that these folks, they stay housed, right? They don't want these families going out there losing their vouchers, plus potentially going into the homeless system. So yes, there are exceptions. They will make them. I know other markets, like in Chicago, even Philly, I know other landlords that are Section 8 landlords, and they have gotten exceptions as well. So it's happening.

David:

Okay, awesome. Alright, so for those listening, I want to take them through sort of a journey of how they could find properties to purchase and then how can they convert them to become section 8 properties, and then also how do you find tenants? So the whole process A to Z. So first, how do you find these properties?

Rosalyn:

So yeah, the traditional way usually for first timers is I would always suggest to get into a multifamily property. If you don't have any in your market, then the goal would be to get a single family condo or a town hall. Section 8 even approves mobile homes, which a lot of people don't know. There's investors that invest into them as well. And those do qualify for section 8. So just FYI. So I would say it's a matter of where you are and what you can find. The most important piece is obviously make sure you get into something where you have already researched the FMR number, you understand what section 8 will allow you to charge, and then you do your numbers. Traditionally what are you paying for mortgage taxes, insurance maintenance, if any, property management, if you're not going to be there, property manage. So you will do your numbers exactly like you would for a market tenant, but you want to make sure that you know what that section 8 number is.

You call that housing authority. You make sure you understand the process. In some cases, the housing authority will give you a landlord packet that you can pick up in advance. You can look through the inspection checklist to understand what is it that they're going to look for to get the unit ready. In most cases, they honestly just want a unit that's clean, that's functional, where the appliances work. They're going to look for things like any signs of mold, signs of chipping paint, signs of locks, not working, or windows, not opening exits, just safety stuff. But they'll be able to tell you exactly what they're going to look for for the inspection. And then once you get your property, finding the tenant, there's a variety of places you can go. Well,

David:

Let me pause you here. Go ahead. I have a few questions on finding the property. So when you're looking to purchase a new property, are there some online that's like already Section 8 approved? Does that exist?

Rosalyn:

Not really, no. So the approval happens once you submit the paperwork to the section 8 office. So you can buy a unit, it's not like an address comes Section 8 certified. That doesn't happen. It doesn't work. So you as an owner, you buy the property, you do your numbers, you make sure you know that your numbers are going to work, and then once you have the property, you can contact Housing Authority just to get that inspection checklist. You want to know what it is they're looking for,

David:

And then check how much front you can collect.

Rosalyn:

Exactly. From section 8. Yeah, so once you find the tenant, then the tenant is kind of the middle person between you and the housing authority. And then at that point, the tenant brings the paperwork back to them. You have to prove that taxes are paid as an owner, property taxes, a utility bill, a copy of the deed. They want to make sure the name of the landlord is across the board legit. And then at that point, they'll certify the unit section 8 once that inspection happens.

David:

Okay. Able and have you ever purchased a unit that already had a Section 8 tenant in there? Yes, but I still have. So you can do that. So it could just transfer over to you?

Rosalyn:

Yes, totally. But you still have to go through the process of a new owner with the Section 8?

David:

Yeah. Okay. Okay, got it. So high level, you're finding a property, let's say it's a hundred grand, you see, oh, market rents a thousand dollars a month, or I can get section 8 for probably 800 a month. So you're kind of weighing those pros and cons at that point.

Rosalyn:

Exactly. Totally. Yeah.

David:

Okay. Okay, got it. Alright, let's talk about how do you find these tenants then?

Rosalyn:

Yeah. Yeah. So the tenant pool is pretty large. I mean, from every investor that I know, the general story is that there are a lot less units available for Section 8 than there are people looking with vouchers. So this is why there's a huge opportunity for this niche. In a lot of the states, there's just a lot of people looking, especially now after covid, people lost income, people got laid off. That group of folks that are struggling to pay the bills have increased. Unfortunately with the economy's acting all weird. So there is going to be a tenant pool out there. So there's websites like affordablehousing.com, so that's one website where investors and owners can list their unit. And Section 8 tenants are told through the office, Hey, go on this website, see what's available in your city and state. Another place is Facebook Marketplace. Really? Yeah, yeah, yeah. Facebook, marketplace free listing, as long as you say section 8. Okay. You put the amount in there, you can also write in what you're looking for. So if you're looking, let's say for a working section 8 tenant, which it is a thing, there are families that do have jobs that just again fall within that income line. So you can actually, in your listing say, minimum income required X amount, credit check will be done, minimum credit score X, even though I don't recommend it too much because usually these families are not in the best credit standing, but if you want to kind of filter through the applications as one way to do it.

David:

So you said a high standard maybe in the beginning, and then if nothing's coming in, you sort of start widening

Rosalyn:

It up. Exactly. But Facebook marketplace is a good one. Craigslist surprisingly as well, still works for this. So anywhere that the common focus is going to look for without having to pay a realtor out of pocket or

David:

How about Zillow or Trulio?

Rosalyn:

You can list it again, you would have to say section 8 in the description to kind of filter out those tenants versus market paying rent tenants. So

David:

You wouldn't use a realtor to post it on the MLS?

Rosalyn:

Not really. I wouldn't because again, I would try these free channels first because the amount of voucher holders that are out there, realtors, you're going to have to pay a month out of pocket as a landlord. And the section 8 tenant doesn't have that extra month, so they won't pay it. So again, I would try the freebie ways first. They've always worked for me. And then worst case scenario, if you're in a market where it doesn't work and you have to get a realtor, then you can do that as well.

David:

Okay. Now you mentioned when you're looking in your market for multifamily, so have you ever purchased Section 8 housing in other markets that weren't local to you in different states?

Rosalyn:

Yes. So I'm an investor in another property, two properties actually in Pennsylvania. So it's not local market, but we do have a property management team there that actually, that community came with, I would say probably like 8 section 8 tenants when it was purchased back in 2021. And then through the pandemic, a couple of more units became eligible. So we helped them get eligibility through the housing authority in the town, in the county pretty much.

David:

And so if you're not there on the ground, you hire a property management company, do they need to specialize in section 8 housing or it doesn't really matter? It's all the same? No,

Rosalyn:

It's all the same. They follow the same process when it comes to reporting, maintenance, paying their portion of the rent, because again, the rent collection split already happens at the beginning. So it's really just about maintaining the unit and making sure the tenant is happy with the unit.

David:

Okay, got it. So you found some tenants they're applying and now you said over the years you've learned how to vet them or screen them better. So how are you doing that better, and what questions are you asking to find out if they're good or not?

Rosalyn:

Yeah, good question. So obviously you always want to know are they new voucher holder or a seasoned voucher holder? Are they just transferring into your unit with section 8 already or are they new? So what I find is transfer tenants, you have to really vet a little extra because you want to know why are they moving in the first place. Like I mentioned, these tenants usually stay a long time, so you want to make sure that if they're moving because they're having issues with the landlord there that you understand why or they're moving because they're having issues with other tenants that's possible, or are they moving, are they downsizing or are they going up in voucher number of rooms? So that's an important conversation, and it's just really about just asking the questions, having the conversation in person, not over text, not over the phone, because then you get to kind of feel is the story making sense?

Because what you get on an application is not always the whole story. So I would say that's just one quick tip. If it's a new voucher holder, you go through the regular screening process, where are they moving? Are they employed? What is their income right now? Who's living on the property? But most importantly, you want to let them know in either cases, if it's a new voucher or an existing voucher holder that your lease is going to be very detailed, your lease is going to have clauses on if there's additional people living there outside of the names, names on the lease, that will be reported to the social worker at the local social. Wow. Yeah, you have to be very clear and have it all in writing. And I think that's the piece that a lot of landlords miss. So they start having all these issues with section 8 tenants. Oh, there was two occupants, now there's seven. Wow, there's five and I don't know what to do. And you want to minimize the amount of potential issues. And that really comes from screening and putting the lease together. Well, all of the pieces.

David:

Okay. So during screening, are you still running eviction history checks, criminal history, bankruptcy, any of those things?

Rosalyn:

Yeah, so I do a background check and a credit check. The credit score, again, like I said, is not really a deal breaker, but I want to know what's on there. Background checks, of course, that will show you any evictions or any criminal history, public searches, things like that. The one thing I do want to say is that in 2022, there are some markets where you can no longer deny a section 8 or affordable housing tenant based on their background check. So you got to know, can you use those reasons in your market. If you cannot, you can see the information, but you cannot use those reasons for turning them down.

David:

Okay. Okay, got it. And offline, we spoke about some new 5% down payment policy. What is that?

Rosalyn:

So with the Fannie Mae loan product, now, I think that was November 18th, they just started. So you can buy multifamily properties with 5% down conventional, not FHA. So that's a new loan product that just came out. Of course, it has to be owner occupied, so the owner still has to live in one of the units. But what that does is it helps with the search and offer process of multifamilies because again, in certain markets, multifamilies are in high demand, low supply, high demand. So a lot of the sellers, if you're coming in with an FHA offer, they might not necessarily want to accept it because FHA, there's a couple of extra things. You got to have inspections so forth. So with this Fannie Mae 5% conventional products, it kind of eliminates a lot of the FHA stuff without taking the risk of not even getting your offer accepted. So that's Wonder product that's out there.

David:

I mean, it almost sounds too good to be true. Now, so are you only doing Section 8 housing now?

Rosalyn:

Not only, no, I'm like about 40% there. I do want to grow that. So for this year, for 2024, any other investments I make is going to be strictly on section 8 with the strategy of Section 8? Yeah.

David:

Okay, awesome. Okay. I mean, I could ask you literally a thousand more questions.

Rosalyn:

Really good question, by the way.

David:

This is the tip of the iceberg, but you offer so much valuable content online. So where can people learn more? I know you have an Instagram anywhere else.

Rosalyn:

So my website is urbanteachnyc.com. So on there people can check out my regular mentorship group, which we meet every week on Mondays on Zoom. So I have students from all over the country learning about section 8, learning about investing internationally since I'm also a broker in the Dominican Republic and everything else that I teach property management, how to vet tenants contracts, how to put together deals, analyzing deals. So yeah, so the website is urbanteachnyc.com. I'm on Instagram under urbanteach_ and LinkedIn as well under my name, Rosalyn Ortega, Ellie. So yeah, definitely connect with me.

David:

Amazing. And we're going to put all those links in the podcast description on our website also. So for those tuning in, you can go to doorloop.com/podcast and view all the links and the transcript and everything from this. And we're also recording on video, so you can watch this on video. Now. I'm on your website now, and I see you have two things here. You have an online course and a q & a club. What are those two things?

Rosalyn:

Yeah, so I have online courses. I think what's on there is the managing multifamily. I also have a first time home buyer masterclass and section 8.

Section 8 and the section 8 masterclass? Yes. All of those three, those are on demand. So folks can just take them at any time. And they are unlimited for a year of access. And they do include email support as well. So folks take it, they have questions, they can email my team. And then my group is the Monday night group where every week, the q and A club is the group that meets with me every Monday night, 8:00 PM Eastern. And then we pick a different topic every week to talk about, and members also highlight their wins. So I have a member that just resigned from her job last week. She now has enough cashflow to make up for her salary. So she came on the group, explained her process, and a lot of good stories, a lot of good support. That's what it's all about.

David:

That's so awesome. Yeah, this is incredible. You're awesome for sharing all this. Thank you. And this is amazing. Oh, thank you. So if people want to get in touch with you, I'm assuming they could DM you anywhere, LinkedIn, Instagram, they can contact you on your website, sign up for the course, join your q & a. I mean, there's numerous ways to get in touch with you it looks like. Yeah. Thank you so much for joining us. This is another episode of Loop It In. Feel free to go to doorloop.com/podcast for more content. See you on the next one.

Thanks for listening all the way to the end. Don't forget to give us a good rating on whatever platform you're tuning in from. And we'll be back soon with another new episode. We hope to see you there. And until next time, this has been Loop It In.