Financing Benefits of Section 8 Housing
Property investments are one of the best ways to acquire passive income and achieve long-term economic stability. However, without starting capital, it can be difficult to get into the world of real estate. Investors can face immense hurdles with financing single-family homes or duplexes. Multifamily property is sometimes a better place to start, because multifamily complexes can actually be easier to finance.
One of the most forgiving financing structures with multifamily property is Section 8 Housing. Section 8 is typically associated with slum housing, unruly tenants, and poor cash flow, but these stereotypes are not actually true. Section 8 Housing can be a great opportunity to get your rental portfolio off the ground, especially when taking advantage of the HUD Section 223(f) program. This program provides mortgage insurance to borrowers in a number of ways:
1. 100% Financing
Under Section 223, affordable housing projects qualify for 85-90% LTV for servicing low income tenants. In combination with other equity sources and grants, funding can easily exceed 100% financing. This is an immense benefit for investors, but it’s important to ensure that monthly cash flow will cover debt expenses and bring you profit.
2. Non-Recourse Loan
This is another great way to reduce the risk involved with your rental investment. A non-recourse debt is a loan that is secured by collateral, which is usually property. If the borrower defaults then the lender may seize collateral but no further compensation, even if collateral does not cover the full value of defaulted amount.
3. RAD Coversions
The Rental Assistance Demonstration (RAD) is a voluntary program allowing public housing authorities and owners of HUD-assisted properties to convert eligible units from capital funding and formula-driven operating to long-term project-based Section 8 contracts, with a minimum of 15 years. This conversion removes the restriction on securing private financing sources, allowing owners to address deferred maintenance issues.
4. Combine HUD with LIHTC
LIHTC is an indirect federal subsidy that encourages the investment of private equity in the development of affordable housing. This program has helped finance over 2.4 million rental housing units since 1986. With LIHTC, the IRS allocates tax credits to state Housing Finance Authorities, and developers apply for credit allocation for their development projects.
5. 35-Year Fixed Rate
A Section 8 investor is granted lower monthly mortgage rates through extending the loan payback time. Although Section 8 housing means owners receive rent that is below market rate, lower mortgage rates allow investors to cover debt service and still make a monthly profit. Standard low income housing investments have 35 year mortgages.
The negative connotation associated with Section 8 housing is fading as investors discover the financial benefits and opportunities of this type of investment. Multifamily housing for low-income families is a unique rental opportunity to allow investors to generate cash flow with minimal capital up-front.
