Free Fix-Up Money from Uncle HUD

More Than One Way to Profit

The message I have for investors is that nothing is going to happen for you unless you make it happen. It’s always been that way and always will be. Because real estate investing offers such a wide variety of profit-making opportunities beyond simply buying and selling properties, investors should never find themselves bogged down in a position where they can’t do something to improve their net worth.

For example, I don’t concentrate on selling when it’s a buyer’s market, when buyers have all the advantage. There are too many properties avail­able for too few buyers who want to purchase them. When the situation reverses, I start to think about selling. Obviously, fewer properties and more buyers means a higher selling price for me. Meanwhile, I can work on other ways to improve my real estate wealth. One of my favorites is the HUD grant-funded, rental-housing program, sometimes called the match­ing funds program.

Uncle Sam Provides Money for Fixing Affordable Houses

Quite often when normal real estate activity has slowed down, smart investors can still find high-profit investment opportunities. One such opportunity is government-assisted low-income rental-housing rehabili­tation. The program is available nationwide in various formats.

The purpose of this program is to financially assist owners of rental properties in expanding the availability of safe, affordable housing for the benefit of low- and moderate-income persons living in the community. Often, the program targets specific areas within a city or a community to prevent slum conditions or reduce blight and further deterioration of a neighborhood. Each city or community uses federal block grant funding, along with state housing monies and sometimes special assessment district funds to improve the supply and quality of housing within its boundaries.

Grant funding is the most active program the government uses to help landlords fix up substandard rental properties, making them available to lower-income and subsidized tenants. What makes this program so attractive to property owners is that grant funds are free money. That’s a huge difference from loan funds, which must be paid back. Free money is the government’s “dangling carrot” to attract property owners to partici­pate. If you learn the ropes and do this right, I will assure you it’s well worth the time and effort it takes working your way through the so-called government “red tape.”

Fix Up Your Rental Properties for Half the Normal Price

If I told how to get your rental properties fixed up for half the normal price, would you be interested? You should be. It’s a very good deal and you can do it with funds from community development block grants. Funds are administered by local city and county housing departments. In my town it’s called the Public Housing Authority (PHA). If your rental house needs $10,000 worth of allowable fix-up work, here’s how you can do it for half price, or for only a cost of $5,000 to you.
First, visit your local city or county housing department, where you must fill out an application and several other forms with information about your property and the tenants. After the housing department receives your application, it will inspect the property and make a thorough fix-up and repair list of the work that needs to be done. All code violations—plus worn-out or damaged items, such as roofs, paint, floors, appliances, win­dows, doors, etc.—must be fixed. The house must be brought up to an acceptable condition where everything is safe and works properly.

After you and the housing representative agree on what work needs to be accomplished, a cost estimate is developed and bid specifications are drawn up by the housing department. There is generally a cost per unit limit—such as $10,000 for a three-bedroom house. If the estimate is $10,000 for the rehab work, you will be required to pay $5,000. The hous­ing department will give you the other $5,000 to do the work. Remember, this is not a loan. There is no payback involved. It’s a free grant from the government to you for participating in the housing program. It kind of makes you feel better about having to spend so much money on repairs.

In addition, once the rehab work is completed, a Section 8 subsidy can be given to the first family to occupy the unit under HUD low-income guidelines. This can be the current tenant who is living there during the rehab, if he or she qualifies for HUD assistance. Subsequent vacancies— after the original tenant of the rehabilitated unit has left—must be filled by open market renting.

Avoid Vacancies—HUD Tenants Stay Longer
Before I get too specific, let me say something about keeping your units rented—no vacancies. In areas where housing is scarce, keeping your units rented is seldom a problem. However, apartment construction goes in cycles. During easy-money times—when loans are available—it tends to accelerate, causing vacancy rates to rise as well. Many tenants move to the newer units, if they can. This is where city housing and subsidized rents can really help landlords who have older properties.
I’ve found HUD tenants stay much longer; they don’t move around as much as non-HUD tenants. Therefore, I’m a lot better protected against high vacancies. Owners of newer units can’t stand too many vacancies; otherwise, they won’t be able to pay their mortgage payments. HUD pro­grams can work quite well if cash flow is your chief concern.

I don’t recommend that all your rental properties be occupied by HUD tenants. However, guaranteed rents can be a real lifesaver if you’re just starting out. About 20% of my current renters are HUD tenants. The city and/or county pays about 75%, on average, of their monthly rent directly to me. I must also point out that it’s never late. HUD checks are very dependable: I can always count on the money on the first of each month, no matter what else might happen.

Housing Authority Needs Landlords to Participate

Even free money is not without a price. Many property owners will have nothing whatsoever to do with city/county housing programs, because of the seemingly endless “red tape” and regulations that are associated with the bureaucracy. It’s true, you must put up with some nitpicking; howev­er, I’ve found that it is more than offset by the benefits I receive.

After many years and a good number of projects, I’m financially better off from participating with the local housing authority. It’s greatly helped me toward my long-range profit goals. I’ve done moderate rehabilitation conversions and grant-funding projects and I continually participate in the rental certificate and voucher programs. I highly recommend that all landlord/owners learn about the various programs in their own commu­nities and use them.

Another important point I must mention here is that with all local HUD programs—including the annual rental assistance contracts—the city or county folks will always do their best to see that you achieve cash flow. They want you to make a profit. It’s in their best interest to have you profitable. They thoroughly understand the value of your staying in business. Remember, they need you, too. Knowing that they will help you keep your rental units full is very satisfying, particularly if you’re just getting started in this business and lack of cash flow is one of your biggest problems.

City Hall Must Allocate Its Funds or Else Lose Them
Just as price and terms will be different depending on whether you’re buy­ing or selling, so it is with the housing folks at city hall. Certainly they have rules and regulations to follow, but in the final analysis, housing departments are both judged and funded on how much housing they provide. For example, let’s say my city has been allocated funds (block grants) to rehabilitate 50 houses during the next fiscal year, but, for various rea­sons, they complete only 25 houses.
What happens? They lose the money. Normally, the funds are trans­ferred to another city that has a faster, more efficient housing department. Also, it’s quite likely that next year my city won’t get funding for 50 hous­es. Instead, it’ll get enough for only 25. I don’t think I need to tell you that giving back unspent tax money is the worst thing that can happen to any government-funded agency.

Local housing politics can often benefit you financially if you make it your business to know what the city wants, particularly if you own or plan to acquire property in the middle of your city’s hottest target area. The rea­son is that, quite often, the city government wants rehabilitation work done even more than the property owner does. This is particularly true in cases where local agencies (city and county) have made promises to the federal government to clean up specific areas as a condition for receiving large federal block grants.

How to Get Started from Scratch

The first step is to visit your local city or county housing department, often called the “housing authority” or “housing assistance office.” Incorporated cities generally have their own housing department under the direction of the public works official. In rural communities, the county performs the same function.
In my area (Shasta County, California)—with a county population of approximately 165,000, and a city population of approximately 70,000—I deal with the city primarily because most of my properties are within the city limits. Outside the city limits it is county jurisdiction. Quite often there are big differences between the two government agencies, even though their funding sources are the same.

One significant difference is worth mentioning here. Within the city limits, property owners are not allowed to perform grant-funded rehab (fix-up) work on their own properties, unless they’re licensed contractors and are approved to bid on city housing projects. In the county jurisdic­tion, the rules are not nearly as strict. I am allowed to do all rehab work on my houses, as long as I can convince the county housing authority that I am responsible and that I have the necessary know-how to complete the work. The county is also much more liberal when it comes to obtaining building permits associated with low-income housing projects. Only extensive work would require a permit for HUD rehab jobs.

The main reason I’m passing this information along is to make you aware that local housing departments differ a great deal in their methods of administering housing rehab funds. It will be to your advantage to search out all the pertinent information and rules concerning your own particular area, before you formulate a plan of action. In summary, first visit the housing authority and ask for all information about grant rehab funding for landlords, to find out how it works. Then, get a map of the area where the city or county wants to apply its funding. I’ve found it’s usually in the older, rundown sections of town. That’s where rehab is needed the most.

Dealing with the Local Housing Authority

Often times, city housing won’t give nonowners the time of day. The hous­ing department considers it a waste of time to discuss rules and regula­tions with anyone who cannot participate. Local real estate agents are responsible for this, as many agents have a tendency to badger the city housing staff in an attempt to secure loan information or rehab commit­ments for their listed properties. Obviously, available funds would make properties easier to market. In my town, the very first question city hous­ing will ask is “Do you own the property?” That’s the first requirement.

Your initial visit to city housing can be a bit awkward. At best, you’ll come away with mixed feelings: you won’t know whether to thank them or resent them. Milling around public agencies can be a particularly frus­trating experience for those who think of wasted time as wasted dollars.
There’s a standard clause in real estate contracts that says, “Time is of the essence.” That clause has little meaning at city housing. You’ll see what I mean after a few visits there. Housing folks are a very patient bunch. They view the world as always having many more tomorrows. The only exception I’ve ever experienced was with a project where I was asked to convert my two-bedroom houses into three-bedrooms. The housing department needed six three-bedroom houses to maintain its spending level—and thus preserve its annual budget.

You can benefit a great deal by knowing this kind of information. I suggest you make friends or develop a good contact within your local housing department. It pays big profits in the long run—as you will learn later on in this chapter.

The Extra “Red Tape” Is Grossly Overstated

All government operations use more paper than they should. That’s espe­cially true when HUD is involved. However, most of the paper goes in files, never to be seen again after you sign it. Your application for a city HUD loan or grant funds won’t be much different from any bank application. Financial information is about the same for all borrowing, even though the forms may vary slightly.

For every housing loan I’ve obtained, my standard personal financial records are all I’ve ever needed to satisfy city or county agencies. Financial information is common to all borrowing. You need five basic forms or doc­uments to provide an adequate picture of your credit and financial capac­ity to housing lenders. (See the previous chapter for a detailed explanation of the five basic financial tools I use.) Just prepare the forms yourself and you’re ready to go.

No-Money-Down Deals Are Very Possible

Some cities and/or counties have more money than others to spend on housing. Some also have “pet projects” and will offer more incentives, such as loans, for these particular projects. This too is valuable information. It’s another reason why you need a contact in the housing department.
I’ve found that the financial climate is always changing, especially when it comes to federal block grants. Some days you can’t find any money and on the very next visit they seem to throw money at everyone. However, unless you stay in close contact, you’ll never know exactly when you have an advantage.
On the day I first noticed the “un-yellowed” squares on the bulletin board, I had no idea that I’d stumbled onto a gold mine. I found out by ask­ing questions, which most housing folks were happy to answer. They generally give you lots of information if you just keep asking—and that’s all I did when I saw the “un-yellowed” squares. (More about these in a few pages.)

I had no idea they would loan me city and California housing funds, until they told me it was available. They explained that city housing had an emergency fund for special uses and that they would seek approval to use it for converting my two-bedroom houses to three-bedrooms. On that par­ticular project it cost me only 20¢ out of each fix-up dollar to completely upgrade six houses. The balance was funded with low-cost housing loans.
Since that time, I’ve done a variety of jobs (with matching grant funds) for which the city or county housing departments have paid for everything (total costs). First, they gave me 50% free grant money. Then they loaned me the balance for my 50% owner contribution. The bottom line is that my units got completely upgraded and I was not required to come up with any out-of-pocket money. Was that a great deal or not? I certainly thought so.

Selecting the Right Property

If you already own rental property in an area where city housing wants to commit rehab monies, that’s good. You’re ready to submit an application and get started. If you don’t own a suitable rehab candidate yet, then it makes good sense to visit your local housing office and discuss where they are doing grant-funding jobs with landlords. Better yet, get a map of the area, if they have one. Then start looking for deals.
Each city and/or county will set maximum dollar limits for its match­ing fund projects. Limits are similar in most towns. The maximum amount of a grant is based on the unit size. Generally it is tied to the num­ber of bedrooms and it applies to both apartments and detached houses.
Dollar Limits for Maximum Grants in My Area
Studio units $5,000 grant maximum
One-bedroom unit $6,500 grant maximum
Two-bedroom unit $7,500 grant maximum
Three-bedroom or more $8,500 grant maximum
Matching grants can only be used for serious work, not cosmetic stuff. Eligible repairs or rehab means basic housing improvements.

Swimming pools or servant quarters will not qualify under this program. Eligible items include roofing, plumbing, electrical upgrading, painting, floor coverings, fencing, and most anything having to do with energy conservation—such as double-pane windows, new doors, weather strip­ping, and better insulation.

Multi-Units Earn You More Profit for Each Dollar Spent
Let’s suppose you own a single-family, three-bedroom house you would like to rehab. Under the matching grant program (50-50 split), applying the maximum grant fund limits described above, you would have to get the work done for $17,000—$8,500 free grant money, plus your $8,500 cash contribution. From experience, I can tell you that $17,000 gets used up very quickly. Let’s say the housing authority estimates the total job (based on whatever rehab it determines must be done) will cost $25,000. Now, the math works against you. The city still contributes $8,500; how­ever, your share jumps to $16,500. It’s no longer a 50-50 deal because it exceeds the maximum grant allowed.
For this reason, it works much better with multiple units or several houses clustered together on a single property (lot). It gives you more free grant dollars to work with. With multiple units, chances are that every unit will not require the maximum grant allowance. That means that if some exceed the unit limit and some cost less, there’s a good possibility that overall you’ll stay within the grant limits for the project.

Watch Out for the Hidden Costs

In addition to basic housing fix-ups, cities and/or counties often include their pet projects with grant-funding approvals. Some local agencies will insist on the construction of sidewalks and gutters, storm drain exten­sions, sewer and water hookups to municipal utilities, and the resurfacing of parking lots and driveways. These items can be very expensive.

You may assume these things won’t cost you; I assure you they will. While it’s true these items improve your property in the long term, mak­ing it more valuable, it must always boil down to present economics. For example, how much more rent can you collect from a low-income tenant who has 65 feet of new storm drain and a new sidewalk along the side of his two-bedroom apartment? If your answer is “none,” you’re right. What about selling the property sometime in the future? Your property may be more valuable because of the additional sidewalk and drain pipe, but I doubt it. It’s really just a wild guess at best, I think.
The purpose of this discussion is to make you stop and think. Sure, grant money is free, but the matching funds are not. That’s your money. If sidewalks and drainpipes add $12,000 to the cost of the project, then $6,000 of that amount must be paid by you. So, you need to figure out how much more rent you’ll receive and how long it will take to recover your cash outlay, to make sure it’s worth doing.

HUD Assistance with My Viola Cottages

Several years ago, I completed a matching funds project on an 11-unit property called Viola Cottages. Each unit had one bedroom. At that time, the maximum grant allowed for one-bedroom units was $5,000. Because there were 11 cottages involved, the maximum amount of free grant fund­ing available to me was $55,000. As it turned out, the project actually cost $90,000. I received $45,000 of free grant money and, of course, was required to contribute an equal amount of matching funds. Two of the cot­tages cost more than $10,000 each to rehab. However, the cost of the other units was much less than the $5,000 limit.

In these situations, it’s not the least bit uncommon for cities to go beyond simply approving your 50% grant fund application. In addition, they will often loan you your share of the matching funds, assuming, of course, you don’t have the money to contribute yourself. Most of us don’t. Wouldn’t you agree?

Why would the city give you free grant money, then loan you an equal amount without requiring you to put up any money at all? They want to see the job get done, so they’re willing to provide additional assistance. What owner could ever say no to a rehab project that costs him or her nothing? That was exactly the situation with my Viola Cottages project. The local housing department wanted to see the project done even more than I did, so they loaned me the money to make sure it happened.

Loans Work in Tandem with Grant Funds

You are most likely to receive city HUD loans by going the extra mile. That means owning property and being willing to participate with your local HUD housing in special target areas where the city is highly moti­vated to clean up older, rundown neighborhoods. Also, single-bedroom units in locations where there’s a shortage of affordable senior housing will cause the housing folks to push a little harder. Often, that translates to making easy loans. We’ve already discussed proper timing, which is always important when negotiating with HUD representatives or, for that matter, anyone else.

City loans are the very best kind of loans, because they are generally designed to fit a particular need or situation. For example, city housing will always insist that you make a profit—generally about 8% or so, but it varies. Let’s say the city gives you 50% grant funding and then agrees to loan you the other 50% (which is your 50% contribution). The loan will be designed with a special interest rate and terms so you’ll be able to make loan payments and still make a profit. The city does this by lower­ing the interest rate to fit the deal, based on projected income. They also set the rents you can charge, so they know exactly what income and expenses should be. Most loans are amortized over 10 to 15 years and sometimes they even forgive payments if you will rent to special hardship tenants who are on the HUD waiting lists.

The Flip Side: Other Requirements by the City

It’s important for me to point out here that when cities and/or counties design easy-pay loans for you and guarantee that you can make your monthly profits for doing rehab projects with them, there’s a flip side— they will require periodic inspections of the property and they will expect you to manage the units well and keep them in good condition. Remember: the sole purpose of giveaway grants and low-interest loans is to provide incentive to owners and investors to create safe, affordable housing for lower-income citizens who might otherwise be left out in the cold.

The City Is a Flexible Lender
The federal government often bails out large banks and businesses to pre­vent them from going broke when they are characterized as “too big to fail.” It’s only fair that this same courtesy be extended to landlords who own smaller properties occupied by low-income HUD tenants. I have known investors who have had their housing loans forgiven or the pay­ments reduced when the reasons were justified.

City housing is not your typical “hardball” lender. They are flexible like owners who finance their properties with carryback loans. Cities never want to own the rental properties; therefore, it’s comforting to know— when you’re working with city HUD and the economy falters—that you won’t be foreclosed or you won’t lose your investment property. It’s more likely that city housing will adjust your mortgage debt to fit whatever amount of income you have. Safety nets like this are very valuable, espe­cially for landlords who are concerned about cash flow.

The Easiest Loan in Town
It goes without saying, you should have your financial tools updated on a continuing basis. That way, when an opportunity presents itself, you are ready to respond.
HUD-assisted loans made by housing agencies are quite easy to obtain. For example, in my area, the city will loan up to 90% of the property value. Banks that write loans (mortgages) in second or third position for rental properties normally require at least a 30% safety margin of owner equity. Also, your personal credit is seldom any major issue for housing loans. Don’t forget: these agencies want to give you a loan if it fits their own goals. They generally assume your credit is good if you already own rental property. To summarize, housing agencies will require you to submit all the financial forms we’ve mentioned. However, they are not likely to scru­tinize them with a fine-tooth comb, because they want you to qualify.

The key to getting the most help is that you must own or acquire properties in target areas. You will get this information by asking your housing department. My approach to the grant-funding program is the same as I use in all my real estate activities: determine the needs of others, then “tailor-make” your project or plan to fit that special need. By doing this, you’ll make more profits than all your competitors, I’ll guar­antee it.

The Application Process: Steps to Take with Properties You Own

The application process—“red tape,” as some will call it—is really not that difficult to complete. The housing department will give you its stan­dard application forms and you can simply fill in the blanks. You will need to provide each tenant’s name, rent amount, size of family, and esti­mate of tenant’s income (information from the tenant’s rental applica­tion you have on file). You will also need to provide information about the property, such as location, size, number of bedrooms, upstairs, types of heating and cooling, and utilities servicing the property. I always pro­vide a sketch of the property (prepared by me at the time of purchase). You can fill in the required information with different colored pencils. Sketches are very useful. Refer to the example of Jay’s typical property sketch in the Appendix.

Housing agencies will want to know financial information, such as your personal estimate of value, number of mortgages, balance owing, and the monthly payments (debt service). You must provide proof of insurance and a copy of your latest property tax bill. If you owe back taxes, you can sometimes get them paid up to date with grant funds. Always ask first. After you complete the paperwork, submit it to the agency. They, in turn, will review your request and visit the property to determine what needs to be done. Next, they will call you to set up a feasibility meeting to discuss their findings and to inform you whether or not the property fits under their program guidelines.
At the feasibility meeting, they will answer all of your questions. For example, you might be wondering if you can do the rehab work yourself. Now is the time to ask. The agency will inform you if your current tenants qualify for rent subsidies. (More about this later.) In short, the feasibility meeting is the time for all parties to ask anything and everything they’d like to know about the proposal before moving forward.
If everything gets satisfactorily resolved and you receive approval, you will need to provide a termite report (not over two years old). If you don’t have one, you will need to get one, at your own expense. However, the cost of any recommended work will become part of the rehabilitation project.

Once the termite report is completed and submitted to the housing agency, they will inspect the property thoroughly and proceed to write up a complete itemized repair list (bid list), along with cost estimates and specifications for doing the work. After costs are established, most hous­ing agencies are required to submit their plans to a loan committee or housing review board whose members will make a decision on the agency’s recommendations. Assuming all goes well and the project gets approved, the next step is the tough one. Once approved, the owner must put up his or her share of the total cost—as I said earlier, normally 50%.

It Pays to Learn What Makes City Housing Tick

I’ve done several very profitable rehab projects (fix-up jobs) on my houses, obtaining easy-to-pay, low-interest city loans, because I took the time to learn exactly what buttons to push and when to push them. Timing has everything to do with getting your jobs approved and making the highest dollar returns at your local housing department.
Before my city housing department used computers, the staff kept track of all rehab jobs on a large cardboard poster mounted on the wall. Houses that were funded for rehab were represented by squares drawn on the poster. Some squares were for two-bedroom houses, others were for three-bedrooms, and so forth. As the budget year progressed and as the various houses were rehabbed and completed, the housing folks would “yellow in” the squares with a felt-tip pen. Obviously, those squares not yellowed meant the houses were not yet scheduled for rehab.

Several years ago, late in the housing budget year, on a routine visit to city hall, I discovered an entire row of un-yellowed squares—each rep­resenting a single three-bedroom house that was funded, but for which fix-up work had not yet been contracted or even scheduled. For some rea­son landlord/owners with three-bedroom, fix-up houses were not responding to the program in the numbers the city had expected. Less than 90 days remained for the housing department to contract and rehabilitate these nine three-bedroom houses or face the loss of grant funds to a faster-spending agency.

City housing did not wish to lose funding, no matter what, and I clear­ly sensed an urgency on the edge of panic. So, I proposed converting my two-bedroom houses to three-bedrooms by making the garages into third bedrooms and adding a carport. Normally, the city won’t do this, because it’s much too expensive per unit. At the time, the cost limits were $7,500 per house and I would be required to furnish $3,750 (my 50% share) plus everything over the $7,500 limit for each house. The bid estimates were $12,000 per house and I advised the city I could not come up with $8,250 for each house.
Quickly the city became very creative. They said, “OK, Jay. How much money can you provide?” I said, “$2,500 per house is my limit.” They did­n’t like it, but they didn’t say “No.”

What finally happened was that they made me a city loan at 5% inter­est for 15 years of amortized payments, combined with a California hous­ing loan at 3% for 15 years with deferred monthly payments (that means none). They also provided 15 years of housing subsidies with rents 20% higher than normal for each of my converted three-bedroom houses. I now have cash flow and guaranteed rents for 15 years, even when the houses are temporarily vacant. It’s a very good deal for me because they always provide positive cash flow.

You Help Yourself Most When You’re Helping Others
The moral to this story is simple. Find out what city housing needs, then deliver it in a timely fashion. Think not what city housing can do for you, but rather what you can do for city housing. You’ll find, as I have, it pays big dividends.
I recommend that all landlords pay a visit to city and/or county hous­ing departments. Find out exactly how these programs work in your own area. Each agency uses various combinations of federal block grant fund­ing along with local loans. I have found that each city has its own specific goals for upgrading community housing. It also has particular sections of town (generally older) that it targets for major fix-up funding grants. Often this information can be extremely helpful when you’re considering where to purchase your next property.

You’ll find it’s good business to learn all you can about local HUD pro­grams in your area. It will give you insider knowledge about where you might consider investing. Plus you’ll be able to find out how much rehab money you might expect to receive if you acquire fix-up properties within the city’s special rehab target areas. Over the years, my work with city housing has been very profitable for me—and it can work the same way for you.

Fixer-Uppers part 20

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