Analyzing the Creditworthiness of Section 8 Investment Properties

In the world of bond investing, specifically in the realm of investment grade credit, there does not exist a higher quality instrument than a U.S. government bond.

U.S. Treasuries are issued by the Department of the Treasury on behalf of the U.S. government, therefore, they carry the full faith and credit of the United States, making them a safe and popular investment.

U.S. Treasuries are typically viewed as being risk-free when viewed from a credit perspective for the aforementioned reasons, but the obvious trade-off resulting from low risk is a lower yield rate.

In the wake of the subprime mortgage crisis of the late 2000s, many mortgage lenders improved their screening process, focusing strictly on originating creditworthy loans to safely deploy and preserve capital.

But in the search for higher yields, creative financiers developed the DSCR loan, a mortgage which is primarily secured by the future projected cash-flow resulting from monthly rent payments from the tenant in an investment property. This is a relatively creditworthy loan to make, especially when the debt service coverage ratio is good. However, could it be better?

The Housing Act of 1937 includes a section which authorizes the payment of rental housing assistance to private landlords on behalf of low-income tenants by the U.S. department of Housing and Urban Development.

The section, often called Section 8, provides an interesting opportunity to blend the creditworthiness of a U.S. bond with the security of Collateral afforded to the lender provided by real estate.
Furthermore, Section 8 properties are required to undergo a full inspection of their premises by government workers for HUD’s Housing Quality Standards to be met. Interestingly, this procedure further strengthens the case that Section 8 properties are of a higher-quality, and deserve their place in a portfolio which values the quality of its collateral.

Epilogue

A DSCR loan made to a private landlord for the purchase of a Section 8 property is, perhaps, the greatest opportunity, from a safety perspective, in the world of real estate. The safety provided by an adequate debt service coverage ratio in a DSCR loan, coupled with the rent payments being made by the U.S. government, and the property being required to meet HUD’s Housing Quality Standards, afford the lender great peace of mind that their capital is being allocated properly.