By Mark Ford, wealth coach, The Palm Beach Letter

Thursday, December 29, 2011

Every month, the government deposits $1,250 into my bank account. But I'm not collecting Social Security. And I'm not talking about tax refunds or municipal bonds.

I'm talking about Section 8 housing.

Section 8 housing (officially Section 8 of the United States Housing Act of 1937) is the government program that helps about 3.1 million low-income families pay rent. It operates through several programs, the largest of which is the Housing Choice Voucher program. It was meant to pay for "a portion" of the rents and utilities of those in its care. But often, as you will see, payments are greater than competitive rental prices.

Here's a real-life example...

Peter, my partner in local real estate ventures, recently bought a house in a working-class neighborhood. In 2008, the house sold for $500,000. Three years later, we bought it for $80,000 and renovated it for another $15,000. It's a three-bedroom, two-bath house with a fenced-in yard, new appliances, and tile floors.

Instead of renting it on the open market, Peter offered it to the local Section 8 housing authorities. They found a young lady with three children to take it. She seems to be an upstanding citizen – she is clean and sober and holds down a steady job. Her only "issue" is that she's had three kids from different men who don't feel it's their job to provide for their children.

The Section 8 people offered to pay us $1,500 a month for this property, which is about $300 more than it's worth. After Peter and I cover the monthly expenses – the mortgage, maintenance, and taxes – we are netting more than 12% on our cash. That's darn good money in today's world. So there must be a catch, right?

I figured the catch would be a tenant who wrecks our house and doesn't pay rent. But the Section 8 people guarantee about 80% of the rent – even if the tenant doesn't pay, the government still deposits $1,250 into our account. Every month, they deposit $1,250 into our account, no questions asked. The tenant is responsible for the remaining $250. So even if she paid us nothing, we'd still be ahead of the game by $50 a month, or $600 a year.

But we don't have to worry about our tenant's $250 payments – even the punctuality of her payments – because the local government stays on top of her.

And as to wrecking the place? They inspect the house and make sure it stays in good shape. In effect, they are acting as our property manager, free of charge. We are pocketing the 6%-10% of the rent that we would otherwise use to pay a property manager.

And if our tenant leaves at the end of her lease, the government will find another tenant to take her place – on the same terms, which saves us the hassle.

Add it all up, and it comes to an additional $5,000 to $7,000 extra every year in savings and/or extra income. And it's all guaranteed and supported by the federal government.

There are strict guidelines that owners and tenants must follow to be eligible to participate in this kind of program. For specific details, call your local housing authority. They can answer all your questions and help you get started.

This is our first experience with Section 8 properties. You can bet we will rent more. I've just looked at the portfolio of properties Peter and I have together. I've identified 20 properties that might qualify for this program. When I run the numbers on income generated by 20 properties, it adds up. It's no wonder some of the wealthiest people I know have been quietly doing this for years in Palm Beach County.

If you are currently invested in rental real estate, you should take a look at the Section 8 opportunities in your locality. Every local market is unique and every local agency has a different standard of service. If you'd like to know more about getting into Section 8 housing, start with the government's explanation of the program here.

Regards,

Mark Ford

Further Reading:

Earlier this year, Mark told DailyWealth readers about another great opportunity in real estate for anyone who has some cash and wants to start a lucrative, income-producing business. Right now, three factors about the real estate market "have created a terrific opportunity for prudent investors," he writes. Read more here: How to Make 54% on Your Money in One Year.

Before you jump into real estate, Mark gives readers four critical elements to being successful. You don't have to be a multimillionaire to generate a steady income. He shares a way to "buy property at bargain prices... and generate double-digit income yields." Get the full story here: I Bought an Investment with a 17% Yield Last Month.

Market Notes

A YEAR-END LOOK AT "SUPER-CONCENTRATION," PART 3

Today's piece is the third in our year-end series on the dangers of a "super-concentrated" portfolio.

Over the past few days, we've noted how assets that are often used to diversify portfolios – like copper and a broad commodity index – are moving in the same "up and down" fashion as stock and exhibiting similar returns. Math majors would say these assets are "highly correlated."

Another asset many financial advisors and 401(k) salesmen claim is a "portfolio diversifier" is emerging markets... stocks in places like China, India, Indonesia, Brazil, and Vietnam. Our chart today shows this just isn't the case right now...

Below is a two-and-a-half-year performance chart of the benchmark S&P 500 stock index (black line) plotted alongside the performance of the big emerging markets fund, EEM (red line). This fund is a broad basket of emerging market stocks. And as you can see, the two are moving in lockstep right now and sport the same returns. If you think you're diversifying your portfolio by investing in far-off lands, think again.