What's the Deal

[mjkst27]

talked to a small time mortgage lender tonight who tried selling me on section 8 investing. Here's his scam - he buys cheap old homes in slummy neighborhoods in the range of 10-20k. These are duplexes or homes that can be converted into duplexes for less than 10k including any other necessary improvements. His management company puts section 8's tenants in the property, at rents of 500-700 per month per unit. Being it's a section 8 the income is essentially guaranteed, so he gets a high appraisal on the property, like 70-90k. He cashes out most of the equity and puts it in his pocket, while still collecting a small income per month from the tenants who more than cover his mortgage payment. He pays his management company 7% of the rent per month for their service, and he's essentially an absentee landlord making fat cash.

 

One hole I see in it is the cash-out. If for some reason the place goes unoccupied, he's on the hook for the mortgage payment. What other holes are there in this sales pitch? Is the section 8 stigma undeserved from an investment standpoint?