Underwriting a seller note where most of the rent roll is housing assistance payments

Worth asking as a straightforward question. If the authority is paying $4,400 of $5,650, the tenant credit exposure is only about $1,250 spread across five households plus one market tenant. That reads as one of the safer rent rolls this kind of underwriting produces, which is usually the point where it pays to look harder for what bites.

The thing that bites is the inspection, marlow. Payer credit is excellent and collection risk is near zero on the assisted portion. What replaces it is a condition standard that has to be maintained continuously, and a borrower who defers maintenance to keep paying his note is exactly the borrower whose units start failing inspections.

Vellum, I'd want three things from diligence: the last two inspection results for every unit, the current payment standard sheet for that bedroom count and zip, and the owner's actual repair spend per door for three years. If gross rent is at or above the payment standard already there's no rent growth available to you, so the note's cushion only shrinks as taxes and insurance move. That's the part your 1.4 coverage hides.

On the 82 versus 88, don't move the price until you've read the file. Price the specific weakness you find or pay the ask.

For small multifamily with a mix of voucher and market tenants, two things stand out from the operating side. First, the inspection almost never fails on something structural. It fails on the cheap stuff. Peeling paint on a porch, a window that won't latch, a missing GFCI near a sink, a handrail with three balusters gone. An owner with cash keeps those fixed for a few hundred dollars a visit. An owner without cash lets them stack up and then abatement follows. Second, the rent side tends to be boring in a good way. Assisted units in a market with a long waiting list rarely sit vacant more than a week or two. Market units turn more often and cost more to turn, but they carry more upside. When market rent moves, the payment standard tends to move later and by less. So for a note like this, the collateral cash flow is generally more stable than a market building and less elastic. If you ever end up owning it, expect to re-paper with the authority and expect an inspection before money flows again.

Your guess about the contracts is broadly the right shape. Housing assistance payments run under a contract between the owner and the public housing authority for a specific unit. A change of ownership generally requires the new owner to be approved and to have payments assigned or re-executed, and authorities have their own paperwork and timing for that. If you take title through foreclosure, expect a gap while that happens, and expect the authority to inspect. Foreclosure timelines and whether a receiver can collect and hold assisted rents in the interim vary by state, so that piece needs a lawyer licensed where the property sits before you price it.

On the concentration question, you're moving risk rather than removing it. The assisted portion has excellent payment reliability, which is the program's central appeal. What you take on instead is program administration: continuous compliance with the inspection standard, rent capped at the area payment standard rather than market, and recertification paperwork that can interrupt payment when it slips. Abatement is the concrete downside case. The housing share can stop until a failed item is corrected and re-verified, and the timing of re-inspection is set by the authority.

The assumption doing the most work in your 1.4 coverage is that the payment standard supports the current $4,400 going forward. If the property's contract rents are already at the standard, your revenue growth is a policy decision made annually somewhere else, while taxes and insurance are not. I'd underwrite the note with flat gross revenue and expenses growing, then see what coverage looks like in year five. That tells you more than a haircut to par does.