Which is best for first investment property?

Question

[b]  I am looking to invest in a property for my two grad school kids to live in location Grand Rapids, MI.
      I've narrowed it down to two properties:  
    1.  4 BR/1BA single family house with new furnace and hotwater heater. recently remodeled BA.  2 stall garage. asking price 69,900  we would rent two bedrooms for $275 each plus utilities.
     2.  House with 3 units.  
         a. 1 BR, LR, Kit, BA
         b. studio 1 BR/LR, Kit, BA
         c. 2 BR, LR, Kit, BA  (this is in back half of house and   has a dorm style bedroom in the attic)  
       rents are 525, 395, 535.   would collect 395 and my kids would occupy other units.
    This home is wood sided,  few spots peeling away already.
Furnaces are about 20 years old.  He doesn't know when roof was done - he's owned for 13 years.  Asking price 89,000.

Multi-unit is located in area with upscale resturants, artsy stuff 1 block away.  Single Family is is a nice neighborhood, typical urban.
One property has potential to generate greater income when children move on but requires more investment to update.
And would it be worth it...we live 3 hours away.
And then there's the MI economy that is awful and property values are dropping. Although the SEV on Multi went up by 10,000 in last two years and single family dropped by 10,000.
Any advice would be appreciated.

Brian Levredge · Answer

I would go with the multi for several reasons.  First, a house with 4 beds and 1 bath is obsolete, imo.  If you are planning to rent out rooms dorm style, you may have a difficult time finding strangers that are willing to share one bath.  As a family man myself, I would never rent a house that only had one bath.  If you are looking at the multi, why not have your two kids share the two bed unit and rent out the other two units?  Your odds of breaking even every month will be much better doing so.

Rich Weese · Answer

Patty- breaking even wouldn't be my goal. As other posters have said, you might be incurring problems that wouldn't be offset by "breaking even", imo. Invest in something that is JUST an investment, and not a job, as this one would be for your son, and probably you, imo. Rich

Bill Patterson · Answer

Rich has some good points about putting the kids in the middle of a rental contract.  Business and friends donâ€™t always mix very well!  Where are the kids going to school?  It sounds like the multi â€“ unit is near East Town, where parking can be a problem, but is a nice area!  Unless you plan on keeping the property for several years and can evaluate the cost of upgrades and repairs that will be needed to keep the property leased, Iâ€™d find a good rental close to where they either want to live (East Town?) or close to work or school.  Then find another investment property to consider that is closer to your home and that you can manage without dealing with the friends of your kids.  One thing I always rememberâ€¦If it will not cash flow, I probably donâ€™t want it!

Rich Weese · Answer

Having done it both ways, paying the rent for a student and previously buying a rental for my student, I'm with Josh. Owning a student rental is a completely different dog. I found numerous items that weren't conducive to investing, but the biggest one was putting my kid in the middle was not good.

1. damages that no one took responsibility for
2. unpaid rent by a tenant made difficult situation for my kids' relationship.
3. the problem with 9 months rental(I tried the year long, but not easy depending on the competition)
4. new requirements by the school (BYU)

It made it difficult to take a hard line with the normal characteristics of mgmt when your kid is in the middle. Rich

Josh Green · Answer

i think you would be better off just paying your kids' rent in someone else's property.

these places appear to be overpriced. you would be taking a loss every month. on the first you would be taking in only $395 and your payment is $592 (P&I).  assuming you are using the 50% rule, this would be a loss of $400 a month! OUCH!

i suggest reading up on the 50% rule. I also advise having your kids find a 2 bedroom for rent and renting it out.

Pat K. · Answer

The Multi is where they want to live and the house in a neighborhood near the Medical School my son will be attending. They RA'd in college to pay for room and board.  Not expecting to make money on the deal just break even...

Pat K. · Answer

I thought tax credits for furnaces are for principal residence only not rentals.  Is there a different credit for rentals?

Jackie Patterson · Answer

You are correct, Patty.  I would still think the multi-unit is the better investment.  You might check with your accountant and see if the title was in one of your kid's names also, if that would allow you to get the tax credit.

Pat K. · Answer

Thanks for the input, appreciate it.  There are two furnaces in the multi.  One of the kids will get a roommate.

Jackie Patterson · Answer

The multi-unit sounds like the better deal to me.  Sounds like it is in a desirable student, or young professional, neighborhood, and should be easy to rent.  It will also be easier to sell when you want to.  I would ask for a seller concession for the furnaces.  You didn't say if each unit had it's own furnace.  With the tax credits, now is the best time to put new energy efficient furnaces in.  Michigan's economy isn't great, but remember Southwest Michigan is totally different than the remainder of the state, and the Grand Rapids area is healthier than many.

Which is best for first investment property?

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