College student buying first rental property

12 Replies

Hi,

My partner and I are both in our second year of college. We found a pretty decent starter house that we are very interested in. It is a duplex with nice tenants and a lot of important things replaced within the past few years so it won't be needing a lot of repairs. The owner is offering 12% APR on our financing. I know it's a crazy rate but I do understand that not a lot of people would hand over money to 2 19 year old kids with no credit. We don't really need money in college so we aren't taking any profits in order to pay the mortgage off in 5 years time. I have all the calculations in place to have all the necassary payments such as mortgage, taxes, insurance, management company, and water. We will have a very little left at the end of each month in case of required maintenance or vacancies.

I am looking for any other general advice anyone can give me as to what to look out for because this is very big responsibility and weight being put on my shoulders if I go along with this. We are both basically putting ourselves in huge debt without jobs for the next 3 years. We have ran a business in the past to have a small income but nothing that can really help aid the payments of a house.

Thanks

Why are you doing this?  

Will the house appreciate?  

If you will break even at the end of every month, what's the point?  (I can see the point for your seller if you are paying him 12%)

Will you live in this duplex?  I would recommend finding someplace where you could leverage money you would otherwise spend on rent if you are considering investing.  

There will be other houses in Rochester.  

Don't forget to work hard learning and having fun in college.  Being a landlord is not necessarily either of those things, unless you are printing money.  

It does not sound like you will be printing money on this deal.  

@Anthony L.  This sounds like a bad idea if you have no reserves.  Hit a bump and you could be done for.

@Tom V.  Pretty much nothing here appreciates.  There are some pockets, but I certainly wouldn't count on it.

The point of doing this is to build wealth. I'm in college so I don't need money for the next few years. Even if I break even every month, I am putting almost nothing down on the house so by the time I graduate I will have that income plus the asset if I want to sell. I plan on finding a lot of these with putting very little down and just breaking even or making even a little just to build up the wealth since I don't need even a pen of profit while I'm here in college.

@Anthony L.  If you break even each month, it will be difficult to build 'wealth' or have income until that property is paid off (and you won't be able to pay off early without extra cash).  There are many properties in Rochester that offer positive cash flow so don't rush into it.  I've purchased a house that had 'everything replaced' but I've been hit with big bills unexpectedly...so if you feel the urge still without cash reserves (or the ability to build one) I hope you have some credit you can tap into (which it doesn't sound like do).  There are always deals, if it were me I would sit this one out.  What neighborhood/zip code you looking in?

Chris

Christopher Schmidt MBA | http://www.chrisschmidtrei.com

@Christopher Schmidt: Thanks for the reply. There is a slight cash reserve but the point of us getting so close to a break even point is so we can pay it off entirely in 5 years. We were given a 30 year limit but we want to get it all paid off for when we graduate so we immediately have positive cash flow to rely on. As for our personal selves, if there are any emergencies we have a few thousand on hand but would like to keep everything coming in an out of one bank account meaning theres nothing out of our pockets and the house is self sustained by the rent coming in paying all expenses. I do also have a credit card for the business I own that has a 35k credit line. Problem is it doesn't count for my personal credit and even the banker I worked with tried but said how terrible that was that they wouldn't count it.

I'm not sure if everyones not understanding our plan or I am just getting myself into a mess but basically what we want to do is take advantage of the fact that we are in college so we don't need any money to support ourselves while on campus. We put the money from our business and part time jobs into a few investment houses and pay them off in 5 years time which is the highest amount of mortgage we can do without going below breaking even. We have some but not a lot in cash reserves but would like to keep each house on an individual self sustaining account. The houses will be paid off around our graduation time and then we will immediately start having positive cash flow and no mortgage to worry about. 

A random example is if I buy a 100k house for 10k down. Rent pays all expenses and when I graduate it's paid off and I own a 100k asset now with only 10k down. I could either keep the rental income or sell it and get whatever market value is. But in the end I still came out with a ton more than I went into with. Thats what I mean by building wealth with it. I'm not looking to take profits from the rent every month. I'm looking to come out in the end with more by paying it off quick and utilizing the only time in my life where I will be old enough to do my own business but not have to worry about any personal financial expenses.

@Anthony L. If you break even each month, it will be difficult to build 'wealth' or have income until that property is paid off (and you won't be able to pay off early without extra cash).  There are many properties in Rochester that offer positive cash flow so don't rush into it.  I've purchased a house that had 'everything replaced' but I've been hit with big bills unexpectedly...so if you feel the urge still without cash reserves (or the ability to build one) I hope you have some credit you can tap into (which it doesn't sound like do).  There are always deals, if it were me I would sit this one out.  What neighborhood/zip code you looking in?

Chris

I have some worries/questions:

1. Will this require you to work more during your college years?  Did you account for your tuition? If you and your partner are not going to graduate on time because you have to work 40 hours/ week, this isn't a good.

2. What is your loan term?  30 years or 5 years?  Most 30 year loans have no penalties if paid early.  If you can do 30 years and pay a bulk sum/everything off when you graduate that will be the better option.  

This will lower your monthly payment and allow you to build some cushion during the time the units are empty.

3. Where did you get your loan? 12% is crazy.  I have credit cards with lower interest than that.  Will your parents be able to loan you some as a "gift"?  Talk to a credit union at your college.  See if they have better rates.

4. Do you know that Student loan can't be erased by bankruptcy- regardless whether you graduate or not?

5. At this point this conversation is devoid of any numbers, such as: how much you are making, how much the property cost, what the rental incomes are, etc.  I think most will be weary to say yes and mostly say no without any of those details.  

 @Udayabagya Halim:

1. It will not require any more work than I am comfortable handling. I do not have a job now but I would like to get a small part time job regardless.

2. It is basically exactly what you said which is why I am not terribly worried. It's 30 years but we want to pay it off in 5. That was our goal and I do have 5 summer, and half school year internships that pay about 12k each one so I can pay bulk if needed. 

3. It's owner financed. If it comes down to my parents. Yes they could give me a loan to pay for the whole house but I am not even telling them I am doing this. It is solely on me.

4. I don't have any student loans. My parents pay for my college in full and all living expenses until I graduate. This is why I want to take advantage of the opportunity while I have it.

5. This area has small extremely cheap houses. That's why I am trying to buy some as starters. It will cost $50k. 2 units combined bring in $1295 a month, tenants pay utilities. Taxes are about $2200 a year, and you have general other expenses like insurance, water, and management.

If you're really set on doing this, why don't you see if you can borrow the money from one of your parents and pay them back.  The 12% just seems killer, especially since it's not going to be short term.  You should also address any worst case scenarios (e.g. major capx event).  If you need to put money in to fix something, what will be your plan B?  How is the expenditure going to be split between the two of you?  The more you can plan for a "worst case" scenario rather than a "best case", the better off you'll be in the long run.

Okay, I will continue to look for another property with a lower interest rate. My real purpose of the thread was to see if I am on the right track though and advice on things I should be looking out for to tell if the investment is good or not. Also does concept of building wealth rather than looking for immediate profit sound realistic or am I overlooking something. 

I am assuming you are investing in a college town, which will typically always have a good renter market, especially through out college as you meet more and more people all needing a place to stay unless they are townies.  Take advantage of the situation while you have it.  However, maybe the better way to take advantage of this is to save as much as you possibly can and hold off until after you graduate and you will have a good down payment since you have all expenses and tuition paid for.  I was in the same boat, just graduated a semester ago and through out college i wanted to invest in property, however i waited, saved and then once i had a career paying a steady income I purchased my first property.  I'm 24 so you can be in the same situation in a few years if you wanna take that path, perhaps even sooner if you are ambitious, but saving first before buying a home is a good idea.  While your in college with free tuition take the time to enroll in a real estate course or urban planning/city planning if your college offers that.  It will pay off and maybe a better small/short term investment than jumping in to a home.  Or say eff it all and just do what u wanna do, its up to you, its your life your future. keep it real homie

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I am proud of you guys. I wish I did the same in college especially with all the current student loans which I have accrued over the past 10 years.

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