Hello all. I have an interesting deal I'd like to get your opinions on. A broker sent me an OM on an apartment building that was converted to student housing a few years ago. The owner's an older man with some health issues and is looking to sell off his portfolio. Even though this isn't your typical multifamily deal, the numbers appear too good to pass over.
The building was originally 12 units, all 2/1s. They knocked down some walls and created 6 larger units which are now 4 BRs, 2 BAs. Students sign a 9 month lease for the school year at $8,500 and they fill the units with interns during the 3 summer months at $500/bed ($1500 for 3 months).
9 month lease GOI: $204,000
3 month lease GOI: $34,000
Total GOI: $240,000
The owner says he's been pushing for $600/month on the summer interns and $9,000/ 9 month lease with success but we'll stick to the numbers I have listed above for simplicity sake.
Utilities, internet, and furniture are all included in the lease.
At the moment, 21 of the 24 units are occupied. Annual expenses are listed at $89,000. Here's my quick breakdown of the numbers
Vacancy 15%: -$36,000
Expenses (added $10k): -$100,000
After several conversations, the owners agreed to a sale price of roughly $800,000. At 4.5% interest, 25% down, amortized over 25 years, P/I would come to around $40,000/year.
$64,000/$200,000 (25%) = 32% ROI
As you can see, the cashflow is tremendous... on paper. To make things even more enticing, other student housing units, depending on location and finish quality, range from $9,000 to $11,000 compared to the $8,500 this one rents for. Summer interns typically start at $600/month which the owner was able to charge this past season. My mentor, who's heavily invested in this market, seems to think I'd be able to charge those prices without issue.
I'm looking for any feedback and insight from those who have experience with student housing. The fact that I'd be filling the building twice every year is a little daunting but the numbers look great.
What should I be asking here? What am i overlooking?
@Taylor Shapiro What documents have they provided to you on the expenses? Did you get a trailing 13? There is some skepticism on the return and a broker sending it to you because if you are not an experienced investor and this deal is as a good of a deal as you say it is, then how is it still even available. Are you tight with the broker or are they newer? Fundamentally the deal sounds good, but I don't see anything that breaks down the expenses and your expense ratio seems on the lower side although could be right and that's what you really need to dive into.
@Taylor Shapiro So maybe a couple of things I'd was detailed clarification regarding...
1.) I'm assuming that rooming houses are legal where you are at. They aren't in all places so just one thing I'd make sure was okay. You never know if someone is trying to sell because they just changed some local city ordinance. Really an unlikely scenario but who knows.
2.) The expenses seem low. For the most part, I don't think (once you factor in cap-ex) that the whole 50% rule for middle-of-the-road properties is really that far off. The issue that you have here is that (since you added $10K) it appear they are saying that expenses are $90K. That doesn't look 'bad' until you consider that the owner pays *all* utilities. I only pay water for 27 units but, I'll tell you what, it isn't free. And they carry the freight for their own electric and gas. With units full of kids that don't sleep and keep lights on and weird hours. Well, those utility bills are going be high. Even just having 4 full sized adults taking showers would crank up a water bill. On top of that you need two DEEP (these are students) cleaning per year (one after 9 months and one after 3 months) and you're paying for high speed interweb(s). And the ol' interwebs have to be fast enough to support 24 kids all streaming Netflix. On top of *that* you can't tell me there aren't issues with the furniture. Clean aside, kids aren't exactly "nice" to that stuff and I'm not quite sure if "new bed" would be considered an expense or a cap-ex item. Either way, it's real money going out of the ol' pockets.
Maybe your $10K "overage" will cover it but something just seems low to me when it comes to expenses in your scenario.
@Taylor Shapiro first your math is off "3 month lease GOI: $34,000" but you somehow recover with the "Total GOI: $240,000"
You did not provide us with your expenses. I have found expenses to be 35-40% on small SH properties so your 100k fits in. $240,000 GOI on an 800k purchase looks pretty good. I would be a little cautious on the summer intern money. What is the history? We normally about 10% occupancy during the summer. Make sure that when comparing other properties, go beyond the comparison of the quality of the product, but also the distance from the school.
The main thing that I have found in student housing is your expenses are higher due to the expense of the turns. The extra damage caused by the students comes out of the deposit or is paid by the students. The other large expense is marketing. It is critical that you do it right and during the lease up window. Miss that, and you can be toast for the semester or year.
I think all the writing on Wall is pointing to a bubble bursting with college debt. And over supply with student dorms and construction. Beware.
Insurance: $6,834 (I was quoted at +/-$9k from my insurance people)
Contract Services: $7,642
Management Fee: $13,339 (6%)
Total: $89,960 (44% EGI)
Casity, I understand your skepticism. The broker is a younger guy but he's experienced. This is an off market deal that he presented to only a few of his "performers". The two other investors passed because it's "an entirely different business model". They're strictly apartment building investors and thought the management here would be too much. I don't have T12s at this time.
Andrew, what do you think about those expenses? Jeff, I hit the wrong button. $36,000 instead of $34,000.
@Jeff Greenberg , "The other large expense is marketing. It is critical that you do it right and during the lease up window. Miss that, and you can be toast for the semester or year." I agree 100%. This is the main factor holding me back from moving forward.
The building is directly across the street from the college.
In student housing the turnover cost will add to your expenses, but carpet cleaning and any non normal wear and tear items are billed back to the student or taken out of the deposits. Because the revenue is significantly higher than market rate rents, the expense ratio is lower.
As far as trusting the numbers, you need to see a 12t and the current rent roll. If you don't trust those, look at the leases and you can even go as far as estoppel letters verifying the lease amounts.
Directly across from the school is great. Our Georgia property is that close. The coaches like it, as their team members can't use car trouble as an excuse for missing practice. If you decide to market to athletes, make sure the coach will back you up if their team members cause any trouble.
On my deals, depending on the age of the building etc... I always use 50% expenses and double the vacancy rate to make sure. If that still works, and I think I can push monthly rental rates up $80-$100.00 in the next 18 months to 24 months, then it is a GO!!
Be careful!! Sellers lie!!! Brokers are often like glorified used car salesman and would sell you down the river in a heartbeat!!
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