Best Way To Fund 5 Student Rentals in Boulder Worth Over $1M/ea

10 Replies

Hello BP Family,

Apologies in advance for the lengthy post, but I have a rather unique opportunity at my fingertips that is a once in a lifetime opportunity and I'd love to get as much advice from as many savvy real estate investors as I can. 

Here we go....

I have a family friend who is basically the Godfather of student rentals in Boulder, CO. He owns 19 single family houses (Many of which are completely paid off) a few blocks away from CU Boulder. He has remodeled each house to maximize the number of bedrooms and get the most rent per bedroom as humanely possible. This friend has owned a few of the properties since the late 90's and has had 100% occupancy in all his rentals for roughly 20+ years. 

Most of the properties have six bedrooms and rent for between $1,100 - $1,500/month per bedroom. These numbers are great for my friend since he owns most of them outright, but they are also worth between $1.3M - $1.5M each so the numbers aren't so great considering a 20% down payment would be over $250K.

I became a licensed real estate agent a few years ago and recently made it a mission to help this family friend find new rentals that fit his criteria. After calling this friend every few weeks with properties I thought might be a good fit for him, he called me last week and wanted to meet for lunch to present an opportunity to me.

We had lunch last week and he brought five files with him which were the leases and rent rolls of five of his properties that are all right next to each other or across the street from one another. He told me he wants to be more liquid and would sell me my favorite of the five properties (or all five properties), or wants me to find buyers for the five properties since he wants to be more liquid in a few months for  a larger development opportunity. He wants to sell these properties off market to save money on realtor commissions so I don't gain much unless I'm buying them or partnering with people on them.

He told me to treat him as a brother on these deals and ask any questions I have while I am determining a fair price for these properties. He said he would sell them to me at a price that will cash flow from day one.

After thinking about this opportunity for for the last several days, I would like to be the owner and/or partner in all five of these rentals when the dust settles. The only issue is that I only have $50K of my own money to invest at the current time.

It appears my best two options are to either get a hard money loan to pay for the down payment, or partner with a family member or friend who would pay for the 20% down payment and we would be 50/50 owners. My wife and I would obviously prefer to be the sole owner of one or all these places but I have no idea how hard it would be (or if it's even possible) to get a hard money loan for one or all of these properties. It also comes with much higher risk and I would have to purchase them at a price under their market value that gets me enough equity to re-finance in six months or a year to pay the hard money off loan off. 

Questions I Need Answers TO:

1. Is there a third or fourth option I haven't thought of to finance these purchases?

2. Do you think it's worth buying all or any of these properties at a price that breaks even for one or two years while I have to pay the mortgage and hard money loan off at the same time? 

3. What can I do to make a hard money lender really want to give me loan for one or all these properties? 

4. For those of you with student rentals, how much do you like netting per bedroom per month?

Thanks for taking the time to read this lengthy post. I'd love answers to any of my questions and would appreciate any feedback any of you have.

@Connor O'Halloran It sounds like a great opportunity.

Have you talked with a hard money lender? If not, reach out to @Justin Cooper . I have a hard time imagining that the numbers will pencil out. How will you pay off a 95%+ LTV hard money loan in a year or two?

Local banks won't lend on those values with $50k down.

Other ideas:

  • Hussle and network to find private money at 6 to 8%
  • Have the owner carry a note to you for five years. This is probably the best option so you can retain 100% ownership. Over the next five years, save all the money and then refinance out when you can.

The hard money costs will eat you alive on this deal, plus you'll have to come up with some kind of down payment anyways. 

If he wants to be liquid, an owner carry won't work. Realistically, your best bet is to find buyers for the 4 properties and charge them  commissions on the deals. Take that money and possibly the rest from family and buy the one you want. He's got 14 others, so in time you might be able to acquire more. 

Boulder is only going up in price; It always has and will continue too. Prices have always been expensive for the most part. 

@Connor O'Halloran get your new brother to be the bank and hold the note on this deal like the other guy said ;-) it could potentially be helpful to him from a tax perspective too but you'd have to dig into that. If you want to keep control of the entire deal that looks like your best play. Good luck.

Originally posted by @Chris Lopez :

@Connor O'Halloran It sounds like a great opportunity.

Have you talked with a hard money lender? If not, reach out to @Justin Cooper . I have a hard time imagining that the numbers will pencil out. How will you pay off a 95%+ LTV hard money loan in a year or two?

Local banks won't lend on those values with $50k down.

Other ideas:

  • Hussle and network to find private money at 6 to 8%
  • Have the owner carry a note to you for five years. This is probably the best option so you can retain 100% ownership. Over the next five years, save all the money and then refinance out when you can.

I am actively in discussions to raise private money, that would be ideal. I don't think the owner carrying a note for five years will work since he wants to be liquid to make a move on a larger development in the near future. Thanks for taking the time to respond!

Originally posted by @Matt M. :

The hard money costs will eat you alive on this deal, plus you'll have to come up with some kind of down payment anyways. 

If he wants to be liquid, an owner carry won't work. Realistically, your best bet is to find buyers for the 4 properties and charge them  commissions on the deals. Take that money and possibly the rest from family and buy the one you want. He's got 14 others, so in time you might be able to acquire more. 

Boulder is only going up in price; It always has and will continue too. Prices have always been expensive for the most part. 

My thought on the hard money loan would be for the down payment assistance only. The only way hard money **might** work is if I can get one of the places to appraise for $1.5M but get my friend to sell it to me for $1.3M so I can re-finance or do a non-owner occupied HELOC in six months or a year and pay back the hard money loan at that time. I do feel like that strategy is sort of robbing Peter to pay Paul since after re-financing the mortgage would be significantly higher and the rental might not cash flow at that point but the interest rate would be much lower and if I could honestly just break even on the place for a few years it would be worth it in the long run and a nice piece to have in my retirement fund.

It does seem more realistic to get buyers for a few of the properties and charge them a commission and work on buying my favorite of the five places. 

my creative brain is working in such a way that wouldn't disagree with anything @chrislopez or the others have said, but add maybe a "Portfolio Lender" or like already stated. have your friend be the bank for 5 yr, you takeover on the 1st of a month with his payment due on the 10th so you can collect the rent and have time for payments to process then pay him. dump a ton of extra into another investment that cash flows and appreciates so in 5 you can 1031 right into the complete payoff for these homes. But that's just being creative and not too sure if it works out or not. (maybe someone can educate me if not)

@Connor O'Halloran Being a Boulderite and always looking to pick up quality buy and hold rentals, this post interests me. I may be able to help you find some solutions or even perhaps participate in some way on these. The first hurdle seems to be drilling down on pricing to determine for sure if this is really something to offer potential partners or worth pursuing for yourself. For example you mentioned that your friend is hoping to maximize profit any way possible even going so far as to sell these properties off-market in order to save money on agent commissions, but then you also say "He said he would sell them to me at a price that will cash flow from day one." As you know for any of these to cash flow day one the sales price would need to be heavily discounted (by several hundred thousand) from market price so those two pieces of the puzzle don't really come together easily. Perhaps your friend would sell them to you and your (potential) partners as a package deal for a discount roughly equivalent to what they'll save by not paying 6% commissions on 5x1.3-1.5M sales (~420k). Or maybe they would let you list 4 of them, waiving your commission on those 4 as a credit towards you buying the 5th? I'm sure there's a way to make this a win-win for you and your friend and perhaps somebody partnering with you too, but I'd be most curious to hear how these would possibly cash flow day one for the buyer while simultaneously maximizing sales profits for the seller as that seems to be the biggest challenge here. Did you already try convincing your friend to just let you list the properties and use MLS exposure to get the highest possible price? I think listing for a little under market to spark a bidding war is still the best strategy for a seller in this market. You could offer a discounted rate if they give you all 5 listings. I sent you a connection request, be great to connect! Steve

Hard money will not provide funds for down payment; they typically want to be in first position. So you'll probably need to partner with someone to provide the down payment, or maybe the seller can carry the down payment, although you'll have to find lenders that allow that. Most lenders want their borrowers to have skin in the game.

Curious... If he wants to be liquid, why doesn't he consider taking a loan on some of his properties? It doesn't necessarily help you, but definitely solves his problem.

Originally posted by @Nghi Le :

Hard money will not provide funds for down payment; they typically want to be in first position. So you'll probably need to partner with someone to provide the down payment, or maybe the seller can carry the down payment, although you'll have to find lenders that allow that. Most lenders want their borrowers to have skin in the game.

Curious... If he wants to be liquid, why doesn't he consider taking a loan on some of his properties? It doesn't necessarily help you, but definitely solves his problem.

I've come to the realization that Hard Money isn't an option for the down payment but I'm still looking into a PML. I believe the owners isn't interested in taking a loan on these properties because he wants to 1031 Exchange these for a lucrative development opportunity and doesn't want to create new loans on these properties that that he will have to pay off. I think he also wants to help me out as a family friend. 

Originally posted by @Steve K. :

@Connor O'Halloran Being a Boulderite and always looking to pick up quality buy and hold rentals, this post interests me. I may be able to help you find some solutions or even perhaps participate in some way on these. The first hurdle seems to be drilling down on pricing to determine for sure if this is really something to offer potential partners or worth pursuing for yourself. For example you mentioned that your friend is hoping to maximize profit any way possible even going so far as to sell these properties off-market in order to save money on agent commissions, but then you also say "He said he would sell them to me at a price that will cash flow from day one." As you know for any of these to cash flow day one the sales price would need to be heavily discounted (by several hundred thousand) from market price so those two pieces of the puzzle don't really come together easily. Perhaps your friend would sell them to you and your (potential) partners as a package deal for a discount roughly equivalent to what they'll save by not paying 6% commissions on 5x1.3-1.5M sales (~420k). Or maybe they would let you list 4 of them, waiving your commission on those 4 as a credit towards you buying the 5th? I'm sure there's a way to make this a win-win for you and your friend and perhaps somebody partnering with you too, but I'd be most curious to hear how these would possibly cash flow day one for the buyer while simultaneously maximizing sales profits for the seller as that seems to be the biggest challenge here. Did you already try convincing your friend to just let you list the properties and use MLS exposure to get the highest possible price? I think listing for a little under market to spark a bidding war is still the best strategy for a seller in this market. You could offer a discounted rate if they give you all 5 listings. I sent you a connection request, be great to connect! Steve

You make some great points and ask some great questions. I just sent you a PM and would love to chat offline about these deals.