Investor · PA · Member since 2019 · 25 posts · 6 votes
I am looking to buy a house listed at 250k in a nice neighborhood. It is near Ursinus College which is reputable school, not a party school, so renting out units should be easy for 1 year leases with the potential to have one student or group of students for 2-4 years aside from potential long term tenants. It is currently being rented out for $2025/month gross rent. Assuming I buy at listing price and have a 4.5% APR on my mortgage there is no money left over (no cash flow) after accounting for vacancy and maintenance savings/expenses. (8% vacancy and 1% of 250k for maintenance) Long term this makes sense as upon sale of the house after 10-15 years I would get around 8-10% Annualized ROI assuming I sell at 250k. I am looking for the opinion of those with rental experience since I have yet to own any real estate of my own. Important note: The house as is needs very little to no repair work as the current owners have taken good care of the property for 33 years.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Keep in mind that any negative cash flow during those 10-15 years reduces the return you think you might get in accumulated appreciation from those 10-15 years. You're banking on something you have no control over while giving away what you can control.
What you are doing in the end, is rationalizing a bad deal into a good one.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
6y
@Shane Braunworth Welcome to BP! Long term appreciation is something I would only entertain if I were already super rich and did not care about cash flow. ;))
@Shane Braunworth Where are you getting a 1% maintenance number. i use 10% for capex. You have to budget for roof 25 year life span, floors 10 year, appliances and hot water heater 12 years, hvac 20 years, kitchen and bath remodel 15-20 year, etc. i use 8% vacancy,5% repairs, 10% capex and 10% property management when I evaluate. A quick analysis use the 1% rule. monthly rental divide by 1%. If you buy and sell for 250k you have no 8-10% roi. You will end up feeding this property out of your income. One eviction could cost you thousands if they damage your property. You already said there is no cash flow.
Are the current leases at the market rate? If they are below, you might have a shot, but if not, I would keep looking.
The market rate lease for the one unit should be below fair value as it's a long term tenant ($1100). The second unit is at $925 which I suspect it could be rented out for $1000. Thanks for the response!
@Shane Braunworth Where are you getting a 1% maintenance number. i use 10% for capex. You have to budget for roof 25 year life span, floors 10 year, appliances and hot water heater 12 years, hvac 20 years, kitchen and bath remodel 15-20 year, etc. i use 8% vacancy,5% repairs, 10% capex and 10% property management when I evaluate. A quick analysis use the 1% rule. monthly rental divide by 1%. If you buy and sell for 250k you have no 8-10% roi. You will end up feeding this property out of your income. One eviction could cost you thousands if they damage your property. You already said there is no cash flow.
Tim, my 1% maintenance number is saving 1% of the value of the house throughout the course of the year so $208 per month. I guess with your numbers you take the percentage out of your gross rent income, right? My 8-10% expected annualized ROI is from me putting down 3.5% and after moving out having tenants paying into my equity in the house (~9k->250k sale after 30 years). I guess based on your post that it might be better if there is more cash flow in case something does go wrong that way I am not out of pocket from my W2 job?
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Keep in mind that any negative cash flow during those 10-15 years reduces the return you think you might get in accumulated appreciation from those 10-15 years. You're banking on something you have no control over while giving away what you can control.
What you are doing in the end, is rationalizing a bad deal into a good one.
@Shane Braunworth Welcome to BP! Long term appreciation is something I would only entertain if I were already super rich and did not care about cash flow. ;))
Keep in mind that any negative cash flow during those 10-15 years reduces the return you think you might get in accumulated appreciation from those 10-15 years. You're banking on something you have no control over while giving away what you can control.
What you are doing in the end, is rationalizing a bad deal into a good one.
Thanks Joe! Seems like this might not be the one based on just the few responses I've gotten so far.
Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
6y
@Shane Braunworth If this is your first experience into real estate investing, doing college rentals will introduce some challenges not present in normal SFH to single family. The numbers at a glance don't seem promising, esp if you are trying to long term hold it. Being cashflow negative or cashflow 0 for years is not only brutal financially but brutal mentally. When you do your books and see that you doing all this work for virtually no gain.
However if you are able to rent out by the room and increase the rents then run the numbers that way. Sometimes in markets that are competitive, being able to adapt and change strategy can turn a no deal into a workable deal.
@Shane Braunworth If this is your first experience into real estate investing, doing college rentals will introduce some challenges not present in normal SFH to single family. The numbers at a glance don't seem promising, esp if you are trying to long term hold it. Being cashflow negative or cashflow 0 for years is not only brutal financially but brutal mentally. When you do your books and see that you doing all this work for virtually no gain.
However if you are able to rent out by the room and increase the rents then run the numbers that way. Sometimes in markets that are competitive, being able to adapt and change strategy can turn a no deal into a workable deal.
Thanks for the unique outlook on the property. Unfortunately there aren't many bedrooms. One unit is a single bedroom and the other unit is 2 bedrooms at best, so that might not workout well but is definitely something I will keep in mind for future properties. Are tax benefits not something I should consider in owning a rental property in terms of reducing my tax liability for my W2 with business expense deductions?
Real Estate Agent · Oklahoma City, OK · Member since 2019 · 956 posts · 600 votes
6y
@Shane Braunworth at first glance it scares me that you're doing an appreciation play at the top of a market cycle. How much did property value drop in that are in the last downturn? Are you ready to take that hit? More than that, did rent rates stay stable during the last downturn? If not you could set yourself up to be really paying every month in the event of the crash and have no exit strategy that doesn't leave you bringing thousands to closing.
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
6y
@Shane Braunworth - Couple things to keep in mind with a student rental play:
1) While at first glance a student rental seems like a no brainer... Be wary about vacancy. If you miss getting it rented come August.... it can possibly sit rented for at least half the school year if not the entire school year as students are only shopping for a place to live at the beginning of the semester.
2) While it may seem far fetched now to think student rental supply will far exceed demand, colleges across the country are seeing stagnant population and decreasing applications. There are several reasons: ever increasing sky high tuition costs, jobs that don't require a college degree (coding, social media influencer, YouTubers, trade jobs) that are paying high salaries without the student loan debt, smaller families (parents having 1-2 kids instead of 2-3 kids).
There are studies out there projecting the demise of large percentages of colleges and universities across the country in the coming decade.
Investor · Mid Missouri · Member since 2018 · 63 posts · 14 votes
6y
@Shane Braunworth
I am in your shoes, although it sounds like we are in much different markets, and I’m not looking at student housing. However, I can totally relate to the feeling of just wanting to get a property. I’ve found that it really helps to spend that energy in making connections in your community. Talk to banks, talk to agents, talk to other investors. Look at properties. Talk to all the people you may eventually use as you get your business going. My aunt is a realtor here in my town. She’s on my side looking for me, but that hasn’t stopped me from connecting with two or three others as well and letting them know my criteria. I’ve also connected with property managers who now know my criteria. This will take some time but in my case has allowed me to see a lot of properties, get familiar with expected rents, save a lot of money and wait for my year end bonus, and it’s allowed to me to find the right bank. I’d say I’ve been actively “looking” at properties and finding connections for the last 6 months, and it is astounding to me the roll that has developed in the last two months now that all these people know what my goals and criteria are.
Be patient, use the calculators, key in to all the these “rules” mentioned above. In a matter of a couple months I’ve gone from hearing “no way” from the banks to today having one immediately send me a prequalification letter upon hanging up with him (on the phone he said he’d have to take it to the board in the morning first). In this particular case the banker has seen me progress over the last few months and seen how I’ve remained diligent but refined my criteria. I know it played a roll in him immediately qualifying me once I found what I believe may be “the one.”
The more you look the more you’ll refine your criteria and recognize the good or potentially good from the bad. I don’t think either of us needs a home run for our first deals, but I definitely think you should value cash flow over appreciation.
@Shane Braunworth - Couple things to keep in mind with a student rental play:
1) While at first glance a student rental seems like a no brainer... Be wary about vacancy. If you miss getting it rented come August.... it can possibly sit rented for at least half the school year if not the entire school year as students are only shopping for a place to live at the beginning of the semester.
2) While it may seem far fetched now to think student rental supply will far exceed demand, colleges across the country are seeing stagnant population and decreasing applications. There are several reasons: ever increasing sky high tuition costs, jobs that don't require a college degree (coding, social media influencer, YouTubers, trade jobs) that are paying high salaries without the student loan debt, smaller families (parents having 1-2 kids instead of 2-3 kids).
There are studies out there projecting the demise of large percentages of colleges and universities across the country in the coming decade.
Anyway, food for thought.
Salvatore thanks for your input. That is a good point. College is becoming much less valuable due to increasing costs and decreasing ROI for the pricey diploma (worked out for me luckily).
@Shane Braunworth at first glance it scares me that you're doing an appreciation play at the top of a market cycle. How much did property value drop in that are in the last downturn? Are you ready to take that hit? More than that, did rent rates stay stable during the last downturn? If not you could set yourself up to be really paying every month in the event of the crash and have no exit strategy that doesn't leave you bringing thousands to closing.
Thanks Kiera! Market outlook is a good prospective. It's rather unfortunate that I am looking to get started at the peak of the market...
I am in your shoes, although it sounds like we are in much different markets, and I’m not looking at student housing. However, I can totally relate to the feeling of just wanting to get a property. I’ve found that it really helps to spend that energy in making connections in your community. Talk to banks, talk to agents, talk to other investors. Look at properties. Talk to all the people you may eventually use as you get your business going. My aunt is a realtor here in my town. She’s on my side looking for me, but that hasn’t stopped me from connecting with two or three others as well and letting them know my criteria. I’ve also connected with property managers who now know my criteria. This will take some time but in my case has allowed me to see a lot of properties, get familiar with expected rents, save a lot of money and wait for my year end bonus, and it’s allowed to me to find the right bank. I’d say I’ve been actively “looking” at properties and finding connections for the last 6 months, and it is astounding to me the roll that has developed in the last two months now that all these people know what my goals and criteria are.
Be patient, use the calculators, key in to all the these “rules” mentioned above. In a matter of a couple months I’ve gone from hearing “no way” from the banks to today having one immediately send me a prequalification letter upon hanging up with him (on the phone he said he’d have to take it to the board in the morning first). In this particular case the banker has seen me progress over the last few months and seen how I’ve remained diligent but refined my criteria. I know it played a roll in him immediately qualifying me once I found what I believe may be “the one.”
The more you look the more you’ll refine your criteria and recognize the good or potentially good from the bad. I don’t think either of us needs a home run for our first deals, but I definitely think you should value cash flow over appreciation.
Good luck!
Jacob thanks for your advice. I could do with some more networking with realtors, bankers, and especially property management and investors. Glad I could relate so well to your situation; it's an interesting market to get started in.
I have 3 schedule C’s showing I make 3k a year! For the past 3 years! Im trying to come up with my 10% my business partner and I close on the multi family dec 27th. This is fun😳😫😆
I have 3 schedule C’s showing I make 3k a year! For the past 3 years! Im trying to come up with my 10% my business partner and I close on the multi family dec 27th. This is fun😳😫😆
Thomas good luck with that! Quite an interesting salary that comes out on the bottom line, haha.