Questionable 1st Rental Property
Shane BraunworthPro Member
Investor · PA · Member since 2019 · 25 posts · 6 votesI 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.
Thanks,
Shane
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.
Definitely should walk away. Too much risk with not enough to gain to make it worth your while.
@Shane Braunworth 4.5% APR is a very safe #. I wouldn't take anything over 4% if I were you!
Thanks Matthew I'll keep that in mind when talking with my lender. It's great to have such low interest rates right now.
@Shane Braunworth, you have gotten some very good advice here from everyone. renting to college students is pretty risky, therefore you should not settle for anything other than GREAT returns.
I do own SFH near college town and rent to students. I don't rent by room (to avoid strangers living together), but rent the house as a whole, so groups of students who know each other. You mentioned its a not a party college. No such thing in my eyes. Statistically when comparing to other colleges, maybe, but there is always the wild side of every college, you just try to avoid it. To put things in perspective for you, my Cash on Cash return is averaging 25% between the properties, that is using a similar formula as @Tim Herman used above. You always have to account for vacancies and stuff breaking all of the time. Keep in mind that most of these kids have never lived by themselves before, so automatically there is a level of negligence that comes along with them as tenants.
Jumping at your numbers, definitely not worth your investment. one thing to keep in mind is that Students are very high risk investment, which should be yielding high returns. Your insurance alone will jump almost double if you rent to students, which will eat away from your profits (if there are any at your numbers).
you are no where close to the 1% rule. saving $200 per month for maintenance is definitely not enough. Just your lawn care maintenance, snow removal will most likely cost you about $200/month, let alone putting money aside for a big expense that comes your way. (Just replaced the heating boiler in one of the houses and that was an $8500 expense). at your $200/month expected maintenance bucket, you would need almost 4 years of savings to be able to cover a similar expense.
Definitely not trying to ruin this for you, but I would start looking elsewhere and apply the 1% rule, at the very least. if you decide to go with student rentals, make sure you make the parents co-sign. very hard to screen students with no credit and this will most likely be the first time living on their own.
@Shane Braunworth, you have gotten some very good advice here from everyone. renting to college students is pretty risky, therefore you should not settle for anything other than GREAT returns.
I do own SFH near college town and rent to students. I don't rent by room (to avoid strangers living together), but rent the house as a whole, so groups of students who know each other. You mentioned its a not a party college. No such thing in my eyes. Statistically when comparing to other colleges, maybe, but there is always the wild side of every college, you just try to avoid it. To put things in perspective for you, my Cash on Cash return is averaging 25% between the properties, that is using a similar formula as @Tim Herman used above. You always have to account for vacancies and stuff breaking all of the time. Keep in mind that most of these kids have never lived by themselves before, so automatically there is a level of negligence that comes along with them as tenants.
Jumping at your numbers, definitely not worth your investment. one thing to keep in mind is that Students are very high risk investment, which should be yielding high returns. Your insurance alone will jump almost double if you rent to students, which will eat away from your profits (if there are any at your numbers).
you are no where close to the 1% rule. saving $200 per month for maintenance is definitely not enough. Just your lawn care maintenance, snow removal will most likely cost you about $200/month, let alone putting money aside for a big expense that comes your way. (Just replaced the heating boiler in one of the houses and that was an $8500 expense). at your $200/month expected maintenance bucket, you would need almost 4 years of savings to be able to cover a similar expense.
Definitely not trying to ruin this for you, but I would start looking elsewhere and apply the 1% rule, at the very least. if you decide to go with student rentals, make sure you make the parents co-sign. very hard to screen students with no credit and this will most likely be the first time living on their own.
Nik, thank you for the advice. Upon absorbing the feedback from this discussion, it seems that most of the rental properties in this area particular area aren't selling for a price that makes sense given the rent prices being charged. Thank you for sharing your experience with student rentals. I will certainly keep that in mind for any future properties located nearby a college. It's quite good to know that insurance companies will charge more when renting out to students. I appreciate the wisdom and guidance from you and all of the other contributors to this discussion.
@Shane Braunworth this thread may be helpful to you if you're considering student rentals:
@Shane Braunworth this thread may be helpful to you if you're considering student rentals:
Thank you! I will look through the post :)
@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...
It might be worth it to look into other markets that don't dip as much during a downturn? You can invest anytime.. you just have to use the right strategy in the right place!