Student Housing Property, rented until May 2016

5 Replies

Hey BP,

I've been looking around my area, and found an interesting property listing that I'd like to get your thoughts on.

The seller is claiming 15k cashflow from this property. I inquired as to why anyone would want to be rid of a property like that and he replied saying that he simply had too many properties in his portfolio to manage. 

I'll quote his listing here:

This is a turn-key student rental investment. The charming bungalow style 2-family is in excellent condition and needs no work. It is fully rented through May 2016. Two side by side 3BR apartments, each with a 2nd floor. Security deposit and the final month's rent is paid up front for each unit. This 2-family was completely renovated in 2005 and renovation costs totaled $80k. It has a 4 spot parking lot. Includes all appliances with Washer/Dryer in the basement. Roof (2005), boilers, electric, plumbing, appliances are all in great shape and nothing is needed.


I have a very successful and profitable business in student rentals and will provide the buyer with the information and guidance to make this property an ongoing financial success, including advice after the closing if wanted.
Estimated Financial Information

Price $164,000

Monthly Rent 2,520
Annual Rent 30,240

Utilities (water) ($480)
Current Taxes ($2,640)
Repair / Maint (7.5% rent) ($2,268)
Insurance ($1,000)
Annual Operating Income 23,852

Closing Costs 5,000
Mortgage (80%LTV) 131,200
Total Cash Invested 37,800

Monthly Mortgage Pmt @ 4.5%, 30yr ($665)
Annual Mortgage Pmt ($7,977)
Estim Net annual cash flow 15,875

Cash on Cash Return 42.0%
Gross Rent Multiplier 5.4
Cap Rate (NOI / Price) 14.5%

So here is my question:

Is is reasonable to rent student housing for 12 months a year?

I'd think student housing would have a lot of turn over, so I just want to know how realistic these numbers are in general.

Thanks in advance,

Lukas Katko

Lukas Katko I have a couple thoughts here. First, 12 mo leases are common for students. Most will stick it out. Some will try to leave or sublet to someone else when they want to move. Second, in general you will have more turn over on student housing. Definitely check what he estimates for a vacancy rate and what local property managers managing that type of property say is average. Third, students will almost always mean more wear and tear. He had 7.5% of rent for repairs, which might be enough, if that doesnt include capex. Remember, most likely you will be touching up the units every year when the previous years students graduate. Finally, trust but verify the info provided. If you go by the 50% rule, I estimated cashflow closer to 2k per year, not 15k. So take a closer look at those expenses and see if they are reasonable, and the property justifies running at better than the 50% rule. Let me know what you end up doing! Clinton

Hi Clinton,

Great response, definitely got me thinking about the details of land lording. 

Any ideas how would I go about verifying the information he has provided? can I request a rent roll or balance sheet/income statement?

Also, I'm in rather dire financial straits to be looking at 35k down properties; While I don't have any debt, I'm not employed and don't have much of a nest egg. I this situation I was thinking about various financing methods, the first that came to mind was to take the seller's offer with an outside entity covering the down payment and closing (Hard money, private money etc.).

Another option may be to ask if he's willing to do seller financing, though I don't know if he has a mortgage on the property that would be due on closing. 

If either of these methods work, then I should be able to stabilize the property by early 2016 and refinance through a credit union or bank using the property itself as collateral. Once I get a 30 year mortgage on it at the expected low interest rates, the property should cashflow and the only debt I'll have is to the credit union/bank rather than a hard money/private lender.

Does this plan sound reasonable? Especially in the light of my being a first time real estate investor, never having done a deal or spoken to an attorney/realtor/banker/lender etc.

I know, woefully under qualified, but interested.

I look forward to any and all responses, thank you for your time,

Lukas Katko

Also, I'm not sure but, is there a way to edit my initial post with updates?

Hi Lukas,

I think you can edit a post, but only for a few minutes after posting.

I invest in an area that is primarily rented to students, it has been a good market for us.  I do have mostly 12 month leases- many students stay through the summer or sublet the apartments.  I offer a shorter term lease if it suits me- if I am trying to get the turnover date to line up with the best season- later August, or if it already doesn't turn over in August I might offer a shorter term.  I usually charge more for a shorter term- $30 more per month or so.  

Get the actual costs on everything- sellers lie all the time, or perhaps don't have a clear understanding of their actual cash flow.  Check the leases, ask for a rent roll, proof of rent payments (are they paying on time?  If not, are they paying the late fee?) Call the utility company and see what the average bill was for the last year.  Get an insurance quote- but be aware that many companies won't insure a student rental.  

I typically get students to stay for 2 lease terms (so far, we have only been in this for 2.5 years) and when buying a new property almost count on each unit needing new tenants.  

I do conventional financing, so not much help there!

Kelly

Hi Kelly,

I'll definitely look into getting more information from the seller.

The only issue I can think of in this regard is that I probably won't be considered a "serious" buyer and that may interfere with the seller's openness to releasing information. I've only been in contact by email with the seller, would you (or anyone reading this) suggest other methods of communication that may be more effective?

Regarding obtaining the rent roll, checking leases, and payment proof, would I just ask the seller for these or is there a non disclosure agreement I need to sign prior? This would also lead back to my previous question on effective communication.

That said, if anyone knows any good blog/forums on checking property numbers that they could link me to, that would be really helpful.

Lukas

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