College rental analysis

30 Replies

I have been analyzing some deals in my area and have come across one that is of interest to me. This will be a college rental that is only 3 blocks off campus which is prime location for a college rental. 4 bed 1 bath SFR. Description: Updated Electrical. Spacious Kitchen. Cute Breakfast bar. Close to Campus. Onsite Parking. Convenient to Lake George, Gas Station, Food, and Bookstore. Large, Flat, Corner, Yard! 24 hour notice for showings. 

Here are the numbers:

Asking price: 89,900

Purchase price: 75,000 (this is the price that make the numbers work)

Operating costs:

Water: 75

Sewer: 25

Garbage: 25

Electric: 0

Insurance: 50

Lawn/ Snow: 50

Property tax: 1416.... 118/month

Vacancy: (3%) 38.40

Repairs: (7%) 89.60

Cap Ex: (10%) 128

Prop mgmt: (9%) 115.20  (I plan to self manage at first but later move to a PM)

Total operating expenses: 714.20/ Month

P&I: 286.45

Overall total expenses: 1,000.65/ Month

Total income: 320 per door= 1,280/ Month

Cashflow: 279.35/ Month   3,352.20/ Yr.

Closing cost: 2,000

Repair cost: 3,000 (have not walked the property yet, I am thinking it does not need much if any rehab)

Down payment: (20%) 15,000

Total cash needed: 20,000

COC ROI: 3,352.20/20,000= 16.76%

Sorry for the lengthy post. I would like to see what you all think of my numbers. Anything you notice may not be correct? Thanks!

from just these number the advice i could give you is one have your ordered a comparative market analysis or appraisal to determine the appraised value of the home, and 2 have you considered purchasing the property with and interest only heloc at a higher loan to value?

purchasing the property with a heloc will lower your closing costs as well as your monthly obligation, and every dollar you pay towards principal would be come available liquid funds to you immediatley. also the payment on an interest only heloc drops as your principal balance drops, so the lower the balance on the line of credit the lower the payment obligation increasing your positive cash flow over time.

@DianaFerreyra I may be mixing apples and oranges but I really like your HELOC approach vs conv financing and have been considering using ours in the same way. My question is does using a HELOC limit Kyle from any other upsides like tax benefits, depreciation or earn him a higher accounting bill? My thinking is that usually with a mortgage you see the interest paid as a single entry and that entry on the statement is the only asset covered on the note and easily transferred to a tax return but if Kyle uses his HELOC like most and on same credit line, he pays for CAPEX or repairs before he has a separate account built for those items from proceeds, what added measures might he have to incorporate into his plans to avoid red flag audit by ensuring his records reflect the proper amounts? I didn't mean to pose such a tax minded question if you're not an accountant but I thought perhaps you might have done this and been advised by your own accountant to share your findings? Again, I am a definitely a fan of your approach and only looking to use same myself. Thanks!

Originally posted by @Brent Coombs :

@Kyle Soderman, student vacancy = only 3% per year? Just asking...

 It is exceptionally easy to rent out college houses in the area I am, especially 3 blocks off campus. Many landlords in the area have had 100% occupancy in the same area. It is also the norm to lease the house around 6 months in advance.

interest paid on a HELOC is tax deductible just a s a interest paid on a loan would be. It is still considered a mortgage and hold a spot on title. The amount of deduction would be less because the strategy allows you to pay less in interest charges. I am not an account and I am not familiar with the term capex. So cannot answer your question there. Unless you can eloborate a bit more.

Originally posted by @Kyle Soderman :

Thanks for the responses guys. I am going to have to look more into that @Diana Ferreyra

Any other suggestions on the numbers?

 I think a 20000 investment with only a 200 month positive cash flow return is low there other investments you can make with maintenance fees extra that would give you a higher rate of return on your money. Why are you choosing to invest in real estate?

Thanks Diana!  Now I like it even more!! 

Sorry - Capex is mostly hotel and builder industry speak and short for "Capital Expenditure". Capex may refer to the item itself like hot water heaters, roof's, appliances, etc - i.e. big ticket items that don't require monthly recurring replacement but also Capex can refer to the account or monies retained from proceeds for future (replacements).

Originally posted by @Diana Ferreyra :
Originally posted by @Kyle Soderman:

Thanks for the responses guys. I am going to have to look more into that @Diana Ferreyra

Any other suggestions on the numbers?

 I think a 20000 investment with only a 200 month positive cash flow return is low there other investments you can make with maintenance fees extra that would give you a higher rate of return on your money. Why are you choosing to invest in real estate?

In my eyes, a 16% Return on investment is an exceptional return... you may believe different though. I am going to invest in real estate because I have a passion for it, I love learning about REI. I want to make it my full time "job" and live off the cash flow.

@Michael Le Any student looking for a house off campus will be a Sophomore or upper clansman. That being said, most students after freshmen year will find part time jobs and stay for the summers. I do not believe it will be difficult finding a group of 4 students that want a full 12 month lease. Typically beginning in May at the end of spring semester.

BUT if that is not the case then most companies in there area will have an extra charge for a 10 month lease to help offset the vacancy over the summer.

The year round aspect depends on your area for college rentals.  The downside is if you are off-cycle for the area then you can have much longer vacancies if you just rent to students.  For example if you buy now and try to rent in January our market has a lot of rentals available then so lots of competition and getting 4 students to come into a house in January is harder. Much easier here if you can rent for September or you are filling a one bedroom in January.  We only do 9 month leases though because of our summer market.  I would add more vacancy if you are buying now.

That is a great point @Colleen F. ! I actually have considered this and the reason I am interested in this property right now is because it is currently rented out. I am assuming up until May as this is the normal lease duration for this market.

That will work in your favor.  If it cash flows do you know why they are selling? It would be good to know if the current tenants have had any police activity or they are issues, not paying etc.   The police here have a fine for being called to the house that goes to the owner if the if the renter doesn't pay. Not a deal breaker but it can be something to address quickly. 

Other things to look out for include maximum unrelated occupancy ordinances. Some areas have them.

@David Kosiorek I definitely believe that to be true with the normal SFR market. As far as the student market I believe it is feasible. Like I said above, management companies have students decide whether they want to stay or leave 6 months or more in advance. This gives them half a year to market the property and find a new set of tenants.

If anyone knows of a BP member with experience in the student housing market, please tag them, I would love to hear their input.

At first blush, $50/month for snow removal in Minnesota sounds a bit low to me.  You did say you are going to self manage the property, but does this include taking care of yard work and clearing snow? 

@Steven S. Yes to managing myself at first. I would prefer not to do snow/ lawn care myself. I honestly was not entirely sure how much snow removal/ lawn care would cost. That is part of the reason why I posted a thread to see what others thought.

I still need to get prices from local companies to get an exact price.

Originally posted by @Kyle Soderman :

@David Kosiorek I definitely believe that to be true with the normal SFR market. As far as the student market I believe it is feasible. Like I said above, management companies have students decide whether they want to stay or leave 6 months or more in advance. This gives them half a year to market the property and find a new set of tenants.

If anyone knows of a BP member with experience in the student housing market, please tag them, I would love to hear their input.

 You are really doing your homework, Kyle! I almost have 1-2 student, though I am not doing student housing per se... My best tip (and I also work at a university) is to think broadly. Universities are engines of economic growth. People often think just traditional students (which can be mixed, from partying teens to quiet and studious ). They often leave for summer, but not always... 

But also think about nontraditional students (older, working, GI bill, even those with families, or graduate student/teaching assistants). Plus, don'f forget faculty, staff, and support (from maintenance to counseling to food service). Think about offering a year round lease or targeting these types in how you advertise (to grad students or faculty). They may well appreciate being very close to work, will stay year round and may require less supervision.

Originally posted by @David Kosiorek :
Originally posted by @Brent Coombs:

@Kyle Soderman , student vacancy = only 3% per year? Just asking...

 what he said.... 3%.... never going to happen

@DK...If you have a good product and close to campus....3% is very reasonable. You are looking at a trapped market, limited supply with big demand.  

Other good things:

Force Year long leases, do whatever you have to to make it work.

Ask current tenants how they like it. They will be pretty honest.

Get a copy of the current leases.

Get proof of rent paid with current tenants.

Market check your rents.

Enjoy :)

It is important to get a good scope on the mechanical systems plus roof for capex. If all is old, not uncommon, then 10% capex might work over a 20 years or longer horizon but keep cash reserves to possibly invest in it much earlier, like in 3 months. If some of those are close to the end of life expectancy, it makes more sense to roll replacement costs into the acquisition cost. 7% for repair at a student rental would mean the property is in a good shape and has been "hardened" already for student life.

@Kyle Soderman since this is for students. I would take into consideration of "Bad Debt" 3% of (Annual rent - Vacancy lost)...In addition, IMO I like to use IRR/NPV approach vs ROI (see attached on my rental analysis) since we are talking about cash flow and there are reinvest opportunities. Also, you might need to figure out your exit strategy for this asset i.e hold for 5 years and sell it or hold forever. By doing so, it'll effect your rehab perspective and R&M....

Originally posted by @Kyle Soderman :
Originally posted by @Brent Coombs:

@Kyle Soderman, student vacancy = only 3% per year? Just asking...

 It is exceptionally easy to rent out college houses in the area I am, especially 3 blocks off campus. Many landlords in the area have had 100% occupancy in the same area. It is also the norm to lease the house around 6 months in advance.

 hi kyle,

i have some student housing 1 1/2 blocks from USC.  no one gets 100% over any length of time.  student housing is extremely problematic.  students are not adults so you cannot expect them to treat your property with respect.  yes you are covered by the deposit, but you're going to have down time getting the house ready for the next tenants. a previous post mentioned "hardened"; very appropriate. 

over the long run even during the semester let alone the summer, some students are going to leave...guaranteed!  the other three students are not going to pay that students share.  you'll be faced with accepting rent from only 3 students until either they get a another roommate, somehow you get the other students parents to kick in or the lease turns over.  

there's great money in student housing, but it's more work and more costly than the equivalent standard housing.  the best way to make money in this situation is if the previous owner had not maximized the square footage and you were able to get an extra bed in there.

good luck!  you'll learn a ton about student housing, get your start on "mailbox money" and know how to look for square footage and layout that's going to get you that extra bed.

phil

One thing to consider, utilize parents as cosigners.  This protects you from the tenants that want to spend their rent money on other things.....