I have been investing in real estate since 1998, and I have never wholesaled or held condominiums in my business. I found out early on that most real estate investors just aren’t interested in those types of properties. The main reasons are the HOA (Homeowner Association) fees. All of these communities have monthly fees that the homeowner pays in addition to the regular mortgage. HOA fees might include the water, garbage pickup, the master insurance policy on the main structure, or may include other things on occasion such as your heat. The fees will also include exterior maintenance, including lawn care, and snow removal in most cases.
As you know, the typical mortgage payment will include property taxes and insurance. When a retail buyer is purchasing a condo, they will add those association fees to your mortgage payment when they are qualifying you for a loan.
If you are a landlord that is renting a condo to a tenant, it can be much more difficult for the property to cash flow with these additional fees. That raises the question of whether or not these properties are ever a wise investment over the long term.
Why You Might Want to Add Condominiums to Your Portfolio
I have recently changed my thinking where condos are concerned. If you live in a city that has a major university, you are probably aware that student housing has become a big issue in these areas. Older students and graduate students in particular, are looking for other living arrangements outside of the dormitories and student apartments on the university campus. I personally know several real estate investors that now specialize in this type of housing.
I recently heard about a condominium that is part of an estate in a nice area near the University of Louisville. I believe that after some cosmetic updates you would have a total investment of $45,000-$55,000 for a typical unit. They have two bedrooms and one bath with a total square footage of about 950-1030 sf. Not bad compared to dorm living.
At first glance the HOA fees seemed really high at about $265.00. After doing some checking I found out that these fees included everything except the electricity. The building has steam heat and that is included along with the water. Students would know what their expenses would be every month.
As a landlord, you would never have to think about replacing a roof, the heating system, or other major items in this property.
How Much Would It Cost Me for A Typical Condo In This Building?
If you were to get a $55,000 loan at an investor rate of 6%, for example, the monthly payment would be about $330.00 on a 30 year loan. If you were to add another $65.00 per month for property taxes in my area, you would still be at about $400.00 per month. After adding the $265 HOA fees you are at $665 per month or $7,980 per year. Not bad at all.
How Much Do Students Currently Pay?
Well I did a little checking on dorm fees for a normal state university; not anything fancy. And I looked at the actual costs for my area. Rates were given for 4 month semesters.
-Dorm fees for a shared double room were $2300-$2400 per semester per student. (In addition to this, there is a required food plan for any dorm without a kitchen that adds another $1460 per semester). So a regular dorm room for 2 students for two 4 month semesters would cost $9200 – $9600 for a 2 semester school year. You can add another $4600-$4800 to that if the students attend school year round. You would then be looking at about $14,000 annually.
-Now for a university student apartment, the fees for 2 bedrooms with single occupancy (one person) in each room and a shared living room are $2754 per student per semester or $11,016 for two semesters. Once again, that number is higher for 2 year round students ($16,524).
-The final option I looked at is a nice, newer privately owned for profit student housing complex near the campus. I only compared 2 bedroom units. One difference to note is that all of their units have a bathroom for each bedroom.
These student apartments are priced by the bedroom and leases are for 12 month terms. (In reality, they are only 11 ½ months but students are charged for 12 months.) The leases run from August 17th of each year, to July 31st of the next year. That gives the complex 2 weeks to turn an apartment between semesters.
The prices for these are $715 per bedroom per month or $1430 per 2 bedroom apartment for an annual total cost of a whopping $17,160.
How Much Was Our Condo In the Example?
Our condo had an annual cost of just under $8,000 per year. The privately owned student housing cost just over $17,000. What a big difference!
As a real estate investor, think about the opportunity here. Your rental income would be well above average even if you charged less than the “for profit student housing complex” in the example. You could create your own market for your niche housing. And, if you have a child that is about to leave for college, you could save some serious money and build equity in a property at the same time.
Photo: Daniel Borman