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We are thinking of buying a rental in Chapel Hill. My thinking is that money sitting in the bank does not generate as much interest as it would if we put it into a rental unit. But is it worth the headache? Is there something I'm not thinking of? Do condos typically keep their value in college towns?
Money sitting in a bank does not generate much interest -- really, you're not even keeping up with inflation -- but there are alternatives short of using the money to buy a rental property that you could also consider. There are REITs which invest in college rental properties. At the cost of (likely) lower returns than going it yourself, you'll have no headaches to deal with (plus diversification, to boot).
MrCurmudgeon has excellent advice. Do you have a child attending UNC that you and thinking "well, we could spend all that rental on a condo and then rent it out when they graduate"? And thinking, "And (student) can help by getting experience in handling rent, utilities, etc."?
Just . . . don't. Unless you are already an experienced landlord, college kids are a real challenge, especially if you don't actually live there. Tenants are . . . fluid . . . depending on the GPA and girlfriend/boyfriend status. Damage is almost always a given, not necessarily through wild bacchanalias, but just from inexperience ("oh, hey, look, ceiling is wet . . . wonder why? Oh, well, back to chemistry mid-term") And, unfortunately, they aren't the neatest, either -- assume the rug will need to be replaced every couple of years, and that the oven and refrigerator will NEVER be cleaned. NO landscaping will be done (if it's a townhouse, assume that the pretty patch of flowers in the front will be baked-over mud in no time, and expect to discover some broken beer bottles in the backyard the first time in a year when the grass is cut.) And did I mention pets? Well, they might not be allowed to have pets -- but their girlfriend who shows up every weekend has a dog who is "just visiting" -- and peeing all over your carpet. Plus, you COULD get the student's parents to co-sign -- but good luck on collecting from them, especially if they live out of state. ("It wasn't MY child's fault -- the hole in the wall was in Ricky's bedroom, not Joe's!" "But Joe was the one who got drunk and threw the lamp at the wall!") yada yada yada . . .
And, from what I've seen, having your child be the "substitute" landlord tends to create resentment among the tenants, especially if you have a tendency to visit your child (game days, etc.) and can't help but make a few comments when you come by ("goodness, there IS a washer and dryer, you know!" or "maybe you should consider paper plates") or you tell your son to impose edicts such as, "Tell Ricky he needs to clean the dirty dishes out of his room!"
Unless you plan to have several kids in succession attending UNC over the next few years, not sure the lure of being a landlord is worth the headaches.
I knew a guy that bought a 150K 4 bedroom house in Tallahassee. He let his kid live there and rent out the 3 bedrooms for 4 years then sold the house. Kid had free housing and the guy made about 40K on the deal. No doubt his kid being a live in landlord helped control the damage.
No, our oldest kid is only in 7th grade. I would love for them to go to UNC, but the reason I thought there was because it's close to where we are and there are some pretty inexpensive properties. We have a little extra money literally just sitting in the bank and I just keep thinking that real estate might be a good way to make my money work for me, you know what I'm saying? We are not aggressive types when it comes to investing, but it seems like real estate is usually a sure thing.... am I wrong??
No, our oldest kid is only in 7th grade. I would love for them to go to UNC, but the reason I thought there was because it's close to where we are and there are some pretty inexpensive properties. We have a little extra money literally just sitting in the bank and I just keep thinking that real estate might be a good way to make my money work for me, you know what I'm saying? We are not aggressive types when it comes to investing, but it seems like real estate is usually a sure thing.... am I wrong??
It's not a sure thing though - Most tenants are awesome & some are professional scammers & the scammers will have a better "line" than the honest tenants. If the tenants don't pay, you'll have to evict & if you don't know how to do that (promptly), you'll be losing money & hiring an attorney to do it. You have to make certain repairs promptly & without disturbing the tenants - that means hiring *good* contractors (and those aren't always cheap or easy to find), and you'll have to clean & market in between tenants - it's a "real" job, not a hobby or a diversion, and if you look at it like a job & run your rentals like a business, the income is more like a "wage" than it is like "interest".. Your money isn't being the landlord, you are. You're basically buying a "job" when you buy rentals. Many times the "job" is pretty darn easy, but once in a while, without warning, it can turn into a full-time, all consuming headache..
I sold real estate for 10 years in a college town. People would often buy it with/for their child, child (or children) live in it during college and then resell it. While my state has some of the lowest housing costs in the country, this particular college town has the second highest rental costs in the state (similar figures for purchasing). I often wonder if this is true for other college towns. I suspect it depends on the state.
The town I live in has a rental occupancy rate over 96/97%. Not all places will have a similar rate and there will be variance based upon location and proximity to campus. What will you do the one year you don't lease it?
Renting to college students is a pain as they can be pretty messy, don't keep up with cleaning regularly, might throw large parties (with guests that don't care about using floors, etc.). It's not an easy way to begin as a landlord.
Those that tend to make money here have owned the properties for many years and own multiple properties. It's tough to purchase a rental that will make a profit here now because of rising sales prices. Consider the Chapel Hill market--will you actually be able to make a profit in that market?
hmmm.... yeah it seems like it could be a headache, but something about it appeals to me. We could get a two bed unit for $130K and rent it out for $1,000. Unless I'm missing something, it seems like it could be a good investment. Of course there will be cost when things break, HOA fees etc. My husband can essentially do anything that needs repairing. If we can sell it for at least that much in 10 years, we will have made $120,00 in rent (of course, minus costs). What exactly am I missing? Besides the headache of course! We are just tossing around the idea. Convince me that it's a terrible idea.
What you are missing is that you've calculated potential gross, not net proceeds. You need to also include:
Annual HOA fees (and HOA's can also charge special assessments for new roofs, painting, upgrades, etc. -- has the HOA charged special assessments in the past? If they don't have enough in reserves, the odds are they will).
Property taxes
Insurance
Miscellaneous expenses---repairs, legal fees, ect. You say that your husband could handle the repairs--what would you do if he got sick and couldn't be able to do so? How much would it cost then? And does he have the time? If he works another job and is now becoming a landlord on top of that, then that is time away from the family--are you ready for that?
I had a client who was a schoolteacher who also owned several rental properties, and he worked from about 7 am to 3 pm each day at school. His coworkers thought he had it made,
earning his schoolteacher's salary, and collecting rent checks on top of that. It's true he did very well, but he told me he worked just as hard being a landlord as being a school teacher. He told me that once he was done at school, he'd visit his properties to see what he needed to address, proactively with his tenants, and he felt this helped with tenant relations and property maintenance.
Also, would you be buying the property all cash, or would you get a mortgage? If carrying a mortgage, factor that cost in too.
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