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I'm thinking of making a significant investment. I keep crunching the numbers for this property with very conservative assumptions and I just cannot come up with many unfavorable long term scenarios(maybe I lack a bit on the practical side of things). I need some perspective from someone with experience. I have my agent, lawyer, and contractor lined up-I just have to pull the trigger.
Description: It's a 3 unit multi-family home that's a few blocks from a major University. It's kinda on the edge on the most desirable area for students but it's ok and relatively safe. The house is currently rented by a group of 7 students. They currently pay $2500/month+all utilities. I viewed property once and it was in working order but needed repairs.
Target Tenant: Undergrad/Grad students
List Price: 230k
My Estimated offer: 210k
Downpayment(25%): 55k
Closing Costs and Fees: 15k
Rehabbing Costs: 15k - Actually, I'm not sure, going with contractor soon to get an estimate
ALL the key metrics are significantly positive EVEN if I consider them at the listed price.
-Cap Rate
-Break Even Ratio
-Payback Ratio
-Operating Expense Ratio
-Debt to coverage ratio
-IRR
...etc
Someone help. I MUST be missing something. The main risk as I see it, is not being able to get student tenants. I would suffer a loss of 20k a year. But, demand in the area is relatively stable.
Lots of risk renting to college students. That $10k assumed profit can easily turn into 2 months with no rents and 5-10k in damages by disallowed pets, heavy drinking. Holes in the wall.
Location: Mokelumne Hill, CA & El Pescadero, BCS MX.
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Make the lease an annual one and allow for sub-letting in the summer. It sounds like the place my son is going to rent in Berkeley next year. I'm with 2bindenver on this one.
I think you're undercounting vacancy and repairs. A conservative allocation would set those as 10% each, annually.
And, for student properties, there is also a high seasonality factor which could leave you with vacancies during the summer, unless it's in an area that also is desireable to non-students. For example, near UT Austin, over half the condos near UT sit vacant all summer, or lease for "summer rates" to temporary renters.
Turnover is the most expensive event for landlords. You're buying a 3-unit property with a higher propensity for turnover than a normal single family home in the suburbs attending good schools. Students are also harder on properties, and you have the hassle factor of their (often) over-involved parents.
I'd talk to an experienced property manager in the area who would be a candidate manager and see if they have any insight or advice.
FWIW, I wouldn't personally buy it because the numbers don't beat what we can achieve with a single-family home by enough to offset the risk.
I think you're undercounting vacancy and repairs. A conservative allocation would set those as 10% each, annually.
And, for student properties, there is also a high seasonality factor which could leave you with vacancies during the summer, unless it's in an area that also is desireable to non-students. For example, near UT Austin, over half the condos near UT sit vacant all summer, or lease for "summer rates" to temporary renters.
Turnover is the most expensive event for landlords. You're buying a 3-unit property with a higher propensity for turnover than a normal single family home in the suburbs attending good schools. Students are also harder on properties, and you have the hassle factor of their (often) over-involved parents.
I'd talk to an experienced property manager in the area who would be a candidate manager and see if they have any insight or advice.
Steve
Thanks Steve, I will try running with those more conservative assumptions. I'm actually going to see the property soon with the owner of a contracting/rental management company owner. Very eager to get his insights.
Quote:
FWIW, I wouldn't personally buy it because the numbers don't beat what we can achieve with a single-family home by enough to offset the risk.
Think about a house renting for $1,500/mo. If it turns over and you lose 1 month to vacancy, that $1,800 right there, over 10%. If it happens 4 of 5 years, it's going to be over 10%. If you get lucky and have no turnover, you got lucky. But there isn't a line item on a spreadsheet analysis for "Luck". I always assume the worst.
Also, $1,800 annually for repairs and maintenance gets chewed up pretty quickly some years. Other, you get lucky, but over 5 to 10 years, 8% to 12% of gross rent should be expected unless you live near and do your own repairs, in which case you could shave a little off.
Steve
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