I’ve been visiting this website regularly, gathering as much information as possible. I made a couple of postings and received great information, which is much appreciated. I bought several books, read and re-read them. I am ready to visit the property in order to make an offer.
The investment is student housing. House has 4 bedrooms and two full bath. It is less than a mile from the college and is already under contract for the 2007-2008 school year. Its a quality place and the rents its receive is on the high side compared to other communities.
$120 (HOA), $150 (MGMT - too far), $100 (for repairs), $100 (for vacancy but may difficult to justify). Total = $470
$40 (insurance) and $75 (taxes). Total = $115
The broker mentioned that $170-175 is the range in order to make an offer.
I can get a HEL for $35k for $233/month. 6.99, 30yr fix.
I can get a mortg for $140 for $758/month. 6.5,30yr fix,IO for 10yr.
Total = $991
TOTAL EXPENSES: $1576
Rent is $375 per student, which makes it $1500 month ( 4 students).
In regards to recent sales, the most recent I found on the website was 2005 but I emailed the director to try to gather 2006 information. The recent sale was 2005 for in the $130s and the current assessment is in the $140s.
The price seems to be more in line of $160k based on the numbers to break even.
If I removed the $100 for vacancy coverage since its has a contract for 2007-2008 and in a prime location, $175 would work.
I’m planning to have the seller provide $3k-$4k for closing so nothing comes out of my pocket.
Any advice would be greatly appreciated. Am I missing anything? Does my reasoning make sense? Is my education paying off? Not being as close to it as I am, what do you think is reasonable?
Are you missing something - YES! You’re missing a LOT.
First, your expense numbers are off. You have left out a BUNCH of the real world expenses that you WILL have. How about evictions, entity maintenance, advertising, legal fees, damage done by tenants (expecially with student housing), captial expenses, utilities paid by owner, lawsuits, etc, etc, etc.
Even with your expense numbers, this property is losing money each and every month. To make matters worse, you’re paying more than the value of the property. How is this a good deal? How do you expect to make money with this property?
Using real world numbers, your operating expenses will be more like $750 per month. This will leave $750 to pay the debt and for any profit. In this case, your mortgage payment is $991 giving you a monthly loss of $240 per month.
Having a lease has absolutely nothing to do with not having a vacancy. Tenants bail out on leases all the time.
I don’t see anything that even is close to a deal here.
Just so that you get an even perspective on this “deal” I agree with everything that Mike said.
Buying overpriced properties and renting them out for less than you’re paying out is never a good idea.
I really appreciate the detail response. This has been extremely helpful and not anything I can get out of book. I have a few questions to increase my learning process.
How do you quantify eviction expenses? The lease is signed by a guarantor or parent. I know it doesn’t eliminate the expense but the student knows daddy or mommy will be footing the bill.
How do you quantify entity maintenance? legal fees? captial expenses? and lawsuits? And I’m afraid to ask what the “etc,etc,etc” expenses I’m missing.
In regards to utilities, they are paid by the renter. Damage done by students are paid by the students (that’s what I was told). Advertising is provided by the mgmt company and is included in the 10% of the rent they get paid.
You absolutely correct about paying more. My intention was to show that $160k was more in line with the numbers I worked up(fantasy that it was) in order to break even.
Using your example of $750 for expenses and trying to break even with the $1500 a month rent, the property should sell for $110k. Checking within this community and others in the vicinity based on 2005 sales, they’re in the high $130s.
Or could it be this little patch of dirt is heaven on earth…and everyone sings kumbaya…and none of the bad stuff happens…
Thanks again for all your advice…
How do you quantify eviction expenses? How do you quantify entity maintenance? legal fees? captial expenses? and lawsuits?
Unless you’ve been in the business for awhile, there is no way to have a “it’s going to cost me this” number, but you still want to budget for them, because it’s going to happen. If this is a current rental, look at the owner’s books and try to determine their actual expenses concerning these.
In regards to utilities, they are paid by the renter.
What happens if they don’t pay? Do you have to pay the missed payments in order to keep it turned on? What happens if you don’t have any renters? You pay. Is the utilities in landord’s name and rebilled or what?
Damage done by students are paid by the students (that’s what I was told)
Damage done by students is charged to the students, just like any other rental. What’s actually paid is usually MUCH different.
My intention was to show that $160k was more in line with the numbers I worked up
Assuming that $160K based on the numbers IS fair market value, you still don’t want to pay FULL PRICE for a property as an investor. Heard the saying, “make your money when you buy” Well this is it. If the FMV is $160K, then your goal should be to buy it for 70-80% of that value tops (assuming that it needs no repairs, upgrades, etc). The bigger discount you get the better.
Just gonna add in something. While in college I lived in off campus housing, and know that in my area, there were tons of students who didn’t make rent. Yes, they did have co-signers, but it was still a problem getting those payments. Also, places can get DESTROYED if the wrong (read: rowdy) crowd rents from you. Right across from me was a unit that 4 kids from the varsity football team lived, they completely wrecked that place, they even had to have a new front door put on.
One piece of advice, if they’re already rented out (btw, this advice is from an observer, not a property owner): roll by that place on thursday, friday, and saturday nights, to get a feel for what kind of tenants are there.
The vast majority of new landlords fail in a very short period of time. The number one reason that they fail is lack of cash flow. Sorry to be blunt, but the “deal” that you outlined is a disaster. If you actually bought many properties like this one, you would rapidly join the vast majority who fail.
Personally, I would not pay a penny more than $75,000 for this property. Running a real estate business is ALL ABOUT THE NUMBERS!
You should study hard, do market research, develop a business plan using real world numbers, and join your local REIA before you consider buying anything. You are not even close to being ready to buy at this time.
Why is the broker ditacting YOUR offer? It’s your money, offer whatever you feel is appropriate.
I’m with Rich.
The broker is paid on a percentage of the closing price…of course he’s going to tell you what a great bargain it is at $170-175K!
You need to offer what the property is worth to you not what the broker would LOVE to see! Sharpen your pencil and get some real world figures. Have you gottena copy of last year’s Schedule E from the sellers yet?
Mike, Keith, Rich and everyone,
Thank you so much for the tough love. You’ve raised some excellent points I didn’t get out of the books I read.
I plan to take a step back. While I’m in this learning process, I plan to start with asking for the schedule E and look into real estate clubs.
In regards to broker’s asking price, I read many times on this site where that number doesn’t make a difference. Its what the property is really worth base on the cash flow and what I was trying to assess.
Can you recommend any books, etc that will assist me in assessing the value of a property better? None of the books mentioned getting the seller’s schedule E. They just mentioned getting the information.
Thanks again…and very much appreciated…