Is rental property in college town worth it?

Question

Hi BP folks! I am a newbie considering going into real estate, primarily with a goal to establish passive income. This is my first post here. I live in DC region, which is known to be a pricey one. Not much cash flow is happening here if consider to buy in this market. What I was thinking is to start with a 2-3 bdr condo in nearby college town (Blacksburg, VA). Already contacted RE agent in the area. Looks like I will need a very good credit score and a hefty down payment due to the nature of this purchase. Is there any downsides I need to be aware of with my plan? Thank you.

Jeremy Hart · Answer

@Aibek Akmat, I've been in real estate here in Blacksburg since 2004, so I've seen both the good and bad markets for condos. I typically invest in college towns, like Blacksburg, because of the relative stability of the market - our major employer is the university and the periphery of businesses that surround it and spin off from it - but you're right, there are some nuances. Condos are not the instant cash flow everyone expects them to be, in large part because of the HOA management fees, which you can't get around. They are a long-term (10-year) hold in most cases for our market. The future for condos and townhomes for students is bright - Virginia Tech is working towards increasing enrollment by as much as 20% in the next several years. Credit and down payment are first and foremost - you will be looking at 20% or more in nearly all cases, but where most people from out of the area get caught is in the investor penetration. Nearly all of our condo complexes in Blacksburg are 90% and higher investor-owned, meaning there are virtually no owner-occupants - which makes sense when you figure that they're all rented to students. This can be a problem for online and out of town lenders, however, because they'll plug the investor penetration into a spreadsheet, and the algorithm will spit out that they can't do the loan. With these things, one size does not fit all, so consider working with a local lender in these cases, because the lenders who are doing regular deals in our area are going to have workarounds for this. This is the #1 piece of advice we give clients and customers when they're thinking about making an investment in our market from outside the area ... our complexes will not conform to traditional, secondary market guidelines.The agent you've contacted here should be familiar with all of this, and which complexes are approved. Good luck!

Jeremy Hart · Answer

Account Closed is right, cash flow isn't likely going to follow things like the 2% Rule. Andrew, I know you were looking at other areas - have you had success in Harrisonburg and Lynchburg? I don't know anything about either location.

Account Closed · Answer

@Jeremy Hart I am looking locally now. I have an Oak Tree townhouse under contract right now. Looking to close, renovate, and rent by Feb 1.We still need to meet up for coffee sometime!

Account Closed · Answer

Hey Aibek,College markets are great although its tough to buy a cashflowing property in Blacksburg, especially off the MLS. Take a look at adjacent towns such as Christiansburg. Also look around JMU and Liberty.Make sure you research what rents are and all associated expenses and you should be fine.Good luck!Andrew

Quin Weidner · Answer

@Rick Ferry Hey Rick,Charlottesville is a little inflated right now. Student housing is locked in and harder to find deals.However, the student market is amazing if you can get in. You can charge ridiculous prices PER PERSON rather than per unit. There is very little risk because the students will sign anything (we had absolutely no say in our contract- sign or go somewhere else), and Cville forces the students to put their parents on the lease too. Just keep in mind Universities in America are in a rising bubble- the growth in students is bound to drop within 10 years.

Rick Ferry · Answer

Anyone have information on Charlottesville?

Laura Tokgozoglu · Answer

I just wanted to add that if you bought something like 3br, maybe a little older, and managed it yourself, you would most likely cash flow much better than we are. I would also recommend Mickey Herzing, as a Realtor, he has many investment properties in Lynchburg and knows the market very well. We did not use him for our first purchase, we were dissapointed with our realtor,and we will use Mickey in the future.

Laura Tokgozoglu · Answer

We just purchased our first investment property in Lynchburg. We ran into what Jeremy Hart is talking about and ended up going with a local lender. Our interest rate ended up a little higher. We put 20% down and we have an excellent credit score. Lynchburg and Liberty are growing and I think that it is and will continue to be a good solid place to invest in college rentals. We are in it for the long haul though and are not making much in cash flow...but we are also using a property manager at this time as we live in South Carolina. We are older and my husband has an excellent W2 job, so we do not need it as income, it is purely a long term investment. We wanted something that we would not have to put a lot of time into, or money so we bought a fairly new 2br/2ba condo that the property manager says is very easy to get tenants into. We are planning to buy another one in 2017. The nice thing about Liberty is that the college is a Christian college and therefore not a huge party school. We bought the property with a tenant in place(lease up in June) When the lease is up the rent will go up about 8% and then we will be cash flowing.

Rick Ferry · Answer

Quin,Thanks for the feedback and I generally agree with you about the rising Higher Ed bubble. All the best,Rick

Aibek Akmat · Answer

Thank you so much Laura!