Buying a property in college - lease option or owner financing?

Question

Hello, all!

I am planning on purchasing a property by the start of my sophomore year of college, and it is completely up to me to secure financing, because I absolutely do not want to involve family or friends with my first couple investments.

I have narrowed down my options to a lease-option or owner financing simply because I have a 0% chance of securing traditional financing from a bank.

I want to buy this property for the following reasons: (1) have a very small living expense (2) gain valuable experience in investing, property management and finance, and (3) build equity I the property and make a profit upon selling by the end of my college career (I am planning on selling it since I will be moving to another state after college, and I will use the profits to purchase a duplex in my new place of residence).

I would say the most important reason is reason number 1 - have small living expenses.

So, what method of financing would work best for a student like me? Lease-optioning, or owner financing? Do any of you have experience with either of these finance methods, either on the buying or the selling side?

As always, thank you so much for your time, advice, and stories. The forums have been a profound help in growing my REI knowledge, and is look forward to a successful future!

Jeff Arndt · Answer

I don't know how well a lease option would work in your favor.  A typical lease option will last about 1-2 years before you can own the property yourself.  By this point you will have a lot of money tied up in closing costs and also the non-refundable deposit that the investor you are buying it off of has charged you.  Unless you do a rehab or figure out a way to add significant value, you typically need to live in a property 3-5 years in order for appreciation to overcome the closing costs you paid up front.  Not to mention the seller costs, Realtor fees, etc. when you sell.  So if you are in college the typical 4 years that leaves 1 year as a tenant and 2 years as the owner.  A lease option strategy will satisfy goal #1 and #2 however with such a short time frame, and the fact that you didn't add value to the property, you may not achieve #3 and you will hopefully just break even.  This strategy could work, but you need to have a plan for when you graduate to hold the property for a little until you can either turn a profit or break even.  Make sure you can afford a property manager in your cash flow analysis BEFORE you buy.

As for seller financing you are facing the same issue.  You are setting a hard date on the eventual sale of the property.  You need as much time as possible for the market to go up (if it does) to recover the transaction costs on both ends of the deal.  But in this scenario, you will bypass the 1 year waiting period.  Therefore giving you a little more time for the market to rise.

I don't recommend relying on appreciation (something you can't control) to determine whether you should sell your investment or not.  I think going in you need have a back-up plan on how you are going to manage and hold the property if you can't break even when you sell.

Your other option is to add value by doing a thoughtful renovation.  One strategy I see in a lot of college towns is to convert a dinning room into a bedroom.  All you need in some cases is to frame out a wall and put a door in.  Boom! an extra $400 in rent could be added by this change (depending on your market).  This will in turn affect the value of the property.

Now the trickiest part, convincing an investor to sell you their property without a steady income.  In a way, you are just trying to convince a less stringent bank to give you money.  You're best route is to try to EARN accountability with the investor and show them the analysis that you have done.  Gain as much knowledge as you can about real estate and talk to them about your goals and why you want the property.  Hopefully they see that you're inspired, goal oriented, and they might see themselves in you.  And then they may be willing to make a deal.

Make it happen.