Student condo with shared management/risk--good deal?

Question

I'm visiting my father-in-law for Christmas, and he told me about a student condo he owns that's not like anything I've run across before.  It has about 160 doors and 700 or so rooms, and all doors are subject to the same rules and are run by one management company.  Gross rents are $1500/mo and net is $1000/mo after the management company covers its overhead, the property taxes, insurance and improvements.  All units are owned by individual investors and all receive the same monthly payout, regardless of how many of the rooms are rented (since the amounts are based on that total complex's occupancy rate).  This serves to drastically reduce the risk, so it wouldn't matter if none of the beds in the unit I purchased were actually rented out or not--I would receive the same monthly payout as everyone else.  Occupancy has been historically at 95% or above.

It's interesting to me as I live in northern Virginia (where everything is crazy expensive), and the property is in Provo, Utah, where things are more reasonable.  And it would require no hands-on involvement from me at all.

A unit is currently listed for $225k, and I could get a loan with 25% down at 4.125%.  So that's about $818/month in servicing the debt vs. the $1000/month in payouts from the rent (taxes and insurance are covered in the overhead).  In the 7 or so years since the condo was built, the payouts haven't varied that much--went down to $900/month during the downturn.

Wondering what I'm missing here, and what else I should be thinking about.  I don't own any other properties currently other than my primary residence, so this would be my first foray into real estate investing.

Elizabeth Colegrove · Answer

@Jacob Elbe

Thanks for the shout out and so true!

@Andrew Jacobs  I tried to be really specific as I hate to tell anyone their niche is a bad idea after the amount of "thoughts" we got when we got started. I will say this as an experience investor! PLEASE look hard as I truly don't believe its a good deal, and "I" do have really thin margins.

Jacob Elbe · Answer

@Andrew Jacobs

No problem and hopefully it answered some questions for you.  You should look at turnkey properties.  You can get some referrals from other people or contact some turnkey providers yourself, but it's basically where you purchase a property from someone that has rehabbed the house and placed a tenant and stays on as the property manager.  So you buy the house and then collect the rent checks.  Just like your father-in-law is doing, but usually with much stronger returns than he is getting.  There are lots of options depending on what quality of property you're comfortable with, but it's worth looking into if you're considering buying out of state anyways!  Let me know if you ever want to discuss some more!  Like you said, it all depends on your personal goals.  My recommendation though?  Get started and you'll figure it out as you go, otherwise you'll never get started!

Andrew Jacobs · Answer

Thanks to both @Jacob Elbe and @Elizabeth  Colegrove for the sound advice.  My father-in-law is still convinced this is a fantastic deal since there is a small monthly return after debt servicing, while someone else pays down the mortgage.  For him, that plus the tax benefits is enough for the risk and involvement required.  So it really depends on the goals, which I haven't figured out for myself yet.

I've been reading on BP for a while and still haven't pulled the trigger on anything, mostly because I haven't been able to find anything cost-effective locally, and there are still too many unknowns for me investing out-of-state.  But I appreciate the responses and would love to learn more about how people make it work out of state--I think that podcast on the topic a while back with J Scott freaked me out too much... :-)

Jacob Elbe · Answer

And  @Elizabeth  Colegrove  normally buys at margins that are too small for me so if she's telling you the returns are too low then you should really listen! :-)

Jacob Elbe · Answer

@Andrew Jacobs

Welcome to BP!

Sorry I missed this earlier! I agree with @Elizabeth  Colegrove  overall. The returns are even lower than she estimated though because you'll have to put 25% down since its a condo. The interest rate you can get is probably higher than that too because it's an investment property.  Even with her numbers though you're just not getting high enough returns to invest that much cash.  You may be fine with returns in that range but I would recommend looking around some more first because you can get much better returns on lower investments. I think risk goes up when you're operating on such slim margins too. Because  when condo fees finally go up you may be losing money every month.

I live locally too but invest elsewhere because the returns are so much better. So you have the right idea but if you're already investing out of state why not invest somewhere that maximizes your returns? Do some reading here on the forums or message some people to ask where they're investing. Some markets to consider might be Cleveland, Indianapolis, Atlanta, Houston, and Philadelphia but there are plenty where you can make much higher returns. As an example, I'm closing on a duplex in Indianapolis for $60k that will rent for $650 per side with some minor repairs.  Sorry I won't go through all the numbers because I'm on my phone but suffice it to say returns are Much higher :-).

I'm sure part of the draw to  Utah is that you know someone that has invested there but there are a number of people on the forums and on the site that can help point you in the right direction to invest somewhere or even partner with you for you to learn the process.

Good luck!

Jacob

Elizabeth Colegrove · Answer

Everyone will have their own opinion because it is a "very" different asset class. That being said, since I don't follow any of the rules and have a "very" specific business plan. I evaluate everything assuming that the deals is solid and has not other issues (Which this one depends on the solidity of the management company, so that a big discussion) I would look at the cash on cash rate of return.

So assuming you put 20% down at 225k that would be 45k down. So 1000-818 is 182 a month. That would be $2,184 a year or 4.85% return on your cash of 45k downpayment a year. Personally for me that doesn't seem worth it. You can get almost that much just doing  CD's. I personally get 15-25% before expenses. My expenses aren't that much so I get at least 10-12%, before you look at the tax value. It really depends on your goals.

Student condo with shared management/risk--good deal?

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