College town apartment rentals

[Ray Bell]

I live close to a college town and I was doing some research on some potential investments. I came across a 2/1 apartment for $220,000 and rents for $2500 a month. I know this does not follow the 2 percent rule, but the building rarely ever has any vacanies because its a prime place for the students to live. What would be the dangers in aquiring these type of properties knowing it will almost certainly be rented out and its fairly easy to maintain?

[Jimmy H.]

The risk would be that the investment doesn't yield a lot of cash flow and the only way you'll truly profit from it is appreciation in the value of the property over 10-20 years. Campus property will always be in demand as you mentioned, but many would prefer and recommend properties that are cash flow positive.

In your scenario, lets say best case scenario you can get the property for $200,000, you put 20% down ($40k), leaving you a loan balance of $160,000 at 30 years around 5% interest is gonna give you close to a $900 - $1,000 payment.

I would recommend using the 50% rule, which is that if you monthly revenue is $2,500 then all of your expenses (not including debt service) will equal 50% of that. So your netting $1,250 per month with debt service of about $1,000.

these are very rough figures and you are close to break even, which means crazy college parties with broken fixtures or hole sin the wall will cost you and be a pain in the ***, kid doesn't pay, you can't get it rented because they just built a nice new campus housing project, the property has repairs and deffered maintenance, there is mold and leaks and rotting wood your inspector doesn't find, etc. and the turnover on campus property is generally once per year - turnover means adverstising costs etc.

So if your running a thin margin and lets say you essentially break even every year - then your sole source of income and profits will be the appreciation in the value of the property.

On the other hand, you could net a larger positive cash flow on other investments in that same $200,000 price range, and use that cash flow to do more deals and get bigger loans down the road.

Not to say your particular property looks like a terrible deal, it seems alright (without knowing anything further). but it may be a lot of hassle dealing with college kids with little to no current income.

If you invest 40k cash and years of time and further investment and it appreciates 25% over 10 years you've only made another 50K, that 5k per year (not to mention transaction costs), wich isn't bad, but some would argue theres better deals. Don't jump on a deal that's alright, be patient and wait for a great deal.

PS had a campus duplex that i bought for 180,000 couple years ago and rented for about 2,500 and it wasn't as good an investment as I had originally envisioned - I won't say more.