Student rental house hack for daughter with 30%+ ROI

[Ken P.]

Last year our daughter started at the University of Cincinnati, and was required to live on campus the first year, to the tune of around $12,000 for room & board.  This isn't bad compared to a lot of schools, but was still more than we wanted to pay.  So while other parents were attending various activities during family weekend last fall, after a perfunctory visit to campus we met up with a real estate agent (@Slocomb Reed) and started looking at houses.  Many of the places we saw were what we associated with typical student rentals - old houses in fair to poor condition, with students sandwiched into small rooms and ancient common areas in serious need of updates.

After much searching, we came upon a nice 5 bedroom brick home about the same 10 minute walk from our daughter's main classroom building as her freshman dorm.  It was the last non-student rental on the street, and was being sold by an older couple downsizing.  The house layout may have scared off some other potential investors, as the former owners had run a business on the ground floor for over 30 years, and it therefore required work to convert it back to residential living space.  The house also had only 1 full bath, an impediment to renting to a houseful of college students.  We wanted to put our daughter's name on the title along with ours, so we waited to close until just after she turned 18 and was legally able to sign paperwork, closing in February.

With help from our Michigan-based contractor, who lived in the house while working on it, we converted the 1st floor back to residential use, adding a large 6th bedroom with walk-in closet, another full bathroom, a study room, and a living room, and made a myriad of small improvements.  Our daughter was able to line up friends as tenants for the fall, but we were still left with a 3 month gap between completion of the renovations and the start of the new school rental year, so to plug the gap and prevent a large cash drain we turned to Airbnb, made possible because we chose to furnish the house.  Without too much effort (and after quickly responding to and fixing some of the things that needed improvement when just starting out), short term renting on Airbnb ended up covering our breakeven costs for those 3 months.

Last week our daughter and the other students moved in, so the house is now operating in student rental mode.  Here are the numbers:

Purchase price - $210,000, with $4000 put in escrow by the sellers for repairs

Down payment - 10% / $21,000

Closing costs - $5000, about half in closing fee and half in pre-paids (taxes, insurance)

Total cash out of pocket - $26,000

Renovation costs - $23,000 ($4,000 paid from escrow), for above-mentioned work plus new central A/C and new electrical panel 

Furniture cost - $8,000. Furniture and renovation financed by HELOC, $27,000 @ 4.5% over 5 years = $500/mo

Rent - $3,000/mo

PITI + PMI - $1350/mo

HELOC loan - $500/mo

Utilities - $350/mo

Maintenance + CapEx - $400/mo (Roof and windows are new, exterior is brick, HVAC is all-new)

Cash flow - $400/mo (18% COC)

This return does not include equity capture of $260/mo from mortgage paydown (boosts return to 30%), appreciation (anybody's guess, but at least the rate of inflation), or the biggest of all, rent avoidance for our daughter of at least $550/mo (boosts return w/o appreciation to 56% annually).

Besides the great returns, another reason for buying the house is the example of living in a money-making house to get our daughter comfortable with house hacking.  When she does eventually sell, maybe after graduation in 4 years and a move to a new city, she should have a nice chunk of equity to deploy on the purchase of new place, hopefully another house hack.

Thanks for reading!

[Ken P.]

Four years have come and gone, and now it's with both pride and a tinge of sadness that this story of student rental investment in Cincinnati draws to a close.  The weekend before last, our daughter graduated from University of Cincinnati (summa cum laude!), and 2 days before graduation she closed on the sale of this house, so when we moved her home to Michigan after graduation it was for the last time.  The house had been a wonderful place for her and up to 6 other young ladies to call home, serving as a base for her to return to from five co-op (internship) assignments in cities across the country.  It was also a great investment, but not something she or we wanted to retain and try to operate from a different state after graduation, so putting the house up for sale at graduation was always the plan.

Our daughter's part of the bargain when we purchased the house was to keep the house full of renters, which she was able to do all except for the final academic year, when continued covid-19- related campus closures, which drove many students to take classes online from their parents' home, meant one of the 7 beds was empty.  She was even able to sublease her room during all 5 internships, bringing in even more income and helping her cover the expense of interning in high cost of living cities like NYC and Denver, among others.  With her fulfilling her commitment to keep the house rented, we kept ours, and quit claimed our ownership portion in the house over to our daughter prior to sale.

So, how did the numbers look during ownership?  Even better than we'd projected above for the first 3 years, and slightly below in the final year.

Rent - $3615/mo

PITI + PMI - $1350, rising to $1545 in year 4

HELOC loan - $500/mo

Utilities - $370/mo

Maintenance + CapEx - $400/mo

Cash flow - $800/mo (35% CoC)

On those semesters when our daughter was in the house, cash flow dropped to $255/mo, but she also avoided having to pay rent elsewhere.

When it came time to sell the house, the price it sold for went far beyond what we imagined when we bought it in 2018.  While benefiting from a great location and solid bones, and a good rental history, there is no denying that the dearth of inventory and the general frothiness of the real estate market must have played a role.  There was only one other house at all comparable on the market when we listed, and our house was fancier, bigger, in better condition, closer to campus, and in a nicer area.  Nevertheless we listed our house at the same $390,000 as the other house, a price that also seemed reasonable based on past student rental sales near campus, albeit none in our very nice neighborhood.  The house had 9 showings and 8 offers in two days, the lowest a full price cash offer. Without further ado, here are the final details:

Purchase price in 2018 - $210,000

Sales price in April 2022 - $450,000 (cash, no inspection, no contingencies)

Net proceeds - $249,000

With initial out-of-pocket investment of $27,000, the return is a 9.2x multiple, or 84% IRR, which is by far the best real estate investment we've ever made, and gives our daughter a great start on her financial life. Perhaps not surprisingly, she is turning to us for advice on how to invest her proceeds. As she heads off to a year of volunteer service in AmeriCorps before beginning her professional career, she will not have much time to devote to considering or managing investments, so we're carefully considering investment options to recommend. Any suggestions? We're old fashioned, so please don't suggest cryptocurrencies!