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!