All Forum Posts by: 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!

@Nicolas Beck, I could provide you the name of the handyman we use in Cincinnati, but since we were introduced to him by @Slocomb Reed, who has already responded, I'll let Slocomb handle your query.  

I've used RentecDirect for the past 5 years, and currently manage 36 units with the software. Quite a few of the local MF landlords managing <200 units use Buildium.

@Brian Adams Congrats!  I'm glad to be along for the ride again.  

 Matt, that depends on the buyer's plans for the larger multifamily asset.  If the business plan calls for spending $4,000 per unit for new flooring, paint, vanity, appliances, etc.,  allowing the investor(s) to raise rents and make a certain return, then the lender will require the funds for those upgrades be part of the initial funding, either in the capital raise or as part of the loan package.  For a smaller complex not financed through agency debt, you have more freedom to fund upgrades organically through cash flow; i.e, pay as you go.  

We took the pay-as-you-go route and, while it is what allowed us to get started in multifamily investing, this route has substantially reduced cash flow for a number of years.  That's worked out OK in the early years, because I didn't need the cash flow, but patience and taking the long view is definitely required!

Patience can be a virtue, especially when the deal is a good one. Remember all the short sales during and after the financial crisis? Those typically took many months to close, but were often lucrative and made the wait worthwhile. In retrospect I wish I'd had the patience then to complete more purchases.

I assume by mortgage you're including PITI (Principal, Interest, Taxes, and Insurance)? P+I are straightforward, but for taxes are you assuming the amount due based on the sales price, rather than current taxes which may be based on a lower assessed value? Similarly, is the insurance number based on an actual quote? With the low cash flow you don't have any room for error in your assumptions.

How does the $3300/mo rent stack up to comparable units in the area? Ideally the rents would be under market with the units as-is, or under what you could get after relatively minor updates to the units, giving you an opportunity to increase NOI.

Of course the expenses in the listing are only $9,784 per year - in listings they are always going to be low, to inflate the NOI. You can generally ignore that number. Much better to assume expenses are going to run about 50% of gross income. See real estate ROI calculators around the BiggerPockets site or other websites to make sure you're not missing any expenses category, and be generous in your estimates of expenses; i.e., error on the high side when estimating. Even if the building is newer and everything is in great shape, if you plan to hold it for any length of time you'll need to set aside CapEx reserves for expenses such as furnace and/or A/C replacement, roof replacement, driveway and other concrete replacement, etc.

Mellisa, property tax will reset based on the sales price, in most areas. Will taxes still run $2800 based on $199k?

Are there any other recommendations for good, reasonable electricians in Cincinnati area?  I have two Federal Pacific breaker panels that need to be swapped out for safe modern panels in a rental property near UC, and a few extra circuits added.  I read the reviews for Denny's Electric mentioned above, and the most recent reviews online are terrible, so I'd appreciate some other electrician recommendations.  Thanks in advance.

Greg, thanks for organizing this, hopefully there is good turnout.  I'm looking forward to meeting up with you then.