Should I move ahead?

[AdamBlackmore]

Hello all,

I have been following the forums for some time and have learned tons. Thank you! I will give you my scenario, and I would love some feedback from more experienced investors about what they think.

I`m a young (25 year old) investor who is just starting out focusing on student rentals. My first (and only) property is very close to the university/bus/ammenities, meets 10% rule, the demand for places this close is very high and have no concerns about vacancies (Had 7 groups go through it less then 24 hours after I posted ad and 5 groups wanted it). It is currently rented until April 2010 for $2200/month. This will give me a positive cash flow of $300/month. I am very highly leveraged (Only have 5% down) and bought in summer.

I have a very secure job as a teacher where income is guarenteed to go up slowly year after year. I live cheaply, to the point where I can save $1000-$1300 a month from my teaching salary. I`m not going to buy a primary residence for a while in order to save $$ for investment properties and to increase ability to get loans from bank. I have $40,000 in stocks and savings. My only debt is the rental property mortgage.

I want to buy another property. I see a great time to grab a deal and great interest rates. I am looking to do the cookie cutter approach which limits risk. There are a couple of very similar properties close to my own that I can pick up at a better deal then what I picked mine up for due to a changed market.

The properties I`m looking at are student lodging houses. They will run around $240,000 and require 20% down. My generous parents will allow me to take a secured line of credit against their home to make it happen. I would then allow my money in stocks/savings grow while acting as a slush fund with the bonus of being able to write off the interest on the loan from parents. It would be payed back over time with positive cashflow and/or a refinance down the road. Essentially the place would be 0 down for me. I dont` see point of having my money in it if I dont` have to... ROI baby!! The one property I`m most interested in is currently tenanted, meets 10% rule, and just down the street from my current one, so I know there will be no issues to rerent it. I will get a fixed rate of 5 years on second place to protect me from rising interest rates as I`m very highly leveraged. (Other place has variable prime -.5).

A further decrease in market place would essentially leave me with negative equity, but I`m holding long term and have a good slush fund. I can even move in! Worse case scenario I see is I have a bit of negative cashflow from a tenant bailing out or really bad maintanence luck, and the market continues to go down. That is just a blip in the long term game and easily handled...... the only disaster is being forced to sell, but I can`t see how that would happen. Opinions? To buy or not to buy???

Thanks
Adam.

 

[Nir]

Hi Adam, I am not doing it myself but heard students rooming house is so much more headaches than a Plex. Also, in the current situation you can find close to DOUBLE (!!!) the 10% ratio you mentioned! Therefore, understand how amazing for you the current situation can be, look for MUCH better properties than mentioned and NOT necessarily where you currently live, and you will soon be a very happy teacher. Due diligence is key though. Good luck, Neil

 

[AdamBlackmore]

Neil,

Thank you for your response. If you buy a good property where you can pick and choose tenants, students can work just fine. I disagree student housing is more of a headache, in fact I think it`s the opposite. Take this post from Mike Milovick, who many see as the "man" when it comes to student housing in Waterloo.

"Definitely rent to students. I have managed both student and non-student portfolios.

Reason 1.
Parents typically co-sign lease. Student doesn`t pay, parent does. Johnny Lunch Bucket bounces his rent cheque, you are paying mortgage that month out of your pocket.

Reason 2.
Parents typically co-sign lease. Students damage something (they do not when parent co-signs) and parent pays.

Reason 3.
Students are typically not as knowledgable regarding rental legislation as "professional tenants." Bad student is gone in a year. Bad tenant can hang on and cause misery for years.

Reason 4.
Students typically do not have pets, smoke or small children.

Reason 5.
Vacancy can be better managed. Regular tenant can pick up after 60 days notice anytime at end of lease. Student is leaving either at end of April or end of August. And replacement students will rent starting May or September.

Reason 6.
Students typically pay premium over family for unit rental.

Reason 7.
Students typically go home for summer. My properties are usually fully rented year round - but half occupied over the summer. Can`t beat that.

Reason 8
Property work load on student housing revolves around "marketing" and "outgoing/incoming" activities. Marketing is done January to February - typicaly. Outgoing/incoming either end of April or end of August. Its really not a year round management endeavour - its very predictable.

Reason 9.
With "zero down" residential purchase options available, super first time home buyer incentives, and low interest rates, it makes me wonder who is coming to your door to rent - and why - if they are not a student? As such, in my opinion, the quality of residential tenant has greatly deteriorated in the last five years.

Try student housing out. I think you would be pleasantly surprised."


And where are you finding 20%??? That would be amazing. Maybe up north in a run down apartment building with poor tenant profile, but that`s not for me. Remember, I cannot afford the "big" properties that tend to cash flow the best....yet. I know in the Waterloo/Guelph area and there is no way you can find a student house that is legal, in reasonable condition and a good spot for anywhere close to 20%. Yes there is better cashflow elsewhere but with the REIN team saying Waterloo and area is #1, and me living here and knowing the area I think it would be a big mistake to start my investment career elsewhere. I agree with you in that it`s the time to get a deal and to raise the funnel standard up a bit!!

 

[housingrental]

Student housing - The best tenant profile if managed well and good product, been able to get 100% occupancy and 100% collections if so...
Student housing - Not a lot of fun if poorly managed
20% - Yes in dieing small towns, or hard to manage boarding houses in small towns...

Adam - Are you the Adam that I`d spoken to through email about 1 year ago ? Did you buy a place in Waterloo or Guelph (and which address?) If Waterloo what place are you looking into? Have you thought about the benefits of buying your own place to occupy?

 

[Nir]

Great input Adam, Adam.
I guess I mixed rooming house with more specifically students house. I learned something today - you raised some Great points regarding the advantages of students housing - I am convinced I undervalued students housing. However, residential tenants can be an excellent income source. In all the units I have, the tenants have been living there for 7 years on average! students housing still can not beat that. some retired tenants are also much much better tenants than students. However, sounds like you`re doing great and on the right track and as mentioned students housing - not a bad idea at all as well. Cheers.

 

[invst4profit]

Although your numbers, to me, do not appear to show positive cash flow with fully leveraged position the only question I would have to ask is in regards to borrowing the money from your parents.
Considering your age and possibility of uncertainty in future how would you feel personally if you lost everything. Would your parents still have a comfortable retirement carrying your debt.

If you move forward with this plan I would suggest you pay back your parents as quickly as possible and make sure you have life or mortgage insurance to cover all of your dept.
Do not think of your parents only as parents consider them as business partners and compensate them accordingly for there investment and risk.
This is a business, treat it as such.

 

[AdamBlackmore]

Greg,

The "parent" thing is part of my issue going forward. I`m keeping myself flexible so if this second place ended up a total disaster I could move in myself. This is why I`m not touching my $40,000 in savings and keeping my lifestyle so that I`m saving at least $1000/mth as "protection".

My parents each have great pensions (retired principals) that pay them each over $50,000 inflation adjusted for rest of their lives in addition to good RRSP, adult kids, no debts, fully paid off $450,000 house etc. Father is also in position to recieve a very generous inheridence. As much as I shudder to think about the possibility, them bailing me out on a $45,000 loan against their place would not affect their standard of living much. I would pay them back in spades regardless.

For things to end up in a disaster, I would have to either lose my job somehow (Again permanent teaching jobs are the most secure you`ll come across, recession or not children go to school) and my current property and cookie cutter property would have to go from being fully tenanted and very easily rented to no one wanting them. I am in a position to carry both properties with no tenants for at least two years (How would that happen!!), and with the location (1.2km from main university gates, 200m from mall, on bus route, in good shape and legal), and demand I`ve already experienced it`s a risk I`ll take.

Your right about paying back my parents. Even though they aren`t using the equity in home, I will not move forward on a third property until then. I do have mortgage insurance.

You mentioned you didn`t see it cashflowing if that highly leveraged....

Rent 5x420 = $2100/mth
Utilities = paid by tenants
Mortgage on $240,000 puchase (Although that is pushin it in terms of what I`d pay) , we`ll say 4.9%/5yr fixed for entire thing even though parents house loan would be less. ..... $1188
Insurance = $125/mth
Maintenance = 8% = 168/mth
Vacancy rate - 5% = 105 I feel I should say 0%. I put ad up for my place Friday afternoon for following school year and had 7 groups of GIRLS ready to go through it the next day. 5 groups offered to take it and ad was off less then 24 hours. Second "possible" place is essentially same house fully tenanted a couple hundred meters away. In better shape.
Property management: 5% = 105 (I manage it myself)
Taxes - $241 a month

= $168 of positive cashflow/month. If 0 vacency = $273mth and considering I`m managing it $378/mth.

Some may scoff at 0%, but there are those with large student PORTFOLIO`S in area that have 1% or less because they keep places in good shape, great location, the student market is consistent, and dont` need vacency for reno`s as students are often away for summer but paying rent.

There is always some risk, but I feel it`s a good overall play. I`m not moving to a new market, it`s a place around the corner from the one I`m very happy with.

Thank you Greg for your questions/comments.

 

[AndyLuchies]

QUOTE (KW1 @ Jan 19 2009, 07:11 PM) Greg,

The "parent" thing is part of my issue going forward. I`m keeping myself flexible so if this second place ended up a total disaster I could move in myself. This is why I`m not touching my $40,000 in savings and keeping my lifestyle so that I`m saving at least $1000/mth as "protection".

My parents each have great pensions (retired principals) that pay them each over $50,000 inflation adjusted for rest of their lives in addition to good RRSP, adult kids, no debts, fully paid off $450,000 house etc. Father is also in position to recieve a very generous inheridence. As much as I shudder to think about the possibility, them bailing me out on a $45,000 loan against their place would not affect their standard of living much. I would pay them back in spades regardless.

For things to end up in a disaster, I would have to either lose my job somehow (Again permanent teaching jobs are the most secure you`ll come across, recession or not children go to school) and my current property and cookie cutter property would have to go from being fully tenanted and very easily rented to no one wanting them. I am in a position to carry both properties with no tenants for at least two years (How would that happen!!), and with the location (1.2km from main university gates, 200m from mall, on bus route, in good shape and legal), and demand I`ve already experienced it`s a risk I`ll take.

Your right about paying back my parents. Even though they aren`t using the equity in home, I will not move forward on a third property until then. I do have mortgage insurance.

You mentioned you didn`t see it cashflowing if that highly leveraged....

Rent 5x420 = $2100/mth
Utilities = paid by tenants
Mortgage on $240,000 puchase (Although that is pushin it in terms of what I`d pay) , we`ll say 4.9%/5yr fixed for entire thing even though parents house loan would be less. ..... $1188
Insurance = $125/mth
Maintenance = 8% = 168/mth
Vacancy rate - 5% = 105 I feel I should say 0%. I put ad up for my place Friday afternoon for following school year and had 7 groups of GIRLS ready to go through it the next day. 5 groups offered to take it and ad was off less then 24 hours. Second "possible" place is essentially same house fully tenanted a couple hundred meters away. In better shape.
Property management: 5% = 105 (I manage it myself)
Taxes - $241 a month

= $168 of positive cashflow/month. If 0 vacency = $273mth and considering I`m managing it $378/mth.

Some may scoff at 0%, but there are those with large student PORTFOLIO`S in area that have 1% or less because they keep places in good shape, great location, the student market is consistent, and dont` need vacency for reno`s as students are often away for summer but paying rent.

There is always some risk, but I feel it`s a good overall play. I`m not moving to a new market, it`s a place around the corner from the one I`m very happy with.

Thank you Greg for your questions/comments.

Dude, you are the man. You`ve sold me on student housing...sigh... now only if i lived in K-W!

question: am i correct in assuming student housing is far to management intensive to do from a distance (1.5 hrs away)?

 

[mark186]

Two things come to mind from reading your original post. The first is you mentioning really bad maintenance issues if you decide to go ahead with the 2nd property. Ensure you hire the best home inspector you can find to avoid this outcome.

The second is a lack of any mention of a long term plan. What is your desired outcome? Do you have a five year plan? What are you looking to gain from your RE holdings - cashflow, capital appreciation or mortgage paydown?

 

[billf]

Wow,

You sound like you have it together, and the plan looks good. A couple of years of POTENTIAL depreciation should not stand in the way of long term cash flow. In KW-Guelph, do you rent out the rooms or the whole house. Is it one lease with multiple signers or multiple leases. How much time is involved in running one of these in terms of maintenance/collection etc.

You have a plan and have your eyes open, take action, whats the old saying....The man that never had a chance never took had a chance!!

Good Luck

BillF

 

[Thomas Beyer]

QUOTE (KW1 @ Jan 18 2009, 07:39 PM) ...To buy or not to buy???
TO BUY .. assuming:

a) you can manage it impeccably yourself (without too many headaches) or have a reliable 3rd party manage it impeccably for you ..
b) you allow for higher vacancies during slow student months (June / July / August)
c) cash-flow is reasonably predictable and positive on an average annual basis
d) cash cushion is OK
e) you can function well at the teaching job
f) you can take 4-6 weeks off a year and don`t have to worry about the properties
g) you sleep well at night
h) you`re enjoying it

Think about: what if I had 5 properties or 10 .. what would have to change ? outsourced accounting perhaps, or leasing assistant.

Aim high for the eagle .. you may hit a star !!

 

[AdamBlackmore]

JessAndy and Mark thank you for your responses.

JessAndy, my first property and one I am seeing tomorrow is in Waterloo`s close neighbour Guelph. I love Waterloo for student housing but in the current market I`m finding it is easier to cashflow in Guelph which I need. It is possible in Waterloo and I do have my eye on Waterloo, it`s a better run city, and long term feel I will be looking to get into their student apartment buildings.

Jess Andy, you have McMaster right there!! I dont` have much knowledge on the student market there, but the real estate there is reasonable, correct me if I`m wrong someone, but the income/price ratios on the student housing there is quite good. Plenty are very gung ho about Hamilton for future equity as well. If interested in student housing, being close, and cashflow your in a good spot (St.Catharines/Brock is close as well which can be EXCELLENT student cashflow, although a bit of a slummy city).

As housingrental stays above, student housing can be the BEST tenant profile if you pick a good place. Allows you to CHOOSE your tenants. I have a bunch of female vet students in my place now. Big difference if your renting to grad students vs. 2nd year boys. When in University, I found many landlord didn`t understand how to relate to students, hence issues....

Mark, a house inspector is a must!!! And definitly will. But bad luck can still happen. A house inspection is essential to reduce risk.

I`m glad you mentioned long term. I would buy and hold these properties. As cashflow is #1, mortgage paydown takes a backseat (Can pay off parents and/or invest in other intruments which can pay me far more then 4.9% tax deducted). This may obviously change if interest rates are crazy when renewal is coming up then mortgage paydown is #1. In terms of equity I am hoping for it (If Guelph gets act together in terms of enforcing lodging rules, my place(s) will see NICE appreciation), but need to make sure I can carry until that happens.

I will stop at these two until equity puts me in a position to refinance, I come into money/get hitched, or score a JV. Will not highly leverage on a third on my own nor dump all my savings into a third as I feel it`s important to have other investments and a bunch of $$ in liquid investments to keep me flexible and able to sleep at night. I`m sticking with students long term in the Guelph/Waterloo area with an eye on Waterloo student apartment buildings. I have tons of scenarios in my head on possibilities with this market depending on what life/market scenarios play out in the future. I am going to continue to live cheap enough where I am saving at least $1000/mth for foreseeable future. I will top up my TFSA every year. Long term goal is to be financially free in 10 years on cashflow/stocks/and partial teaching pension I can qualify for after 10 years. So many factors though, but who knows!

 

[AdamBlackmore]

Thomas, thank you so much for your post. You are very respected around here. I have checked out your website and you are quite the success!!

a) Management is going fine so far. I could pick and choose tenants when I re-upped for next year. I deem this as my strength and am quite enjoying it. As a high school teacher and not far out of University myself, I am both used to dealing with young adults as an authority figure and can relate due to age/experience. Manger will happen when property/portfolio can afford it. If I can`t afford manager I`m not ready to buy further.

b) No vacancies for summer months. No issues with 12 month leases for good student houses. All my student life I had to sign them to have a decent place to live, and every landlord with a decent place in Waterloo/Guelph demands and gets it. As Mike has pointed out, they are paying full rent and often not there in summer!! Excellent for wear and tear and no vacencies needed for reno`s!

c) I hope caclulations are ok and reasonably predicatable! Again inexperienced so like to check them with you folks!

f) With summers off and properties often rented but half vacent, summer is a great time for me to not worry.

g) Sleeping well... very important. Why I need to make sure bases are covered and heavily considering this "Cookie Cutter" second property rather then one a bit different.

Thank you.

 

[markl]

Sounds like you have a great plan. I am 30 and have been doing this for 5 years and I can definitely see the benefits of starting 5 years ago. Your on a great track and a good start. Sounds like you have a good head on your shoulders. I think your 10 year plan is totally achievable.

Having a REIN member as a realtor really is a great benefit as they get it as well.

Good luck on your search for #2

Regards,

 

[housingrental]

Greg - Got your long email, will reply to it also. Seems like a good deal. I`d consider it. For sure with good management and product I`ve been able to get 100% occupancy and 100% collections for student places.. How do you not collect rent if you have a 20 year old future professional renting for $420 /month AND there chances are 50 year old parent that makes good cash, has a few hundred k`s in assets also responsible for the $420 rent if properly managed you know?

The one issue you might (not are) discounting is rentability... depending on how well you know the market... I"ve seen investors get smoked by buying nearby property and not realizing that the difference between a house that`s a seven minute walk and fifteen minute walk can sometimes be the difference between an easy rent for $475 and a tough rent at $375... be very cautious before jumping in that you fully understand the stability of the revenue source...


QUOTE (KW1 @ Jan 19 2009, 07:11 PM) Greg,

The "parent" thing is part of my issue going forward. I`m keeping myself flexible so if this second place ended up a total disaster I could move in myself. This is why I`m not touching my $40,000 in savings and keeping my lifestyle so that I`m saving at least $1000/mth as "protection".

My parents each have great pensions (retired principals) that pay them each over $50,000 inflation adjusted for rest of their lives in addition to good RRSP, adult kids, no debts, fully paid off $450,000 house etc. Father is also in position to recieve a very generous inheridence. As much as I shudder to think about the possibility, them bailing me out on a $45,000 loan against their place would not affect their standard of living much. I would pay them back in spades regardless.

For things to end up in a disaster, I would have to either lose my job somehow (Again permanent teaching jobs are the most secure you`ll come across, recession or not children go to school) and my current property and cookie cutter property would have to go from being fully tenanted and very easily rented to no one wanting them. I am in a position to carry both properties with no tenants for at least two years (How would that happen!!), and with the location (1.2km from main university gates, 200m from mall, on bus route, in good shape and legal), and demand I`ve already experienced it`s a risk I`ll take.

Your right about paying back my parents. Even though they aren`t using the equity in home, I will not move forward on a third property until then. I do have mortgage insurance.

You mentioned you didn`t see it cashflowing if that highly leveraged....

Rent 5x420 = $2100/mth
Utilities = paid by tenants
Mortgage on $240,000 puchase (Although that is pushin it in terms of what I`d pay) , we`ll say 4.9%/5yr fixed for entire thing even though parents house loan would be less. ..... $1188
Insurance = $125/mth
Maintenance = 8% = 168/mth
Vacancy rate - 5% = 105 I feel I should say 0%. I put ad up for my place Friday afternoon for following school year and had 7 groups of GIRLS ready to go through it the next day. 5 groups offered to take it and ad was off less then 24 hours. Second "possible" place is essentially same house fully tenanted a couple hundred meters away. In better shape.
Property management: 5% = 105 (I manage it myself)
Taxes - $241 a month

= $168 of positive cashflow/month. If 0 vacency = $273mth and considering I`m managing it $378/mth.

Some may scoff at 0%, but there are those with large student PORTFOLIO`S in area that have 1% or less because they keep places in good shape, great location, the student market is consistent, and dont` need vacency for reno`s as students are often away for summer but paying rent.

There is always some risk, but I feel it`s a good overall play. I`m not moving to a new market, it`s a place around the corner from the one I`m very happy with.

Thank you Greg for your questions/comments.

 

[housingrental]

I`ve seen people do it quite well with easy to manage places from 1.5hours away but WORK and not recommended...
You can also hire someone like me (me) to do it for you in KW
Or pickup a condo unit at the bridgeport lofts... (I filled apx. 70 of the beds at that building a few years ago when going condo (rest parent purchased) ...) then pay me just to fill it for you instead of manage... good chunk of your work done for little cost...


QUOTE (jessandy @ Jan 19 2009, 07:27 PM) Dude, you are the man. You`ve sold me on student housing...sigh... now only if i lived in K-W!

question: am i correct in assuming student housing is far to management intensive to do from a distance (1.5 hrs away)?

 

[housingrental]

You can rent out by room or whole house to a group of friends - Market for both, group better....
Same re leases - Some use group lease, some individual.. and a few MISGUIDED SOULS use dual lease structure
Management time - Property quality / condition /location dependent...


QUOTE (billf @ Jan 19 2009, 08:41 PM) Wow,

You sound like you have it together, and the plan looks good. A couple of years of POTENTIAL depreciation should not stand in the way of long term cash flow. In KW-Guelph, do you rent out the rooms or the whole house. Is it one lease with multiple signers or multiple leases. How much time is involved in running one of these in terms of maintenance/collection etc.

You have a plan and have your eyes open, take action, whats the old saying....The man that never had a chance never took had a chance!!

Good Luck

BillF

 

[housingrental]

Thomas - please note - 0% vacancy during summer months if properly managed... all tenants make minimum 12 month commitment... (also 4 month summer term for most students not 3 in Ontario)


QUOTE (thomasbeyer2000 @ Jan 19 2009, 08:52 PM) TO BUY .. assuming:

a) you can manage it impeccably yourself (without too many headaches) or have a reliable 3rd party manage it impeccably for you ..
b) you allow for higher vacancies during slow student months (June / July / August)
c) cash-flow is reasonably predictable and positive on an average annual basis
d) cash cushion is OK
e) you can function well at the teaching job
f) you can take 4-6 weeks off a year and don`t have to worry about the properties
g) you sleep well at night
h) you`re enjoying it

Think about: what if I had 5 properties or 10 .. what would have to change ? outsourced accounting perhaps, or leasing assistant.

Aim high for the eagle .. you may hit a star !!

 

[AdamBlackmore]

Thanks Bill for you input. Seeing place tomorrow and and grateful for your opinon.

To answer you questions. Maint is no more then your standard rental house. Maybe a bit more, but no small kids, pets, etc. Kitchens/laundry more heavily used. Utilities are more if you are paying in general. But again, I`m new so a more experienced landlord can shed more light. Depends on type of tenant, like any rental. Grad students tend to be great, 2nd year "jock" type guys, you will have more maint issues.

In terms of collections. I do post -dated cheques, although I cannot not legally make them do it this way, they tradionally have no issues with it. Easier for all. Pretty standard with students. I use single lease and parents are guarantors, so any issues with damage/rent they are on lease. Tenant giving you issues, then call the parent and often the parent will put them in line real quick, as their name is on lease and they are often paying the way!!! I like to have one lease for entire house. That way I can go after any guarentors (any of their parents). Also, if one roomate bails it`s not my issue, they all signed same lease and as a group need to come up with money whether one is paying 0 or all equal. This type of set-ups have a lot of peer/parental pressure to follow the rules. But again, buy smart, and you won`t have those issues as you can pick and choose best student profile (Female grad students!!)

Take my views with a grain of salt. While I`m a recent University student, and have done a lot of reasearch, my landlord experience is very limited. Someone like housingrental who posted a few back manages student rentals in WAterloo if you want a more experienced take on your questions!

 

[Nir]

I reviewed the data provided again. $168 per 240K property is unfortunately a little low. Even 10 such properties worth $2,400,000 will only generate 1,680 a month still not paying all your bills so still stuck in the "rat race" (see "Rich dad, poor dad"). Also, yes it`s the 5% vacancy rate you should take not 0%. PLUS, after owning 10 such properties, property management will be higher than 5% so brings your cash flow to below $1,680 (not necessarily due to higher direct management costs meaning prop mgmt fees being higher than 5% but more due to the inefficiency in having another company manage 10 properties for you compared to you managing your own (1) property being much more on top of things). I`m not in... but with some appreciation in the future you can still make millions. the Plexes I buy cost like the rooming house you have but generate $250 NET PER DOOR after financing.
so it`s not $250 vs. $168 but rather $250 x number of units per Plex VS. $168. not trying to discourage or something but rather encourage you to at least consider other property types/locations for a significantly better cash flow, if that is your main goal. Cheers.