About 6 months ago, I cam across exactly what I was looking for (or what I thought I was looking for). I found a house in the town I invest in that was up for sale and it had a particular set of features that made it ideal. The type of property I was looking for was one that I could get a conventional 5% down payment on, but had the potential to be very profitable. This particular house had been converted to a single-family, but had previously been a duplex. The kicker was, it was still registered with the town as a duplex. That is HUGE. Mainly, because to convert back is relatively simple when the town still considers it a duplex, not so much if it was still a single family. Many towns require what are called “Impact Fees” if the house is going to be turned into a duplex from a single family. In the town I invest in, it would come out to about $16,000 just in impact fees alone to do something like that. I would not have to with this house. “Perfect“, I thought, “here I have a house I can convert with only a few work permits and the money to add a wall and put a kitchen back in“. I soon realized, however, that their could be a much more profitable alternative.
There are a number of “college houses” in my town, (some of which I may or may not have been in before for a party or two) because of its close proximity to a major university. In a conversation with the sellers agent, I quickly realized that the house was previously rented to college students for 7 years.
So, I did the math. In the town I invest in, the average rent for a decent two bedroom is about $1,150. As a duplex, I may have been able to get $2,300 to $2,450 per month. However, as a college rental, I could get $2,625 per month if rented at $525 per bedroom (which is a normal price for the area). So the rent is much higher.
Additionally, putting that kitchen back in and adding a wall and the work permits would have racked up a bill of around $10,000 even if I did a lot of the work myself.
Here is another benefit that does not always cross people’s minds. Often, there is the opportunity to tap into a network of other future renters once you have your first group. For instance, you could offer a discounted last months rent if the group can “pass the house along” to another group. In one instance I know of, a friend of mine was managing a house rented to a sports team. A discounted rent was not even necessary because it was passed to the following team every year. That continued for about a decade. Imagine not having to look for tenants for a decade!!!
So, by changing the strategy, I was able to keep $10,000 in the bank and gain between $175 and $325 in rent monthly; $2,100 to $3,900 per year.
What about the risks? Well, think about it this way. If you are renting to a non-college student,or if you are renting to a college student, you are still getting a security deposit for damages. The difference is, there are more people responsible for damage above and beyond that deposit; many times, their parents. Lost rent, excessive damages, etc. would all still be risk factors even if you were not renting to college students.
Here are the actual numbers on this house:
|Downpayment||Other Fees||Immediate Repairs||Total Cash Out|
|Total Monthly Payment||$1,525.00|
|Total Rent Monthly||$2,600.00|
|Bottom Line Cash Flow||$700||Mortgage principal paid monthly||$350.00|
|Annual Bottom Line Cash flow||$8,400||Mortgage principal paid annually||$4,200.00|
|Total Annual Return||$12,600|