College housing - Posted by gs

Real Estate Investing Real Estate Gurus
1

Posted by CAL on June 25, 2007 at 12:41:24:

This property has the chance to cashflow a little, but it is going to be WAY more expensive than you are currently figuring. Your expenses will likely be closer to $3000 than to $500. Expenses you haven’t mentioned yet may include:

Vacancy - figure on at least 5% even though it is fully leased right now.

Plumbing - I have the plumber out at my 16-unit at least once a month, usually more.

Legal fees - You will wind up having legal fees for evictions, collectoins,etc.

Property management - unless you are doing it yourself, figure somewhere between 8 and 10 percent of gross rent

Trash collection - you will most likely be required to have a dumpster on site

Electricity - for common areas and outside lighting

These are just a few that came to mind for me. It is true that expenses generally run close to 45% of gross rents. Even if you cannot think of where in the world all of that money could go, just use that number because it usually works out very close to it. That is before your debt service also.

2

College housing - Posted by gs

Posted by gs on June 24, 2007 at 08:01:21:

Am I right or am I wrong.

This building is located in the fraternity district of the largest university in the
US.

At one time it was a fraternity that lost it’s charter.

There are 4 units

7 beds and 2 baths rent for $2,345.00 a month.

7 beds 2.5 baths rent for $2,485.00 a month

4 beds 1 bath rent for $1,440.00 a month

4 beds and 1.5 baths rent for $1,300.00 a month

The lower level has a game room and a storage area that they have started to
develop for 2 more units. One would be 3 beds and 1 bath and the other
would be 2 beds and 1 bath or you could combine them for a 5 beds and 2
bath unit.

The asking price is $689,000.

The unit is fully rented through the 2008 school year and the tenants take
care of all untilities and water and they also mow the yard.

With current rents being $7,470.00 ($340.00 per bed) that is a gross cap rate
of 10.8%

With the additional beds being developed the rents would increase to
$9,180.00 month (13.3%).

Average rents in the area for college students are $500.00 a month.
Potentially this property could bring in $13,500.00 a month.

I figure that updating the whole house would cost about $100,000 with the
completed additions and the rents for 2008 - 2009 could be $500 a bed.

Acquisition cost + rehab = $800,000.00 (16.875%)

Average cap rates on this campus are 8% and below.

Does this mean the real value of this property could be 13,500 x 12 =
162,000 annual rents / .08 = $2,025,000.00?

Is this a good way to figure the value of commercial property or is there a
diffrent formula?

Thank you in advance

3

Re: College housing - Posted by Merez(IA)

Posted by Merez(IA) on June 24, 2007 at 11:53:09:

I think you’re overlooking a few things:

  1. What are the landlord’s expenses? Gross income is fine and dandy, but net income is a much better number, as well as it should be the one you are using for the cap rate formula.

  2. Are there year around leases, or month to month? If the latter, I would see problems having them rented for June to August, the typical months most schools have breaks during.

  3. I’m not sure if it is true of this property, but as a general rule most undergraduate student rentals have large repairs and maintenance expenses between tenants, as the students will wreck their first place away from home as they don’t have their parents to clean up after them. Again, this is only a general rule, but I’ve seen it happen more times than I’ld like to.

4

Re: College housing - Posted by gs

Posted by gs on June 24, 2007 at 12:21:32:

The landlord is very hands on. He is in his late 60’s now and that’s the
reason he is selling.

he said his expenses was on average $500.00.

Leases are 12 months with each student having their parents co sign.
Each has a deposit and each has a credit card registered.

I remember when I was in college and I could of cared less about the
property.

My objective is to rehab the prop during winter and spring break, get
the 2008 - 2009 rented, then sell it.

I’m trying to figure out how I can value the property. Do you focus on
the cash flow side or the appraised value of the property?

5

Re: College housing - Posted by Merez(IA)

Posted by Merez(IA) on June 24, 2007 at 13:35:57:

I find it very hard to believe that any landlord’s expenses are only $500 per year. In my area, the insurance alone would be more than that and property taxes on a $689k property would be in the tens of thousands. Even if the expenses were $500 per month, it would be very low. Any multiple family housing that claims to have less than 25% of gross income in expenses per year deserves some very careful review, as it is much more common for expenses to run 35-45% of gross revenue.

Our moderator, Ray Alcorn has written two articles, one on due diligence and the other on valuing a property that you may find useful:

http://creonline.com/articles/art-148.html
http://creonline.com/articles/art-216.html

6

Re: College housing - Posted by gs

Posted by gs on June 24, 2007 at 14:54:18:

$500.00 a month is what he said his expenses were.

The auditor site has his taxes at $8500.00. He paid cash for the property
in 97 so he may not have insurance. He is a foreigner.

I will read the links. thanks for all your input

7

Re: College housing - Posted by Patrick S. Lawson

Posted by Patrick S. Lawson on June 24, 2007 at 15:05:52:

If this is an OSU property I know the building. The expenses are off big time.

8

Re: College housing - Posted by gs

Posted by gs on June 24, 2007 at 15:22:22:

It was the old Governor’s Mansion.

The owner states that most of the expenses are paid by tenants. Such
as utilities, lawn care and snow removal.

He has a coin operated washer and dryer that is operated by an outside
company.

Taxes alone are over $700 a month plus insurance would have to be
$200 to $300 a month for college student housing, especially since
this has a fairly large balcony.

What other expenses would there be besides typical wear and tear by a
bunch of overly hormoned 19 years olds.