Buying 1st rental house - tips needed
April 19, 2018 12:34 PM   Subscribe

I am thinking about buying a house in a college town a few hours away from where I live. The plan would be to hire a property management company to handle the day to day as well as finding tenants.

I plan to hold the property for a minimum of 5 years. Down payment, legal fees, insurance fees etc. are accounted for. It is not possible to buy something local due to high real estate values where I live. I used to live in said college town, and have a decent feel for the neighborhoods.

What do you wish you knew before you did something similar?
posted by walkinginsunshine to Work & Money (11 answers total) 3 users marked this as a favorite
Are you viewing this purely as an investment property, or is your intent to move there permanently after a certain amount of time?
posted by mccxxiii at 12:41 PM on April 19, 2018

Have you read up at biggerpockets??

If it's a true college town, it can be hard to find tenants outside of the semester change cycle. Do you have the cash flow to pay the rent for 6+ months if that happens? College towns also have fairly frequent turnover and lax tenant care which can be hard on the property. In many parts of the US, a lot of those damages are considered routine wear and tear and landlords aren't allowed to use the security deposit for that, so you need to build padding into the standard rent for that.

If the property management company flakes out on things like repairs, you are generally still legally liable. Make sure you have some plan for that contingency.

Do you have the spare cash/line of credit to pay for emergency replacement of something expensive like the HVAC if it unexpectedly goes bad?

I've seen people getting evicted deliberately trash the place on the way out (structural damage, etc.). The landlords sued them but they had nothing to take or garnish. Make sure your insurance covers deliberate damage from tenants.

I plan to hold the property for a minimum of 5 years.

How likely are you to need to cash out in 5 years? With that short of a timeframe, real estate may not be the best investment for you.
posted by Candleman at 12:48 PM on April 19, 2018 [4 favorites]

Buying it as an investment property
posted by walkinginsunshine at 12:51 PM on April 19, 2018

I live in a college town and I own a rental property here.

I would not do what you're thinking of doing, for a couple reasons:

1. Like candleman said, college students are horrible tenants. There needs to be CLOSE monitoring of the property to nip any problem behaviors in the bud right away, because the costs of letting those things go on is really, really high. Be prepared to basically repair/replace every single surface between tenants. And yeah, they only want leases that run for the academic year.

2. Hiring a property management company to handle everything is not ideal. First, they will not care about the property nearly as much as you do, will be looking to make the most money they can while doing the least amount of work, and will generally just suck (seriously, I have never heard good things about property management companies -- the most positive things I've heard about any of them are neutral at best). Second, it really eats into your bottom line; we do all the work on our properties ourselves and our margins are still pretty thin. With a management company, you're paying 10% of your profit each month AND you're paying for labor as well as materials for every repair. I wouldn't get into rental properties if I had to use a management company.

We moved across the country a couple years ago, and sold the rental house we had in our old location last year, because dealing with turnover and tenant issues long-distance is the WORST. We now own a rental in our new location which is approximately 1000% easier. I will never ever be a long-distance landlord again.

In our new town, we purposely bought a rental property that was really convenient to us so we could keep a close eye on it (it's right next door) because we found that even living a half hour away from our last rental was too far. And we bought the property because it's more appealing to a family than to college students for a few reasons, because we would really, really prefer to rent to adults than to college students. (It's against the law to discriminate based on age etc. so you have to be very careful about how you conduct your search for new tenants. You can do things like enforcing unrelated inhabitants laws, requiring large deposits, only doing leases for one calendar year, and writing your lease to spell out every little thing that is an evictable offense. This requires very careful study of local landlord/tenant laws to make sure you don't run afoul of them.)

Bottom line: in my opinion, small-time investment real estate is only worth it if you are able to do all the work yourself.
posted by rabbitrabbit at 1:08 PM on April 19, 2018 [5 favorites]

I get parent co-signers for each of the many undergrads living in my out-of-town property-managed rental property.
posted by OrangeVelour at 1:30 PM on April 19, 2018

We had a rental several hours away. The property manager never brought us quality tenants, they nickel-and-dimed us every month for various maintenance issues (hiring our own vendors would have been an even bigger hassle) and in the end we had to evict the second tenant that the PM brought us. This was over the course of three years, maybe less. We sold the property immediately after the eviction. We broke even on the sale, but we lost money overall.

Lesson learned: we will never again have a rental that we can't go view ourselves immediately whenever there's a concern.
posted by vignettist at 1:31 PM on April 19, 2018 [6 favorites]

I wish I would have recognized how significant the downsides are to having an non-diversified, labor-intensive, physical asset, and calculated more carefully how those measure up to the potential profits.

Since we're just talking about an investment property, I'd compare it to a much more boring and more "traditional" investment vehicle, like a broad stock market index fund.

Based on the past, let's say your index fund is expected to return you 7% per year. It asks nothing from you in return.

Your investment property requires a lot from you in terms of insurance, maintenance, finding tenants, etc. A management company will do some of these things but will charge you a pretty penny for it. You also bear the risks of having an undiversified asset, since bad things can happen that significantly devalue this specific asset (toxic waste dump moves in across the street, whatever).

So, in my mind, all of the pain-in-the-ass things that come with the investment property need to reward you with significantly higher returns than our boring index fund. How much better is up to you, but I would make sure I've fed all of the numbers into the equation, including things like replacing the carpets after one set of tenants move out etc.
posted by craven_morhead at 1:33 PM on April 19, 2018 [3 favorites]

Another voice saying if you want to throw money at something to make more money with that money (on a 0-5 year horizon), college town rental is not a great pick, and doubly ill-advised if you are not local and not managing it.
posted by SaltySalticid at 5:58 PM on April 19, 2018 [2 favorites]

I am a landlord on the side. We have 3 student rentals (3, 5 and 6 roommates respectively). From an investment perspective they are fantastic but we do live in the same city and manage them ourselves. I will readily admit that these student rentals do take up more time than our non-student rentals but they also bring in more money and overall I feel they are well worth it, especially compared to other investment vehicles available. I have lots of specific advice to share if you want to PM me your phone number.
posted by rada at 9:03 AM on April 20, 2018

As a note, I'm not saying you absolutely shouldn't consider this, but a longer time frame than five years might be needed to make it really worth it and be aware of the headaches that dealing with college students can bring.
posted by Candleman at 6:50 PM on April 20, 2018

Just a few random thoughts:

- Really think about how much maintenance and repairs could eat up your profits. Especially since you're staying on the more affordable side of things, a new roof for a 1200 square foot home costs the same amount whether that house is in a low-cost or high-cost neighborhood.

- Do not expect your tenants to align with your sense of reasonable behavior. Example: my brother once had a tenant who had a cat and did not use a litter box but merely put down one layer of newspaper over the next. Not only did the flooring need replaced, I forget what he had to do about the fact that the smell had seeped into the subfloor. On the other end of the spectrum, he had another tenant who wanted him to remove the kitchen tile to re-level the entire floor. Especially in a college town, I'd be wary of balconies or any way that a drunk person could accidentally seriously injure themselves. Can your flooring stand up to a weekend of beer pong? Try hard to find good tenants.

- Understand landlord-tenant law and write a good lease. Be aware of things like Fair Housing law (and e.g., that you can prohibit pets but not service animals).

- You sure you want your investments to be this illiquid?

- Read up on taxes, and depreciation recapture upon sale. Get a good record keeping system in place up front to track your expenses for tax purposes.

- Neighbors are (practically) forever.

Good luck!
posted by slidell at 6:00 AM on April 21, 2018

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