Buying a Property That Guarantees Over $10,000 of Cash Flow In The First Year: Part 1 of 4

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I thought that I would write a blog post that is a little different today and share with you the deal that we are currently working on.  My husband and I are currently working on a new type of deal and I want to walk you through our whole process as we ourselves go through it.

My husband and I have been wanting to broaden our investing to include student rentals. For about 2 years now we have been scouring the internet, previewing properties and coming up with nothing.  We are primarily looking in the college town of the university where we met.

We've previewed a ton of properties there always walking away saying, "Are we sure we want to invest in student rentals"?  They seemed to have always been scary to walk through not knowing what you may find lurking around every corner.  This is one of the obstacles you must realize when planning to invest in student rentals.  

Students are well....kids.  Most of them do not take the pride or ownership in renting something and keeping it really nice.  Yes, there are some that do.  But, the properties that we have walked through always seem to send us in the other direction.

Yet, when we run the numbers on these properties they keep drawing us back. Why?

Student rentals can be quite lucrative from a cash flow standpoint.  But with more cash can bring the headaches of dealing with students and the upkeep of the properties and the constant turnover of tenants.  These are things you must think about when planning to go down this road.

Finally, just a few weeks ago we found a property that didn't seem too bad online.  We called the realtor that we work with there and asked her to preview the property for us.  We actually live about 3 1/2 hours from this town in another state so not only are we looking to invest in a new type of property but also in a new town.

We've looked at properties with her before, so she is aware of what we look for and what we try and stay away from.  She called us and told us one of the properties she viewed was a definite no and the other one was actually pretty good compared to what we have seen.

The Problem With Buying a Property at a Distance

So here comes the problem when you don't live local.  We wanted to get moving on it, but didn't want to make an offer without getting another set of eyes on the property since we can't make it up to visit until July.  Luckily, my parents only live about 20 minutes from this town so we asked them to view it and get their feedback as well. In this instance they are our "boots on the ground".  I recommend if you are investing in a town not local that you have some boots on the ground to check out the properties.

With all of the feedback and pictures we received we have decided that we were going to make an offer.  Like always, I have run the numbers using my property analyzer and have come up with the following numbers. Check out the screen shot below of our property analyzer with the numbers for the property.

As you can see the numbers are pretty awesome, yielding a 50% ROI.  We will make our money back in just 2 years cash flowing over $800 a month. Leaving plenty of cash to cover issues or problems that may arise such as vacancy rate, capital expenditures that play into the 50% rule.

The best part about this deal, the property is already rented to 5 students for the upcoming year with a lease start date of August 10.

Meaning that we are going into this deal with nearly guaranteed cash flow of over $10,000 for a year without having to advertise or market the property.  So, we decided to make an offer.

When we made the offer here were the conditions of the contract:

Contract Conditions

Asking Price: $119,900

Offer: $104,999 with 2% closing cost assistance

15 Day Home Inspection Contingency

  • A longer home inspection in this case allows us to travel up to be there with the inspector for any major red flags.

Appraisal Contingency

  • The house must appraise for contract price or higher

Radon Inspection

  • Allows us to have this inspection done because of the fact it is an old home in an area where water gets in the basements of these houses.

Financing Contingency

  • Contract dependent on our ability to obtain conventional financing.

Earnest Money Deposit: $2,000

  • Our deposit that shows how serious we are in the property.  This payment is taken off of the down payment check at closing.

Believe it or not our initial offer was accepted with the only condition being that we eliminate the offer being contingent upon the radon inspection.  We decided to agree and ratify the contract.  We do plan on having a radon inspection on our own so that we are aware of that and know whether we need to put a radon removal system in place.

Like I stated earlier, this is our first student rental deal and our first out of state property so we are very much feeling like rookies even though we already own rental properties.  I'm excited to be sharing this process with you in real time as we work through it.

At this point we are working on scheduling the home inspection with a closing date happening in August.  Check back soon for Part 2 where we will talk specifically about the contingencies- financing, appraisal, home inspection- of the contract.

Here are a list of tips that we have learned through this initial part of the process.

  • For distant properties: have trusted individuals preview the property for you providing you with pictures, videos, and information
  • Find local financing: banks know the area where they are located. You can run into more issues when using a bank that isn't local than you need to, making the process more stressful.
  • When buying a property that is already rented or will be rented when you take over- get a copy of the leases ASAP so that you can look over what you are getting into.
  • Learn about the zoning and ordinances of the new area. Different towns, cities, and states have different zoning rules that you should learn about before you are locked into the deal.
  • Be open to where you find your properties. I actually first found this property listed on Craigslist.

Have you invested in student rentals or in out of town properties?  Share your tips below!

4 Comments

  • Ismael

    Reply Reply September 19, 2014

    Hello what do you know about buying property with other peoples money or private lender I’m looking for a mentor to show me how to put deals together and flip the the house for profit do you do that or know someone can you please point me in the right direction. Kind regards Ismael

  • Henk

    Reply Reply November 6, 2014

    Good to hear this kind of success stories but in my country the numbers not working that way. Also I searched thought a lot of area but no luck. Every where is the same even in the capital 🙁 At least I try keep to look for it !

  • J Tee

    Reply Reply July 2, 2015

    Hello,

    Theres a bit of a flaw in your calculations. Even though it is fully rented you should always calculate your cash flow with a vacancy rate of lets say one months rent for the entire year. Secondly with student rentals $42 a month for utils, hydro or water bill seems very low for 5 students. Another thing is internet is normally provided an with unlimited you can pay about $80-100/mo

    • Emily

      Reply Reply July 5, 2015

      Thanks for the comment! With the utilities the students pay all of the utilities except for sewer and trash which is a very minimal cost in this town. This also includes them paying for internet. In the older home that are rented as student rentals in this college town nothing is included- students pay extra for everything. Now, the newer built apartment complexes include everything but it’s at a higher cost. Thanks!

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