Long-term Wealth through Real Estate
Cash-Out Refinance: The Simple Math Behind a HELOC

Cash-Out Refinance: The Simple Math Behind a HELOC

Cash-Out Refinance: The Simple Math Behind a HELOC

BiggerPockets guys and gals, let’s talk about cash-out refinancing. Back by popular demand!

We’re going to talk a little bit about the pros and cons, the mechanics, what a refinance is, what a cash-out refinance is. Let’s get to it.

OK, the cash-out refinance. Now, we did a video before, discussing a little bit about the cash-out refinance. It got more into the weeds about what it is and how we did it in an example.

Today, we’re going to talk a little bit more high level about what a refinance is and how you’d actually go to your bank (provided you have equity in your home) to engage in a cash-out refinance.

The best thing to do when talking about cash-out refinance is to break that down to its simplest form—and that’s just the refinance of a home. A lot of people hear this term, and I think it confuses them. But it really isn’t that complicated.

What Is a Refinance?

It’s basically the replacement of an existing mortgage. That’s right. It’s not a redo. It’s not anything more complicated. It’s the replacement of your existing mortgage with a new mortgage.

And why would somebody do this?

Oftentimes, what happens is people have a mortgage at a high interest rate compared to today’s rates.

So, for example, you might have a mortgage that is at 7.5 percent. Today, you could get it at 4.5 percent. That might be the reason you go to the bank to refinance—you’re achieving that lower rate.

But that’s not really what we’re talking about today. We’re talking specifically about a cash-out refinance. This is slightly different and applies more to real estate investors.

What Is a Cash-Out Refinance?

So, what that is, is we’re trying to take equity that has built up in a property we currently own, and we’re going to use it. And what we’re going to use it for is really up to us. That might be buying a new property, doing renovations to an existing property, or it might be some other strategy with regard to investment.

But ultimately the goal is pulling money out of existing properties.

Related: The 3 Major Reasons It Makes Sense to Refinance a Property

I’ve got an example. Alright, we’ve got our friend Mike. Mike bought a $500,000 duplex. Today, Mike’s property is worth $600,000.

Now, when Mike purchased the property at $500,000, he put 20 percent down (or $100,000).

How many of you know LTV, or loan to value? In this example with Mike, he’s got $400K in debt aka the mortgage. He has $100,000 in equity. So, he has an 80/20 LTV.

Good for Mike. That’s fantastic.

Mike’s property now is worth $600,000. Bought it at five hundred; it’s now worth six. He built up a $100K worth of equity.

Now what?

What he wants to do is take a portion of that. So, he goes to his bank. Banks are not going to let you take the whole $100K. They’re going to have certain loan to values that you have to stay within. That might be 80/20, that might be 70/30.

In this example, let’s assume that Mike can get an 80/20 loan to value. That means he can take up to 80 percent of his built-up equity.

“$100,000 x 0.80 = $80,000″

What he does is he goes down to the bank. The $600,000 of what it’s worth today is appraised by the bank. They agree.

He gets now $80K on his cash-out refinance. But it doesn’t end there, because you really have two options with a cash-out refinance:

  1. You could add to the existing mortgage of $400,000. That would mean that right when he gets that, he starts making monthly payments.
  2. Or he could do something called a cash-out refinance and utilize a line of credit—or a home equity line of credit.

The reason many investors go the HELOC route is if you don’t utilize any of that equity—that means you don’t actually take money out of the line of credit—you don’t pay any interest on it.

The other benefit is that these are interest-only loans. And that just means they’re not amortized.

If you have a 4 percent interest rate and you take out $100,000, that’s $4,000 payment for the year. Just the $4K—nothing in addition to that (unless you elect to).

Related: The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Strategy: A Primer for Investors

So, Mike’s feeling pretty good.

To back up, what did we have here? We had a guy who bought a property for $500K. It’s now worth $600K. Bank told him he could take 80 percent of that gain of that $100,000. He pulled out $80,000.

Now, what do you use that money for?

And that’s where this video is going to fall short—because we’re not talking about what you can use the money for. There’s a number of things you can do with that money.

Like we mentioned, you can go buy more property. You can do renovations. But really, that’s the snapshot of the cash-out refinance: how to do it, where to go and do it, and what you can actually take out of your property.

For simplicity, what I did here is I didn’t talk about interest rates. Oftentimes, when you do a cash-out refinance and you do it through a line of credit (a home equity line of credit), it might be the prime rate plus a certain percentage point. I don’t want to get too complicated though. I just want to kind of give you an idea at a high level of what a cash-out refinance is.

‘Til next time!

Questions? Comments?

Let’s talk below.

The Pros & Cons of Hiring a Property Manager

The Pros & Cons of Hiring a Property Manager

The Pros & Cons of Hiring a Property Manager

Today we’re talking property managers. My God, these are some of the hardest-working, most under-appreciated people in our industry.

We’re going to do a deep dive. Watch the video below or read on to learn how to hire the right manager for your rental properties and the reasons you’ll be happy you did.

OK, it’s absolutely true. I think property managers have some of the toughest jobs out there. And you get absolutely no pats on the back for being a property manager.

It’s very rare you’re going to pick up the phone and say, “Hey, Tim, nothing’s wrong. Just want to make sure you know you’re doing a great job!”

Most of the time when you’re communicating with your property manager, something has hit the fan. You’re dealing with an issue.

I think it’s pretty obvious that not all property managers are cut from the same cloth. There are a lot of great, fantastic property managers out there. And there are some that are just… not so much.

What I’d like to do is talk about some of the pros and cons of hiring a property manager and some of the things to look out for when hiring a manager.

What to Look for When Hiring a Property Manager

1. Integrity

This is going to sound kind of highfalutin and wishy-washy but the first thing is integrity. Although, it’s not something you can really screen for on a job application. It’s just something where you have to meet the person, you have to gel with them, and you really need to get referrals from other people.

Anytime I’ve ever looked for property managers in a given area, I’ve interviewed multiple managers. It’s not to be pedantic or annoying. It’s legitimately to try to find somebody that you gel with.

Related: 10 Questions to Thoroughly Vet Potential Property Management Companies

You might find a manager who is a perfectly good manager, but you and him or her just don’t see eye to eye or your personalities don’t jive. That might just not be the property manager for you.

Try to talk to a few of them, find ones you feel that you connect with, and get referrals from other people that they have integrity and that they’re honest. Because at the end of the day, this person better be honest, because they’re managing probably your most expensive asset—kind of a big deal.

2. Familiarity With Property Type

Are they familiar with the asset type that you have? If you have managers who only do student rental investing and you’re asking them to manage a retail strip plaza or you’re asking them to manage an office building, it might not be the perfect fit. So, try to figure out what their area of expertise is and make sure that they know the area and the asset type.

I was in student rentals for a number of years. Still own a couple today. And the student rental game is somewhat different than the normal multi-rise apartment game. The managers that are in that area often times specialize in student rentals. They understand how to deal with students. And ultimately, that’s going to be key for you when you’re hiring a manager to look after your investment. You want to know that they’re an expert in that area.

3. Flexibility

I can’t tell you how many times I’ve had managers that have been difficult in adopting the systems I wanted them to adopt in the management of my properties. So, what I asked them to do is to upload the financial statements into a cloud drive. And I would have them get fed into my accounting system.

Another thing is he would have his own bank accounts, and he liked to move money from his bank account and then pay out what’s left over to me. I didn’t like that system as much. I’d rather that he put all of the rent into our business account, and from our business account, we allowed him to have access to a small management account. (I say small because we’d only keep a certain amount of money in there.)

Anything above a certain amount or certain repair, he’d have to get an OK from us. Anything below that, he could utilize that amount. He could take money out and spend it on certain things that were under that threshold that we needed done. That worked out for us.

So, having that flexibility was just extremely important to us. And I’ve had managers in the past that just won’t budge on things. And if that doesn’t work for you, find a different person again.

This is somebody that’s managing one of your most expensive assets. You want to feel comfortable, and you want to feel that they’re serving you.

So, that’s three of many things I look for in a property manager.

Pros of Hiring a Property Manager

In terms of why you would want a property manager, a couple of things come to mind fairly easily.

1. Save Time and Preserve Energy

A manager ultimately is going to save you time and energy. If you add the most value through finding properties, or acquiring them, or doing something else (maybe you have an actual day job), then having a manager is probably worth it to you.

2. Avoid Headaches

Another thing is stress. It’s very stressful to manage properties. That’s why these people are in the business of it.

To the average person—even the average investor—it can really take a toll on them. It’s stressful to have properties that they’re worrying about and getting that call at 2 or 3 a.m.

Instead, hiring a manager and delegating that to professionals might be the best thing.

Related: My Biggest Property Management Nightmare

3. Enable Growth

Another reason you hire a property management company is because you might be scaling your business. And when you do scale your business, you might be able to utilize that manager to look after multiple properties. If they’re looking after multiple properties, you can start having economies of scale, where the percentage that you’re paying in management goes down.

4. Get the Inside Scoop

Another big reason I like property managers is that they have their finger on the pulse of your market and your building. If you do manage your property (and even if you do routine inspections), you’re not going to get a good feel all the time for things that are happening at the building. So, having a manager there that actually is doing this for you is great.

You’ll know if something’s wrong, you’ll know if there are issues with tenants, you’ll know what’s happening in the building. You’re just informed, and that’s crucial.

4. Get the Inside Scoop

Another big reason I like property managers is that they have their finger on the pulse of your market and your building. If you do manage your property (and even if you do routine inspections), you’re not going to get a good feel all the time for things that are happening at the building. So, having a manager there that actually is doing this for you is great.

You’ll know if something’s wrong, you’ll know if there are issues with tenants, you’ll know what’s happening in the building. You’re just informed, and that’s crucial.

Property managers have this wealth of knowledge that people don’t tap into. Before I even buy a property, if I’m in a market that I’m not familiar with (or I’m only somewhat familiar with), I will go into that market, look for the property managers, and actually take them out to coffee and talk to them about the market.

I’ll say, “Hey, I’m looking at buying this property. I’m looking at these type of rents. What do you think?”

And oftentimes, they’ll tell you right away: “I think this is too high. I think this is too low. Oh, you know what? You could probably get a few hundred more for each of these suites.”

They are a great piece of knowledge because they see what’s happening in that market—even more so than some brokers—because they’re the ones dealing directly with tenants. They see where deals are falling from the leasing perspective. And that’s crucial information for yourself. You really need to take advantage of that!

Cons of Hiring a Property Manager

You’ve probably gathered by now, I’m a little biased. I do like outsourcing management. I think if you hire them properly and you maintain a good relationship, they’re such an asset. But there are some cons with management, too.

1. Cost

The first con is the obvious cost. Depending on the market, it can be as low as 4 percent of the gross income of the property (the gross rent) all the way up to 12 percent. So, you really have to take that into consideration.

Oftentimes what people forget, though, there’s the percentage management fee and in addition to that, there’s leasing up costs. When and if they’re going out to find new tenants for you, that could run up to a month’s rent or half a month’s rent. And those numbers can actually really start adding up—that 4 percent all of a sudden is 7 percent if you do the calculation over the year.

It’s definitely something to think about. But if you can manage that cost, it’s just another expense item. It’s a tax-deductible expense, obviously, running through the business. And again, in my opinion, I think it’s worth it.

And one of the reasons I think that is especially with commercial properties—offices, apartment buildings. They’re being underwritten assuming that there is property management. Most people don’t think 100-unit buildings or 50-unit buildings are being managed by Tom, the owner—as great of a guy as Tom might be.

2. Oversight

Now, the other thing that might be perceived as a con is the fact that this person is not going to love your baby as much as you do. That’s just the reality of it.

It’s your property. It is a totally different type of relationship when you own something as opposed to manage something. So, it’s something just to keep in mind. Even if the person is a good manager, they might go that extra mile, but they won’t manage it or care about the asset in the same way you do.

In my opinion, that may be perceived as a con, but I think it’s just a reality that can be managed. And the real thing about that is you have to manage the manager. You’re technically the asset manager. So, you’re managing the property manager, and you’re making sure that that relationship is good.

You’re not disrespectful to that person. You’re honest. If you have a good working relationship, good things happen.

I can’t tell you how many times over the years I’ve had a property manager that gave me a little bit of a golden nugget in a market. They found out an owner was potentially selling or there’s a conflict with ownership. And that’s what happens when you have these good relationships: You get rewarded. Over time, you’ll get little pieces of market information that ultimately might result in a purchase for yourself.

So, be good to the managers. They’re good to us. The good ones, they are doing God’s work out there.

Do you use property management for your rentals? Why or why not?

Comment below!

Scaling From Single Family to Commercial Real Estate

Scaling From Single Family to Commercial Real Estate

Scaling From Single Family to Commercial Real Estate

Let’s talk about scaling in real estate, whether that means moving from no properties to single family or single family to commercial. In general, we’re just going to talk about taking your business to the next level.

To explain how scaling is possible and how to have the courage to take the plunge, I’m going to talk a little about how I did it personally.

Starting Out in Single Family Real Estate

It all started for me in student rentals. When I was 19 and in college, I started getting the itch to invest in real estate. I saw people around me investing in university towns. Where I was living, a roommate’s dad owned the place.

I thought it would make sense to just have people pay you. You own it, and you collect the check. It sounded so simple at the time.

My parents didn’t necessarily want me to do this. They wanted me to focus on school. But I was fortunate enough to have other people around me who owned real estate and invested in real estate. It just showed that it was possible.

I know not everyone has people like that in their lives. So it may take them longer to realize it’s possible.

Long story short, I got into it with a $245,000 property that was 19 or 20 years old. There were five girls living there, close to the college and attending that college.

The going rate per person for rent at the time was $500. So five girls at $500 a piece for 12 months, that’s $30,000 a year!

The reason I remember this is because I found out they weren’t paying market rents. I thought there was a value-add component to that, even though I didn’t know that’s what you call it.

So I got this property, and unbeknownst to me, I was already doing some of the things real estate investors should be doing. Take the 50 percent rule, for instance. I was looking at $30,000 and figured around $18K of net operating income, so what kind of yield does that get me?

It’s pretty good, at least in my market. I know some investors in other areas wouldn’t be impressed with that return. But my market is similar to New York or L.A. Yields even back then were pretty low.

That property was on a street called Williams Street. A year and a half later, I refinanced it, and that’s what got me into the next one.

The next property was on a street called Marshall Street. That one had six male student athletes living together. Needless to say, I learned a lot.

Anyway, I kept this pattern going. I eventually got up to four properties in the college area.

Part of my goal at the time was getting to a million dollars in valuation. I thought that would be cool.

And that’s one of the benefits of real estate in general—how scalable it is. You should have these short-term and long-term goals.

Another one of my goals? To be featured in a Canadian real estate magazine that I always read. It was part of my education to get into real estate.

I did it, and it actually helped! It gave me a little bit of credibility with some of the banks I was working with.

I held those four properties for years. I only sold them about three years ago.

Scaling to Multifamily/Commercial Real Estate

What happened is I began working downtown after college. That’s when I started getting into condos.

I was thinking that if I bought cash-flowing condos, if there was appreciation and I could capitalize on it, I’d have the option to sell those and parlay that money into something bigger. But those four initial properties that I bought allowed me to break into commercial.

How and why?

  1. When I sold them, they all had appreciated quite a bit.
  2. The amortization (pay down of the loan) was decent—a good chunk of change.
  3. I started partnering with someone who works on the multifamily side of real estate.

As an agent, my partner Jonathan buys $10, $20, $50 million apartment buildings for clients. This is stuff that hopefully we’ll be able to afford sometime but can’t right now.

I saw he was in that market, and it was somewhere I wanted to get. He had a great balance sheet but never bought a rental property. I had a lot of debt, but I had a little bit more know-how when it came to actually being a real estate entrepreneur.

So we teamed up and bought an apartment building. It’s 11 units. We still own this today. The rest is history!

Our goals now, as we move the goal post further and further, is get to 100 units. Like I said, this is the beauty of real estate. It’s so scalable.

Once you get one single family, all of a sudden you’ve socialized yourself with getting two. Then you get five. Then you meet someone who is doing retail plazas or commercial or industrial. And you think, well if they can do that, why can’t I?

You really can build something. I wanted to share this to help some people out there who are trying to get into their first property. Then maybe once you get into the first one, you can move onto multiple or even the commercial side.

I think commercial is one of the most lucrative places to be in real estate. It’s not for everybody. But especially on the apartment side, you can really scale under one roof.

Do you have any questions? Do you like my mustache? How many Luigis out of 10 does it get?

Let me know in the comment section below!

Landlords: Tenants Matter Most Right Now—Please Keep This in Mind

Landlords: Tenants Matter Most Right Now—Please Keep This in Mind

Landlords: Tenants Matter Most Right Now—Please Keep This in Mind

I thought I’d reach out today, partially to keep my own sanity, but also to hopefully provide a bit of insight for landlords and tenants in this new reality that we’re in while living through the coronavirus pandemic.

I hope everybody stays safe and connected. You know, we are social creatures. I don’t think that social distancing means that we can’t continue Skype calls, continue Zoom calls, and be with your friends as best as you can remotely. I would encourage everybody to do that if you aren’t already.

Prioritizing Tenants in a Time of Crisis

I also want to talk about the real estate side of this coin. I’m going to avoid speaking specifically about commercial real estate, because it’s a bit of a different animal. And it is something that I don’t think is at the top of the priority list when it comes to the government and the people right now.

Yes, businesses definitely are going to be hurting right now. But I want to specifically talk about tenants and landlords in multi-residential and residential investing.

I want to talk about what I think is prudent to do right now as a landlord, as well as some of the things to avoid while dealing with tenants.

1. Treat Your Tenants Well

At the end of the day, if you’re a landlord and you want to stay in this game long-term, tenants are your customers and they can’t be treated poorly. This is a perfect time to really put that to the test.

I think right now the reality has set in for a lot of landlords that they are not going to be getting 100 percent of their rent payments come April 1—and going forward indefinitely.

The government has made a few steps, at least on our Canadian side. And I know different states and the Feds south of the border have made adjustments in how easily we can obtain employment insurance or unemployment insurance, depending on which state you’re in.

Related: Coronavirus Content & Resources

I think that’s going to be helpful. But I also think the reality is the landlords are not going to be on the top of that list for the first people that tenants are looking to write a check to. And they shouldn’t be, quite frankly—if food and other care are more essential right now, that’s more important.

Depending on the state you’re in, certain states have basically begun to ban evictions. As a landlord, I’m all for it. The idea of evicting a tenant right now is so far out of my mind. There’s a misconception that landlords are just out to get tenants—but evictions are not even on my mind right now.

We do have to think about the implications of that, as tenants know that they’re not going to be evicted. So rent payments are not going to be on the top of their list.

2. Go Through All Your Expenses

The reality is, I just started tallying up my expenses. You know, when you start looking at $15,000 or $20,000 per month for expenses for your real estate investments, nobody can pay that if you’re not getting rent from your tenants.

So you really need to start looking at strategies to deal with each individual expense and looking at what your options are. What I’ve done is run through the top line expenses, the biggest expenses.

I went through the property tax, mortgage, insurance, water, electricity, gas, and basically called all the providers to figure out what the situation is.

I know in some states there’s been some capital that’s being introduced to alleviate some of that. In Canada, I believe as part of an $82 billion dollar package from the Feds—CMHC, which is our mortgage insurance company—they have also put together a package to help lenders.

The reason that’s important is they are aware that if tenants can’t pay, that means landlords can’t pay. If landlords can’t pay, lenders are in a crunch. Right now at least, my bank has basically said that they are giving deferral options to different landlords making payments, as well as people just with their personal mortgage.

Just to keep in mind there, that’s a deferral. It’s not a freebie. You will pay that eventually, but hopefully, it gets you through in the interim.

3. Contact Your City

Once you’ve gone through your expenses, you want to contact your city and figure out if there’s anything that you can do there. I’m waiting to hear back on that end. In terms of the actual providers, one I had for gas basically said they’re not doing anything. We’ll see how long that lasts because, you know, you can’t get blood out of a stone. There are people who are not going to be able to pay.

And then I went into my utilities further—water and hydro basically gave me a July 1 abatement period so that I don’t have to pay during that timeframe.

Related: What Property Managers Need to Know Amid the Coronavirus Crisis

You know, it’s helpful, and I think it’s important to go through all of the expenses you have and try to figure out which ones you may have some flexibility with. If you’re in a situation where you do see on April 1 that maybe you’re getting just 20 percent or 30 percent of your rent, for those of you who own only one or two single-family homes, that could be 100 percent of your income.

It’s prudent to go through all of those items and figure out which payments you can make different arrangements for during this time. And it’s 100 percent your responsibility to do.

4. Communicate With Your Tenants

Don’t think that not communicating with your tenants is a solution—it is the worst thing you can do right now. Communicate with your tenants. Make sure there is an open line of communication. And if you have third-party management, make sure you have weekly—at least— sessions speaking with them, talking to them about what’s been going on at your building and making sure that the message gets through to your tenants.

Any communication that you have with your managers is vital. I think that as a landlord right now, it’s important that we all work together. This is nobody’s fault—we’re unified in this, and it’s not one person against the other.

Like I said—you have the tenant level, landlord level, the lender level, and the government level. We’re all trying to do our best right now.

How are you handling the challenges you’re facing as a landlord in these uncertain times?

Join the conversation in the comments below.

What’s the Best Type of Commercial Real Estate Property for Investors?

What’s the Best Type of Commercial Real Estate Property for Investors?

What’s the Best Type of Commercial Real Estate Property for Investors?

Thinking about investing in commercial real estate? It can certainly be a lucrative venture.

For those unfamiliar, this type of property is generally defined as land or buildings that are intended to generate a profit in some way.

More specifically, commercial real estate is divided into subcategories. There are four main types, including multifamily, office, industrial, and retail.

Which type is correct for you? It really depends.

Each comes with its own set of pros and cons.

Pros and Cons of Investing in Commercial Real Estate

1) Multifamily

Risk is typically limited with multifamily properties, such as apartments. High vacancy is somewhat of a rarity. When a tenant moves out, often little needs to be done to re-rent a unit beyond some fresh paint and new carpet. On the flip side, sometimes a lot needs to be done.

2) Office

Office spaces tend to be somewhat of an inflation hedge. Built into leases are increases in the rent. Plus, tenants are usually responsible for all costs, including net rent, taxes, maintenance, and insurance. However, when tenants churn, the vacant space may need major renovations to suit the new renter.

3) Industrial

Capital requirements are quite low with industrial spaces, but it’s an extremely competitive market right now. (Thanks, Amazon.)

4) Retail

High-end retail spaces (like promenades) and low-end spaces (think dollar stores) are currently doing well. But the retail properties that fall somewhere in between, such as strip malls, seem to be falling off.

For added insight into each category, check out my video above!

Which category do you prefer? Why?

Leave a comment below.

8 Reasons Student Rentals Make Good Investment Properties

8 Reasons Student Rentals Make Good Investment Properties

8 Reasons Student Rentals Make Good Investment Properties

Let’s talk about investing in student rentals (aka student housing)—an area of real estate that’s near and dear to my heart, because it is the area that I got my start in.

I know what you’re thinking: “Student housing is scary.” That’s what I thought when I first started, too. And it can be!

There is that connotation when it comes to student housing that it’s just a dangerous and high-risk game, where you have students trashing the place. If you’re not careful, that can be true.

But the reality is, student housing is a bonafide area in real estate. There are companies that have built their business models around student housing.

And some of the unique aspects of student housing is really what I want to get into here. So, I’m going to talk about some of the benefits of student housing and how some of the returns you can get are even better comparatively to other areas in residential and commercial real estate.

Pros of Renting to Students

1. High enrollment

Despite tuition increasing in the United States, Canada, and other areas in Europe, there still seems to be a great demand for undergraduate and graduate degrees. Student enrollment continues to increase and some of it in certain states and countries is actually record-breaking. I believe in the U.K., in 2018 and 2019, the number of undergraduate applications surpassed any previous year.

So, we’re still seeing a huge demand. And as you know with real estate, that’s a huge component of how you’re going to perceive your longer-term outlooks. With other types of real estate, job growth and demographics are the most important indicators.

But in this case, when it comes to student housing, that’s really your proxy. Applications and continued application can indicate growth in a certain area or around a certain university.

Related: 4 Vital Tips for Tapping Into the Lucrative Niche of Student Housing

2. High demand

Universities just can’t keep up with the demand. If you’ve gone to university in the recent past, you’ve come to realize that the actual housing on campus often is only offered to first-year students. That wasn’t always the case for a lot of universities. That was the accommodation for students.

But because the actual supply is just not available on campus any longer, we’re seeing developers come in and build purpose-built student apartments for students outside of campus. And we’re seeing that all across the country, as well as in other markets across the pond.

3. Recession-proof

You hear the term “recession-proof” thrown around all the time. And sometimes it’s valid; sometimes it’s not. Student housing actually is a genuine area, in my opinion, that is as close to recession-proof as possible.

In many areas, an economic downturn can actually have the opposite effect on student housing compared to what happens in other areas of real estate. During a recession, more people do apply. When job prospects don’t look good for people who are about to enter the labor market, they see staying in school and perhaps getting an undergraduate degree (or an undergraduate student getting a master’s degree) as their best available option.

So, you still see that demand there—even during a recession.

When I first started investing, it was ’07/’08 and that was all student housing. We really saw no dip in vacancy in the student markets that we were in, despite dips in vacancy in the market abroad.

4. No chance for 100% loss of income

One nice thing here is that you usually don’t have 100 percent loss of income. What I mean by that is, when you have for example a single family house rented out to one family, if that family leaves, you’re now down at zero income—0 percent to 100 percent, that’s a big swing.

With student housing, for instance, the first property I bought had five students. They were each paying something like $500 or $550. And when you had one student leave, you still had 80 percent of your income coming in. In terms of your actual vacancy, sure, it’s not ideal. But it’s not as bad as losing your full income.

There were times where I had student housing that had eight students, lost two or three of them at one time, and then filled that spot a few months later. But you still don’t have the big wipeout down to 0 percent, given the demand in student housing.

5. Turnkey

We’re seeing actually a lot of turnkey student investments. And what that is, is we’ll see developers buy large apartments or condominiums and either sell the condominiums or rent out the actual apartment units.

In that case, you can purchase smaller units within a larger complex and have a relatively turnkey investment where they manage it. And that’s part of their business—you really don’t have to think about anything.

Related: Student Housing Is My Best-Performing Investment (But Yes, There Are Some Drawbacks)

6. Concrete structures

The great thing with these places is they’re often built concrete-based. So, the actual amount of damage a student can do in there is relatively limited. I heard one investor say they’re built like prisons—and the funny part is they are.

7. Less delinquency

If I told you there is a guaranteed investment, you’d probably think I’m crazy. But student rentals are actually one of the closest things. You do get a guaranteed income. I can’t remember how many times I’d have parents guarantee—actually signed guarantees—for their students. It’s not uncommon in student areas.

And the reality is, I have actually in my student rentals seen less delinquency than any other area in real estate. I think the reality is, when somebody is going to school, they’re going to school for a purpose.

Plus, a lot of times it’s the parents who are paying. Not all the time—but I find when the students are the ones actually paying, they’re even more prone to make sure that the rent payment goes in on the first of the month.

8. Maintain market rents

For any of the states that have rent control—by that I mean a specific time where you can’t actually raise rent until you have a new tenant—that can be such a pain. If you have long-term tenants that are paying such a low amount, you can never “mark to market” as they would say.

With student rental investing, what’s great is that you will have a new crop of students every two, three, four years—you’re always going to be able to mark to market. So if you’re in one of those states or one of those provinces where you have rent control, you’re always going to be able to get new students in, because they finish their degree and then they go live wherever they’re going to work or they go back to their hometown or home city.

The Bottom Line

So what I’ll say in summary, when it comes to student rentals, they are a great investment. And sometimes you can get some of the best returns with this area.

Now, you should be careful. There is, like any investment, risk associated with it. But in our business, it’s all about trying to find where that risk is and being able to contain it.

With student rentals, I feel a lot of people look at it and turn away immediately. There’s just this bad connotation that comes with students and housing—and it really doesn’t have to be that way. Even if you really don’t want to manage yourself, there’s always third party management.

That’s another beauty about student rentals: If you have an area, a university/college town that’s booming with students and development, what else is there? There’s usually property management companies that are full service and know how to manage students and do the administration. This is especially great since it can be a little bit more laborious when it comes to students, because there’s a bit more turnover.

Questions? Comments?

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