Apartment or Single Family Homex4 converted to student rentals

[Swish]

I have two different investments I am looking at and would be curious for some input from this group as to how best use $250k.

Currently I have an accepted offer on an apartment building for $1M the plan is to put down 25%. The last years financials have expenses at $98.8k on $185k gross rent. My lender is offering 5.8% interest on a 20 year term. Its a good return but I feel like this is the more tempting option because I am being lazy and not wanting to spend months on end doing renovations once again lol.

The alternative is to buy and convert Single Family Homes (SFH) near a college into student rentals. I can buy the homes for about 200-300k each. The rent per room is 500-600/mo. I figure I can buy 4 of them with the cash available and renovate them (about 2 months for my last one) into legal suites with 6 bedrooms per home. A conservative estimate would be about $130k/yr of rental income. Currently my expenses on the one I have run ~$9.3k/yr. If I have similar experience with the 4 new properties I would have $37.2k/yr. This works out to a much bigger rent to expense ratio with stronger cash flow. If I assume similar interest rate, down payment and a 25 yr term that is really the only difference on the financing side.

Thanks for any feedback!

[GilesMM]

You will get better answers on BiggerPockets.com but the SFH scheme has better financials in exchange for the headaches of renovating and potential headaches associated with renting them by the room rather than by the house.  Is it easy to find students willing to rent by the room?  They get along fine sharing the kitchen, house, etc?


Why not put the minimum down and a 30 year loan to max returns?

[uniwelder]

I'm assuming OP is in Canada, which probably changes what advice to give and which loans are available.  There have been other people here on the forum that swear they would never be a landlord in Canada due to very favorable tenant laws. 

OP-- how many rental properties do you currently own and who do you rent to?  I live in a college town where rooms do get rented individually and I'm also a landlord, but I generally stay away from traditional student rental situations.

I don't understand how you estimate the expenses of the single family homes to be only $9,300 per year.  I would imagine the mortgage would be at least $1,000 per month, plus all your other costs.   Can you elaborate a bit more?

Who is doing the work in these houses?  How much does it cost in labor and materials to do the renovation?  It doesn't sound like you're including that in the calculation here.  What constitutes a 'legal suite'?  I wonder what kind of house you're buying that you can fit 6 of these into one.

edited to add--- I read through OP's previous postings a little.  It sounds like you have 20 properties--- some single family, an apartment building, a commercial building.  It seems like you shouldn't need any advice from us, but it also sounds like you might not be great at doing financial analysis or at least explain it very well here.

Also, do your zoning laws allow you to cram all these bedrooms and unrelated people together?  In my college town, there is an ordinance that generally limits 3 unrelated people in the same house.

[Swish]

You will get better answers on BiggerPockets.com but the SFH scheme has better financials in exchange for the headaches of renovating and potential headaches associated with renting them by the room rather than by the house.  Is it easy to find students willing to rent by the room?  They get along fine sharing the kitchen, house, etc?


Why not put the minimum down and a 30 year loan to max returns? We have pretty strict lending guidance in Canada for commercial loans. I could get away with that when I had less than 5 properties and even then only 25 year.

[Swish]

I'm assuming OP is in Canada, which probably changes what advice to give and which loans are available.  There have been other people here on the forum that swear they would never be a landlord in Canada due to very favorable tenant laws.  Yes I am in Canada and if it was easy everyone would do it lol

OP-- how many rental properties do you currently own and who do you rent to?  I live in a college town where rooms do get rented individually and I'm also a landlord, but I generally stay away from traditional student rental situations.

I don't understand how you estimate the expenses of the single family homes to be only $9,300 per year.  I would imagine the mortgage would be at least $1,000 per month, plus all your other costs.   Can you elaborate a bit more? This is only expenses not including financing. Only utilities, insurance, municipal taxes etc. Financing and interest would be additional.

Who is doing the work in these houses? How much does it cost in labor and materials to do the renovation?  It doesn't sound like you're including that in the calculation here.  What constitutes a 'legal suite'?  I wonder what kind of house you're buying that you can fit 6 of these into one. The previous property I did a student rental in was a 1200 sqft bungalow with an unfinished basement with an additional 1200 sqft. I spent just over $21k in materials to renovate it and get it up to code. That includes new electrical plumbing and the most important is proper windows for fire escape in a basement. I do 90% of the work myself in my rentals but have begun hiring out more and more work over the years.

edited to add--- I read through OP's previous postings a little.  It sounds like you have 20 properties--- some single family, an apartment building, a commercial building.  It seems like you shouldn't need any advice from us, but it also sounds like you might not be great at doing financial analysis or at least explain it very well here. I like to get the opinions of different people. It stretches my thinking a fair bit. I find the perspective here a lot more conservative in their approach to investing and often risks issues are viewed very differently than other RE investors I know or the guys on Bigger Pockets. As for explaining it I often use approximate figures. I have found in the past I get way too bogged down in the analysis and have learned there is a lot of merit in the old saying its better to be approximately right than specifically wrong. Hence why I round typically to nearest thousand. I have every thing modeled out in excel and the more we buy the more we are able to buy as I have certain free cash flow expectations.

Also, do your zoning laws allow you to cram all these bedrooms and unrelated people together?  In my college town, there is an ordinance that generally limits 3 unrelated people in the same house.Yes from this perspective the city is actually quite desperate for more student housing as there are very few options near the school. There is no limit on the number per property rather than that posed by the physical building. You need so many sqft per room

Thanks for the thoughtful response.

[uniwelder]

This is only expenses not including financing. Only utilities, insurance, municipal taxes etc. Financing and interest would be additional.
...
The previous property I did a student rental in was a 1200 sqft bungalow with an unfinished basement with an additional 1200 sqft. I spent just over $21k in materials to renovate it and get it up to code. That includes new electrical plumbing and the most important is proper windows for fire escape in a basement. I do 90% of the work myself in my rentals but have begun hiring out more and more work over the years.
...
As for explaining it I often use approximate figures. I have found in the past I get way too bogged down in the analysis and have learned there is a lot of merit in the old saying it's better to be approximately right than specifically wrong. Hence why I round typically to nearest thousand. I have every thing modeled out in excel and the more we buy the more we are able to buy as I have certain free cash flow expectations.

Sorry.  If you're going to leave out bank financing (50k annually?) from the numbers you provide, as well 80-100k material for renovations spread over 4 houses, its really hard for us to tell which is a better deal.  I understand not wanting to get bogged down in little details, but this is pretty big.

edited to add--- What cost do you value your time in the renovations?  If the last conversion took 2 months, you're talking about 8 months full time labor not included in the analysis.  As a landlord, I don't add in my time for the basic landlord stuff, but a full time construction job needs accounting for.  100k? 

[Swish]

This is only expenses not including financing. Only utilities, insurance, municipal taxes etc. Financing and interest would be additional.
...
The previous property I did a student rental in was a 1200 sqft bungalow with an unfinished basement with an additional 1200 sqft. I spent just over $21k in materials to renovate it and get it up to code. That includes new electrical plumbing and the most important is proper windows for fire escape in a basement. I do 90% of the work myself in my rentals but have begun hiring out more and more work over the years.
...
As for explaining it I often use approximate figures. I have found in the past I get way too bogged down in the analysis and have learned there is a lot of merit in the old saying it's better to be approximately right than specifically wrong. Hence why I round typically to nearest thousand. I have every thing modeled out in excel and the more we buy the more we are able to buy as I have certain free cash flow expectations.

Sorry.  If you're going to leave out bank financing (50k annually?) from the numbers you provide, as well 80-100k material for renovations spread over 4 houses, its really hard for us to tell which is a better deal.  I understand not wanting to get bogged down in little details, but this is pretty big.

edited to add--- What cost do you value your time in the renovations?  If the last conversion took 2 months, you're talking about 8 months full time labor not included in the analysis.  As a landlord, I don't add in my time for the basic landlord stuff, but a full time construction job needs accounting for.  100k? This is a great point and helped sway a lot of the decision to go with the apartment. I definitely don't account a value for my time well as I always stack it up against the time I would have spent wasting it on pointless boredom killing activities. Ultimately it came down to time and energy so this chain of thinking really resonated.

Update a year later: We closed March last year on the apartment. It has been really excellent. Good cashflow and being right downtown in our small community it is really easy to rent. We have had a few issues repair wise but nothing too major. We have a tenant in the building that we pay to show and get suites rented when they turn over and basically have had a fairly hands off year. Over all glad I went this route as the school we were considering buying near for the houses has reduced its enrollment dramatically as a result of a reduction in immigration permits being issued by the province this year.

Once again thank you all for the input I always appreciate the sounding board this forum provides!

[clarkfan1979]

I have two student rentals. One is near Florida Gulf Coast University in Fort Myers, FL and the other one is near Colorado State University, Fort Collins in Fort Collins, CO. I don't rent by the room. They are both rented to a group of college kids. The kids nominate one person to take the lead on communication with me. It works pretty well and management has been fairly easy.

[GilesMM]

I have two student rentals. One is near Florida Gulf Coast University in Fort Myers, FL and the other one is near Colorado State University, Fort Collins in Fort Collins, CO. I don't rent by the room. They are both rented to a group of college kids. The kids nominate one person to take the lead on communication with me. It works pretty well and management has been fairly easy.

We had a rental in a building with another owner who rented exclusively to groups of students. They abused his unit and the rest of the building, annoyed the other tenants with parties, and moved out every year it seems.  Is it worth it?