Today’s question comes from Dale and Dale says, hi, Marco. I stumbled into you and your tutelage. Very recently. I currently have no investment properties, but looking into a duplex in my old college town where our kids might presumably attend in six years, the student population is approximately 50,000. My plan is to buy now cash flow and build equity for six years, then own a residence we can occupy while kids are in school while still renting out the other unit. My question with the revolt and revolution currently going on with the higher education system, as they deal with COVID hotspots, reduced admissions, remote learning, and the ridiculous increases in tuition. Do you think this scenario is a good investment now, later, never?
Thanks for your help in making me feel a little wiser after every episode – Dale
Well, Dale, thank you very much for the question and for your kind words. So your basic question is, should I buy a rental property in my college town? Obviously, you have some connection there and your kids will probably go to school there, I would assume in six years. So here’s how I would look at this. This actually is kind of a difficult question. Believe it or not, because there’s so many, it depends, but regarding, you know, does it make sense now? Does the scenario make sense today? Well, first of all, you have to do the same kind of market analysis. If you will, that you do with any other investment property. Look at the market, look at the area and the neighborhood, and then the property. So let’s just assume that the neighborhood and the market all check the boxes. Okay. So it makes sense that pretty much every level fundamentally, and you’re happy with the area and the location, et cetera, et cetera, you know, it’s obviously a school district.
So the next step is to run the numbers. You want to make sure that the numbers make sense today from an investment perspective. So if you’re buying a duplex, you have two tenants, you look at the gross rents, subtract your vacancy, allowance, your expenses. You end up with your net operating income and then figure out what your mortgage payment’s going to deduct that, and what’s left over is your net cash flow. So do the numbers make sense today. And then you start to make some assumptions and predictions about the next six years and see if the numbers continue to make sense. And this is where it starts to get more and more nebulous. So as far as this year goes, you’ve got this covert thing going on and we all know that things are not going to be the same. This fall 2020. The attendance is probably going to be lower.
A lot of students are going to class virtually they’re going to be at home. So they’re not necessarily traveling to school or living by the schools. And that’s a big problem. Especially if you have a rental property that you are depending on students to come and occupy your property. The flip side of that is if you’re looking to buy in these areas, and there are people who are selling, it might be a little bit more of a soft market or a buyer’s market where you may be able to pick up properties at a better price, because the demand isn’t going to be as strong people may be avoiding investing in those areas. And the people who are trying to sell are just going to give in and say, okay, well, I’m not going to get full price. I’m not going to make $300,000 on my property. I’m going to sell it for 280 or 270 or whatever you can negotiate. So I guess it works both ways as a buyer investor. It might be to your advantage as a landlord owner, it might be a problem because you’re going to have higher vacancies. So having said that we are seeing studies come out where the effects of this pandemic in the student housing market is certainly having an impact. And we’re all expecting fall 2020 to be softer. So property vacancies in student housing last year in 2019 in the fall, the vacancy rate was 5.2%. And this is coming from a study by Ries, R-E-I -S. And you can go to reis.com and you know, they’re a, a leading commercial real estate data source for markets all across the country. So 5.2% last year, but fall of 2020, they’re already showing or even predicting a vacancy rate of 7.4. So that’s an increase of over 2%. And the lady who did this study Keegan Kelly was saying that vacancies by the unit are expected to rise from 2.3% last year to 3.3. So in a full percentage point on a per-unit basis, the previous statistic was on a per bed basis. Cause sometimes you have multiple beds in a particular unit. And they’re also saying that by fall of next year. So a year from now, both of these categories are projected to see only a partial recovery. So we can expect to see the impact of this COVID pandemic on student housing to last for a good year, maybe more. And they also go on to say that hopefully by the start of the 2122 school year, we’re going to see some recovery. So again, you’re probably looking at a soft student housing market for the next year, if not more.
Okay. Now, so we’ve looked at this as far as does it make sense today? Now we have to ask the question, will this make sense in the years to come, especially in six years from now, when you plan to move in, live on one side, rent the other and help to cover the cost and pay the mortgage and whatnot, a concept that is known as house hacking. So when you live on one side or one unit of a multiunit property and you’re renting out the other units that have been defined or called house hacking now, will it make sense in six years? Well, I don’t know. I mean, you gotta start looking at things like student growth trends in these college towns. Is there a trend for increased student growth or decreasing student growth? So you have to consider whether there are going to be more students or fewer students.
Now that could be because of a new trend that has been kicked off by this catalyst called COVID where more and more students are going to be learning from home virtually, they’re going to have online classes and more and more of it can and will be done at home or remotely, but not on campus. Secondly, with the education costs just skyrocketing and they have been for many, many years, and you pointed this out yourself that they’re ridiculously high and they’re ridiculously increasing year over year. In fact, the rate of inflation with student housing or let’s call it this, the inflation rate with tuition college and university tuition has been some of the highest as far as inflation rates across all kinds of sectors. So how long can that last? And at what point does it become so unaffordable that people choose other career paths or other trades, or maybe just become entrepreneurs and start businesses.
So I don’t look at that as a tailwind. I look at that as a headwind. And so that’s just another item that might say, okay, well, the trend is negative in terms of student growth and student housing. And here’s another thing about student housing. What if you are on campus or it’s an institution where they’re actually building more and more of their own housing units, they’re providing more student housing for their students. Now that is just a growing competition for you. So what if that doesn’t exist today, but in six years from now, and these are all hypothetical thoughts, right? But what if in six years from now, they end up building a hundred, 200, 300 units on site, as far as subsidized student housing that not only provides more availability, more supply in terms of what you are providing that market in terms of your rental units. But now you also have potentially cheaper housing and you have to drop your price, your monthly rent in order to compete.
So student housing, maybe looking into that, contact the college and ask them if they have any plans over the next five to 10 years to build or add to their student housing. If they have any at all, that would probably be a negative trend because it just adds supply to the market. So I like to just think of investments, especially real estate as completely separate from my home and my personal affairs and personal ambitions and goals. In other words, I’m not going to a house in Florida as a rental, just because I want to go on vacation in Orlando or Southwest Florida or Miami. I keep those things completely separate. If I’m going to go somewhere, at least on a vacation, I’m going to go there for a week, maybe two, and I’ll stay at an Airbnb or a stay at a hotel or resort or whatever it may be. I’m not looking to go to my rental property and hope that my tenant has moved out by then or give them early notice to evict them, not evict them, but ask them to move out because I plan to stay at the property. That’s just silly. That’s just cutting your cashflow. I want to keep my tenant in there all the time and for as long as possible. So this is why I don’t mix my personal affairs with my business or investing affairs.
So I dunno if this is helping, but really this is what I would think about. Does it make sense today? Will it make sense six years from now? What can I do to see or predict the future? And I know that’s a long time from now and that’s hard to do, but are there student housing trends, are there units coming online? Is the student population growing or shrinking what may cause the student population to grow or shrink? And what is a fair assessment of what the numbers will look like down the road each and every year, I’ve just mapped this out for the next 10 years and see if it makes sense. So anyway, if you’re really tied to this emotionally, because you want to live with your family or be with your family or near them while they’re going to school. Great. I understand that that’s certainly a strong personal driver and that might be what all it takes for you to make sense of this and move forward. But if you answer those questions, I think you’ll find that the answer you’re looking for, it may make sense now, but it may not make sense later. Um, but think objectively not emotionally, and then just keep things separated and I’m sure you’ll get the answer you’re looking for.
Okay, Dale, thanks for the question. I appreciate it. If you have any questions about real estate investing, finance, or whatnot, just submit those over to me. Go to passiverealestateinvesting.com or AskMarco.com. Help us spread the word about the show. Visit us on iTunes, leave us a rating and review. We greatly appreciate it.
And thanks for listening. I will see you on our next episode.
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