Recently I was reminded of the biggest lesson that I learned about investing in real estate. It was costly and very effective at ensuring that I would never make the same mistake again. The reminder came about when a friend asked a question about investing in student rentals. While the question about student rentals is an interesting one, there was an even bigger issue underlying the question and it’s so important that I’m going to address it today.
My friend’s interest in student properties is rooted in kindness. She feels that students deserve better accommodation than the fare that is typically on offer and she wants to fix that. Buy a place, renovate it to make it look decent and then rent it out to responsible students. The problem is that she has some doubts about whether this would be a great investment.
I’ll answer the question about buying student rentals as an investment strategy in a moment, but first I want to address a much more important issue that is buried in the question: Why should you purchase a rental property? Your motivation is key. Here’s why.
In late 2006 I was a fairly new investor. When one of my three-bedroom units became available, I received an application from a single mom with two young children. Debbie (not her real name) had terrible credit, questionable references and a history of moving from place to place. In person, though, she was very likable. We chatted about her situation and she spun a good tale about how she was working hard to try to make a life for herself and her boys despite the many barriers she faced. She had recently landed a good job and was determined to finally settle down for her kids’ sake. Since her background was so spotty, her parents were willing to co-sign the lease as added security for me.
At the time I had a three year old daughter and I was five months pregnant with my second child. My head told me to reject her application but my “mom heartstrings” kicked in to override all rational concerns. Everyone deserves a break. Heaven knows that many people had gone out of their way to help me out when I found myself in a mess following my first husband’s death. It was my turn to do some good. Surely I could help out a fellow mom raising her kids alone. Those poor boys had endured so much already: an absentee father, poverty, frequent moves. Could I really turn them away? After all, the parents were co-signing. Even if Debbie failed to live up to her promises there was a back-up plan in place.
One month into her lease Debbie stopped paying the rent. Then I got a call from the police: Her boyfriend (what boyfriend?!) had pulled a gun on the garbage collector because he was asked to move his car which was blocking access to the driveway. The boyfriend fled and was now on the police’s wanted list.
A meeting with the police revealed that they had been watching my building because they suspected that Debbie was selling drugs from her unit.
At this point a few months had gone by and I had served her with the proper notices stating that she had to pay up or be evicted. I heard nothing. Every time I drove by the curtains were drawn and there was no sign of life. I finally left a notice taped to the door stating that I would be entering the next day to inspect the unit.
When I showed up the note was still taped to the door. I knocked and rang the door bell. Nothing. When I unlocked the door and began to enter two large dogs lunged at me, growling and baring their teeth. I just managed to get the door shut in time to avoid the dogs. At this point I was eight months pregnant so moving quickly wasn’t always easy. The dogs kept throwing themselves at the door.
I ran back to my car and called the Humane Society. I also called a large friend who graciously came out to be with me as I entered the premises. The Humane Society staff managed to subdue and remove the dogs, photograph the environment and take a statement from me. Then I was allowed into the apartment. What my friend and I saw was shocking.
Debbie had clearly left in a hurry, abandoning her two dogs in the process. There were bags of food on the kitchen and basement floors. A raised toilet seat was their only source of water. We estimated that the dogs had been alone in the apartment for roughly three weeks.
The unit was shattered: dog feces everywhere, chewed door frames and doors, children’s clothes, toys and sporting equipment scattered about; a fridge full of rotting food; and junk strewn on every surface both inside and out. I felt faint and needed to sit down but I didn’t dare. Every square inch was disgusting.
When we turned to the parents we discovered two things: They are mentally disabled and while their credit was good, they were penniless. What little money they did have was stolen by Debbie on her way out of town. It was a full blown tragedy.
That mistake cost us more than twelve thousand dollars and a lot of heartache. I spent the first few months of my youngest daughter’s life dealing with the mess and all because I let emotions guide my decision-making at the outset.
I learned a very valuable lesson through that experience: It is great to want to help people and to do good in the world but charity is charity and investing is investing. As an investor (in this case a landlord), you have a responsibility first and foremost to protect yourself. By all means engage in charitable work outside of real estate – donate your time, knowledge and money to worthy causes. But investing is a business. It requires a rational analysis of the facts and the numbers.
Choose a tenant or buy a place because it makes sense from an investment perspective. If you’re feeling tugged by emotions, take a step back to re-evaluate.
For some people, yes they are. It’s like any form of real estate investment: your success will depend largely on your preparation and your choices. Student rentals are much more work than a typical rental because they involve a transient population. That is, you rarely get long-term tenants from student rentals which means that you’re going to get a lot of turn-over and do a lot of repairs. Even responsible students cause far more damage than you would because they are not the owners. No one cares about a property as much as the owner.
I have colleagues who have a number of student rentals and they are doing very well with them. They can charge a lot more for their units since there are a number of students living in each house rather than a single family. But they also spend a lot more time managing the units, dealing with noise issues and fixing broken parts. The costs for repairs can be significant and in addition, they pay a lot more in insurance. The people I know who are engaging in this type of investment are all handy, hands-on type of people. If that’s you and you’ve done your research about where to buy, how to manage tenants and you know the laws that govern rentals in your jurisdiction then full speed ahead.
Back to my friend. My advice is simple: By all means invest in student rentals if, after careful analysis, you feel that it is a good fit for you as an investment strategy. However, treat it like a business and keep emotions out of your decisions. If you want to help students, then I suggest that you find another way of doing it as part of your charitable work. The two shouldn’t mix – unless you want to part with a lot of cash.
Until next time, Survive, Thrive and Grow!