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Investing Strategies

How to Spot a Sublime Student Housing Investment – Part 2

dougAs we continue our series on “Why You Should Invest in Student Housing”, today we pick up where new faculty member Doug Fath left off at the conclusion of our previous lesson.

But first, a brief reintroduction to Doug.  (After all, he’s kinda new around here!)

If you read the intro to the last lesson, you saw how Doug really has the “Midas Touch” when it comes to student housing…

Everything He Touches Turns to Gold

Even though Doug is a serial entrepreneur in other areas, he has a special love for buying, holding and flipping real estate surrounding colleges and universities.

But, then again, who wouldn’t love an investment class that can throw off gobs of cash?!

Over the years, Doug has bought hundreds of student housing units, and he’s made hundreds of thousands of dollars doing it. 

And through his experience, Doug has discovered what works and what doesn’t to maximize the returns investors (like you) can earn on student housing.  Thankfully, Doug loves to share the lessons of his success with all of us here at Mogul.

numbersNumbers & Answers

So, in today’s lesson about “How to Spot a Sublime Student Housing Investment”, Doug talks specific numbers.  He gives you the formulas you need to know, in order for you to really succeed in this profitable niche. 

He also helps you answer the following question:  “Is the student housing deal you found a winner or a loser?”

If you agree that this is important stuff (which you should), then read on!

Specifically, Doug discusses:

  • How to buy distressed properties at a discount and “add value” to them
  • Buying “turnkey” properties that provide great returns with very little work
  • Analyzing a property for its potential monthly cash flow
  • What the heck a “price-to-cost” ratio is all about
  • The minimum $ criteria for buying a property to rent
  • The minimum $ criteria for buying a property to flip
  • The mathematic theory behind all these numbers (for all you closet accountants)
  • And once again, Doug’s customized spreadsheet for evaluating potential student housing investments (available FREE for Mogul Elite members)

*Don’t worry if you’re not a spreadsheet expert.  Later in this lesson, we have re-posted the video in which Doug explains exactly how to use this helpful Power Pack tool!

searchingHow to Spot a Sublime Student Housing Investment – Part 2

Doug:  Let’s talk about how to find the deals.  “How are you able to pick up student housing at a discount?” That’s a common question I get when I talk about the returns I make on student housing.  

“How do you make a property cash flow thousands of dollars a month without investing a lot of money into it?”

I’ve already spoken to this a little, but we look for value-add opportunities.  Typically we are dealing with distressed owners.  Often we’re looking at run-down, non-owner occupied properties.  There are usually a large amount of debts on the property like unpaid tax bills, water bills or other city liens. 

It’s a situation where we are able to create a win-win-win scenario.  We help out the distressed homeowner and relieve them of their debts.  Depending on the deal, we may find a way for the homeowner to walk away with a nice chunk of change in their pocket. 

We also help out the city and the debt holders because we bring their debt current. We’re often able to negotiate the debt down a little bit, so we’re able to create some additional equity for ourselves. 

Then it’s also a win for us because obviously we’re picking up these properties at a discount and we’re renovating them at a discount.  When it’s all said and done we’re in these properties at some really good numbers.  We’ve done that with distressed properties and with pieces of land. 

valueSo specifically we’re looking for value-add opportunities where we can come in, pick up the properties at a discount, and add value.

There are some who say “Oh I don’t have any time for the value-add opportunities. I just want to purchase an income-producing rental.”  You can certainly do that with student-housing rentals.  In fact, we’ve been flipping some of our student housing deals to high net-worth individuals who are looking for exactly that. 

These high net-worth individuals have a bunch of cash.  They are looking for places to invest where they can receive good returns.  They are willing to pay us retail price for these student housing deals because they’re achieving 8% to 12% cap rates after the purchase. 

When you add financing to the deal, the cash-on-cash returns pretty much blow anything else out of the water

Then when you add depreciation and look at their after-tax benefit I would argue there are very few investments as good as income-producing student housing.

If you’re someone who has some money and you’re looking for an easy investment, you may not be able to buy it at a discount.  But you’ll be able to get a really nice return on your money.

questionJP:  By the way Doug, you just mentioned some specific numbers there that the buyers of your flips are happy with.  But what I’m interested to know is – what’s your personal criteria?  And I realize it’s not one size fits all.  It’s going to be different for people in different areas and different circumstances. 

But if you, Doug Fath, are looking at a new deal to hold – a new cash flow student housing deal – what cap rate/cash-on-cash minimum criteria do you consider a good deal?

Doug:  Great point.  For those of you who get the “Investing in Cash Flow Tool”, it shows my criteria exactly.  I’ll explain that now.  Keep in mind, this is for properties that I’m looking to hold.

When I flip the criteria varies a bit, but I can still use the tool.

Click here to view a demo of Doug’s cash flow tool…

{Mogul Elite: Download Doug’s “Investing in Cash Flow Tool” in this lesson’s section for Power Pack tools.}

There are two important things that the “Investing in Cash Flow Tool” will help you analyze: 

  • How much money the deal is going to make you each month, and
  • The price-to-cost ratio. In other words, if the property’s worth $100,000, how big a discount am I receiving on the purchase.

Let’s start with the cash flow analysis. I compare the gross monthly rent to the total cost.  Since I’m also doing renovations the total cost means my acquisition price plus my renovation cost.  When I take the gross monthly rent, and divide that by my total cost, I want that number to be a minimum of 1.25% to 2%.  Again:

                    Gross Monthly Rent       =       1.25% to 2%

                            Total Cost

To map this on to a real deal, I’ll go back to the numbers that I entered earlier when you gave the example.  You said that acquisition price was $150,000 and the gross monthly rent was $1,400.  I’ll plug that in here:

                                $1,400           =       0.93%


The result was 0.93%, which is obviously below the 1.25%.

When you’re doing this cash flow analysis, the higher the number the better.  In this case the number was lower than 1.25, and that’s why it failed the analysis.

comparisonThat’s the first part of it from a cash flow standpoint.  The second thing this “Investing in Cash Flow Tool” does is analyze the cost-to-value ratio.  We had our total cost number of $150,000, but the other number we needed was the “After Repaired Value”.

In keeping with this example I plugged in an “After Repair Value” of $275,000.  You didn’t tell me that it’s worth $275,000, but that was just the number that I plugged in.  So we could do the full analysis.  My guess is that it’s probably worth less.  When you take 150 grand (your purchase price) over 275, you end up with 54.55%.

                             $150,000       =       54.55%


Now the number that I look for is anywhere from 65-75%.  When you’re looking at the cost to value ratio, the lower the percentage the better. 

This analysis looks at the two ratios separately, and then it looks at them together.

When you’re looking at the cost-to-value ratio, you’re picking it up at basically 55 cents on the dollar, which is great in my opinion.  If I was just to look at the cost-to-value ratio of 55 percent on the dollar, this may be a deal that I would want to flip.  But when I combine it with the cash flow analysis, it’s not a deal that I am looking to hold.

JP:  I was kind of reverse engineering what the buy price should be based on the cash flow analysis in the first formula.  It looks like if we follow “Fath Rules” I would have to pick it up for around $70-$75,000.

dollarDoug: Yup.  That $75,000 would give you a 1.87%, which is certainly above the 1.25.  I’m just plugging these numbers in.  Even if you paid $100,000, that would work out, because that would put you at 1.4.  That’s what’s great about this tool.  You can just plug and play.  You can see exactly where you need to be in order to make the deal work.

JP:  Ahh - 1.25 is the number.  For some reason I had 1.9 stuck in my head.  I kept going backwards and backwards until I got 1.9 – you can buy at a little more than 75,000, but still, point taken.

Doug:  Obviously we’re talking about numbers but often when you’re not seeing it in front of you it’s a little more difficult to do.  Just so you know the “Investing in Cash Flow Tool” also has another analysis tab where the formula is written out.  That way you can actually understand what is being automatically spit out for you in the tool.


Do It To It! Immediate Action Steps

Action Step #1:  Search websites such as Craigslist and Zillow to see what student housing is renting for in your target area.

Action Step #2:  Talk to a realtor or other investors in that area.  Find out what student houses are selling for based on square footage basis, and per bedroom/bathroom.

Action Step #3:  Find a couple potential deals in a college town near you, either through Zillow, Trulia, the MLS or Craigslist (see our article on mining deals with Zillow and Trulia). 

Action Step #4:  Visit some of the potentially good deals, in order to see what it would cost to renovate them.

Action Step #5:  Analyze your potential deals using Doug’s “Investing in Cash Flow Tool”, in order to determine if they meet Doug’s (and your?) criteria for a good deal.

Action Step #6:  If the deal(s) meet the right numbers, consider whether you should pull proverbial the trigger …

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