I've been working the past few years, and I've saved up a decent chunk of change. I'm considering buying a cash-flow positive investment property. I'll be applying to business school this falling and hopefully matriculating next fall. I guess my two questions are:
1.) Will having a mortgage prevent me from being able to take out student loans?
2.) Does anyone think this is an awful idea? If yes, why?
I'm on the same boat, and am curious to hear what others say about this...
Having a mortgage will not prevent you from being able to take out loans. It may make your interest rate higher, though, depending on the lender and what school you attend. Some lenders like CommonBond and SoFi have the same rates for everyone, but are only open to students at top 15 to 20 schools.
I would think about the cashflows of your proposed investment after paying the mortgage each month as well as how it will impact your liquidity needs for business school. The equity required in you investment may mean that you would leave business school with more debt (since otherwise, you could use that money to finance business school).
Can you elaborate on liquidity needs for business school?
Right now, I have 14k, set aside for an emergency fund. I wouldn't be touching that money for the down payment or closing costs.
In my 2 years in school I spent just over $250,000 when you include cost of living, drinking, traveling and all the other random expenses that happen in life. If you're desperate you can take out ~$200,000 in loans, plus scholarships and you'll make $15-$20,000 over the summer. If you want any sort of cushion or to not be crushed by debt when you graduate $14,000 isn't much.
Personally I sold my house before business school even though I could have rented it out and been cash flow positive. For me I wanted to use that equity to help pay for school (being a career switcher into a high-risk field I wanted as little debt as possible to keep my options open) and I didn't want the headache of being a long distance landlord. I don't know where you are buying the property and where you are applying to school but it's probably safe to say they won't be in the same city. There is a time element to managing a property and it gets more difficult if you aren't nearby. Or alternatively you can hire a property management firm but then you will pay significant fees and have no control over the costs of maintenance and repairs to the property. This can quickly turn what you thought was a cashflow positive property into a negative one. Can you do it? Sure, but I'm not sure it is worth the hassle.
I wouldn't do it. MilitaryToFinance hit all of the points. I did the long distance landlord thing and it wasn't that it was a huge pain in the ass, it was just something we didn't really need or want to think about for the amount of money we were making from cash flow. Completely different situation where I got married and bought a house then was offered a move to London so it was really long distance and we didn't want to sell the house 6 months after we bought it, but real estate's not a completely passive investment and you'll most likely only make a few hundred bucks a month on it after the mortgage, taxes and insurance, especially if you're not local and need a management co (and then it can go negative CF). And if there are any maintenance issues you'll be out of pocket when you're making no money in school. We ended up selling it after about 18 months because it was just something else to think about.
You also don't know if you'll return there after grad school so you could end up as a permanent long distance landlord or if you want/need to sell it, you never know where the RE market's headed and you could end up paying to get rid of it. I'd just keep the money more liquid in case you want or need it and do it after grad school when you definitely know where you'll be living for at least some period of time.
And $14k isn't enough money.
Thanks Everyone! You guys have convinced me not to buy one.
Just to chime from the prospective of both a fairly recent business school grad and somebody who has owned/managed rental properties before:
1) If you do it right, you will not have time in business school to worry about crap like rental properties. Your time will be 100% dedicated to recruiting, networking, getting to know classmates, and maybe even studying. 2) Being a long distance landlord is a major PITA. 3) If you hire a property manager you can basically kiss any profit goodbye. 4) As mentioned, 14k savings is not enough. You'll spend that in your first semester easily. 5) Repeat...you will not have enough time to worry about rental properties.
I own a condo in Santiago that I currently live in and I will be renting while I am in business school. My thoughts:
1) This property is pretty low maintenance, only about 10 years old, and it would be highly unlikely to have to major maintenance beyond what I could handle pretty easily. However, after the mortgage payment, property taxes, etc, it's barely cash flow positive, so even minor expenditures are going to wipe out any potential profit.
2) The lease is for 12 months, so I'm golden until my 2nd year, then I potentially will have to hustle to come up with another tenant. Not what I want to be thinking about while I'm away, but I think I'll be back and I'd be happy to live here again so there's no point in selling it.
3) Bottom line is, on a cash basis I'm breaking even and potentially in store for some headaches. My equity continues to increase at a snails pace as long as the mortgage is being paid. There is some nebulous potential for capital gains, but not very liquid. Sounds like a crappy investment to me.
4) I'm heading out with a little more than 45k in savings, and I consider that I am in WAY over my head. You want to increase that 14k nest egg however you can.
OP I am curious about your ability to receive financing for an investment property that Im assuming you will not personally living in? Considering that the loan will be recourse and you will not have cash flow coming in (assuming you are going to B School) I am curious to see the environment for banks willing to give you a loan.
I am considering buying investment property myself within the next 2-3 years and from what I can tell for loans less than 250k on commercial properties financing is very tough to get.
Fuck that.
Well put, SB
greengohome
Condos are notoriously bad investment properties, so while I understand it is a bad investment vehicle for you that might not have been the case for me for the properties I'm looking at.
REPE8
I'd be investing in a duplex that costs $164.9k, and I would be taking out a residential loan.
The total income from the property would be $1725 per month.
I'd assume 50% of the cash flow will go to maintenance, insurance, taxes, vacancies, and property management fees.
If I put 25% down (which for multi-unit residential properties is the minimum) and pay another 12% in closing costs, that's a total of $61.1k down.
Assuming an interest rate of 5.2%, my monthly payments would be $679.
This would give me approximately a return of $2.2 after the first year or a cash-on-cash return of 3.6%. Is that huge? No, but I'll also start building up equity in the property. Over time, the value of the property will increase and the rents will increase too.
Dude, you're not even earning your cost of capital...
please don't use abuse
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