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My brother and I are still in college, but we have quite a bit of money saved up from various online businesses we own. We are looking at places to stay next year and are considering purchasing a house a little ways off campus. I haven't really looked at in great depth, but Zillow tells me that the mortgage would probably be around $1,800 per month. I figure if we took on a few friends and had them paying $500 dollars per month rent we'd be in pretty good shape.

We'd be using the home for at least the next two years while we finish up college. However, the neighborhood is pretty bad (College Park, MD), so we wouldn't want to continue living there after graduation. The home is right outside of the University of Maryland so I figure that it will at least maintain its value and I would hope that we could eventually flip it for profit. If not after we graduate then we could continue renting it out to students until the time was right.

Of course, I know nothing about real estate or owning a home. I would love to hear people's thoughts on why this would or would not be a good idea. Are there any costs I am neglecting? I want the house to be primarily an investment. Is there any reason that it would be a poor investment?

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If you don't plan to stay in it, it is never good money to try to buy a house in a bad neighborhood. The question you want to be asking is probably "Is it smart to buy this piece of real estate," not "is it smart to buy a house in college."

In this case, it's probably not smart because you won't actually have revenue from the property (you'll break even compared to renting), you may face some expensive repairs (water heater or other appliances going out, etc.), and you may find that your startup costs in things like lawn mowers, etc. is not worth the hassle (or cost of lawn service if you have someone else do it.) On top of that, can you get a loan with your proven income and assets?

Don't forget to factor the cost of selling the house again into it -- and how long can you leave it on the market after you move out if it doesn't sell without going bankrupt yourself? In my opinion, it'd be a giant albatross around your neck.

  • Thanks for the response Karl. I understand that it's not typically a good idea to buy a house in a bad neighborhood, but do you think the fact that the house is located right outside of a major university counts for anything? Your point about the expensive repairs is a good one that I hadn't thought of. I don't think it would be too hard to find renters though, given the location. – Stranger Sep 26 '11 at 22:08
  • Nope. I think you'll lose any money you'd have saved by renting in a) maintenance, and b) closing costs when you buy and sell the house. – Karl Katzke Sep 26 '11 at 22:11
  • Good point, I didn't think of those extra costs. – Stranger Sep 26 '11 at 22:23
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Of course, I know nothing about real estate or owning a home. I would love to hear people's thoughts on why this would or would not be a good idea. Are there any costs I am neglecting? I want the house to be primarily an investment. Is there any reason that it would be a poor investment?

I live and work in a college town, but not your college town. You, like many students convinced to buy, are missing a great many costs. There are benefits of course. There's a healthy supply of renters, and you get to live right next to campus. But the stuff next to campus tends to be the oldest, and therefore most repair prone, property around, which is where the 'bad neighborhood' vibe comes from. Futhermore, a lot of the value of your property would be riding on government policy. Defunding unis could involve drastic cuts to their size in the near future, and student loan reform could backfire and become even less available. Even city politics comes into play: when property developers lobby city council to rezone your neighborhood for apartments, you could end up either surrounded with cheaper units or possibly eminent domain'd. I've seen both happen in my college town. If you refuse to sell you could find yourself facing an oddly high number of rental inspections, for example.

So on to the general advice:

Firstly, real estate in general doesn't reliably increase in value, at best it tends to track inflation. Most of the 'flipping' and such you saw over the past decade was a prolonged bubble, which is slowly and reliably tanking.

Beyond that, property taxes, insurance, PMI and repairs need to be factored in, as well as income tax from your renters. And, if you leave the home and continue to rent it out, it's not a owner-occupied property anymore, which is part of the agreement you sign and determines your interest rate.

There's also risks. If one of your buddies loses their job, wrecks their car, or loses financial aid, you may find yourself having to eat the loss or evict a good friend. Or if they injure themselves (just for an example: alcohol poisoning), it could land on your homeowners insurance. Or maybe the plumbing breaks and you're out an expensive repair.

Finally, there are significant costs to transacting in real estate. You can expect to pay like 5-6 percent of the price of the home to the agents, and various fees to inspections. It will be exceedingly difficult to recoup the cost of that transaction before you graduate. You'll also be anchored into managing this asset when you could be pursuing career opportunities elsewhere in the nation. Take a quick look at three houses you would consider buying and see how long they've been on the market. That's months of your life dealing with this house in a bad neighborhood.

  • +1 for talking about unexpected life events of your tenants who will likely become your friends (if they are living with you). This can really wreck both relationships and finances. – WetlabStudent Apr 6 '15 at 20:37
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People have lost money buying houses in good to great neighborhoods. It's a pretty large red flag that you state this so clearly "the neighborhood is pretty bad." I'd rather buy a bad house in a great neighborhood, and spend my weekends fixing it up, turning sweat equity into real equity. A two year bet? I'd pass.

Close to the school, high demand area, and my answer might change.

(And, "welcome, stranger")

  • Thanks for your contribution. The house is about 2 blocks from the school, but I just looked and there were about 20 other houses and apartments for sale/rent in the same neighborhood so it seems the demand is not as high. – Stranger Sep 26 '11 at 22:21
  • With so many properties for sale, what do you think will move that inventory? And if there are many rental listings, will you get the $500 you hope for? – JoeTaxpayer Sep 27 '11 at 0:12
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I've heard success stories but personally, I was considering it and I'm so glad I didn't. I ended up hating the atmosphere; left after one semester. To take care of that house I rent out, I'd need to hire someone, or drive 2.5h each way for anything that needed my attention.

If you plan to stay in the area, I'd consider the housing prices, the rental market, considering the responsibility of maintenance, your expected margin (trust me, it will be lower. I've never heard a landlord say he didn't encounter significant unintended expenses.)

It's such a unique situation, it really requires more detail. After all, you'd be saving rent, have control over the house and who lives there, but you have a whole hell of a lot of responsibility. I met one guy who had basically became the house's mom because he had a vested interest and was always cleaning up spills, preventing staining or damage to the paint, facing awkward social situations as they tried to chase down rent.

With the right people I've seen it go very well.

Oh, one more caveat. With a live-in super', they can provide notice of any necessary repairs instantly and from there, the clock starts. They can legally withhold rent until the repairs are completed and if you're not too liquid after that down payment and the mortgage payments, plus school, etc.. this could put you between a rock and some hard ass creditors.

2

NORMALLY, you don't want to buy in a bad neighborhood. The one exception is "gentrification," that is middle class people are moving in because of a good location (which you seem to have).

The other important thing to do is to cover your mortgage. Four "guys" at $500 a month will do for an $1800 mortgage. The nice thing is that you are your own tenant for two years and can watch the place. The downside of the neighborhood may be that you can't rent the place to four "girls" or two girls and two guys even after you leave; it will always have to be "guys."

I'd advise most people to pass. With your financial standing and entrepreneurial background, you might just be able to take this risk, and learn from it for your future dealings if it doesn't pan out. (Donald Trump "cut his teeth" on a slum complex in Cincinnati.) Hear what I (and others) have to say, then do what "feels right," based on your best judgment, of which you probably have plenty.

  • Thanks for the response, the idea is still rough in my head and I will definitely do some more research before I decide what to do. – Stranger Sep 26 '11 at 22:33
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    +1 for "gentrification". Great point if that's the case for this area. – JoeTaxpayer Sep 27 '11 at 0:35
  • I don't understand this line " The downside of the neighborhood may be that you can't rent the place to four 'girls' or two girls and two guys even after you leave; it will always have to be 'guys.'" – WetlabStudent Apr 6 '15 at 20:40
  • @MHH:The OP had referred to a "pretty bad" neighborhood in which women probably should not live, so it would be safer to have only guys in the house. Even from an insurance/liability point of view. – Tom Au Apr 6 '15 at 20:44
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    Women go to college too, and University of Maryland has a nearly equal gender ratio. Also you have not provided any empirical evidence that having female tenants in a bad neighborhood increases your liability or insurance premium over having male tenants in a bad neighborhood. I think such evidence really needs to be provided in the answer if you are going to talk about gender. – WetlabStudent Apr 6 '15 at 20:56

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