Happy Tuesday! Today we’re crunching the numbers on a single-family home for sale in Durham, North Carolina. This isn’t going to be an easy house hack, but let’s see if we can make the numbers work.
Here’s the home we’re looking at - it’s currently listed for $795k and has 6 bedrooms and 3 bathrooms.
It’s a single-family home across the street from Duke University’s East Campus (where all the freshmen live). We’ll assume that we purchase the property for the asking price. The interior looks great, so we won’t allocate any money upfront for repairs and renovations.
We’re going to make the following assumptions:
20% down with a 30-year fixed mortgage at 7.5% interest rate
0.89% annual property tax rate (based on Durham’s current rates)
$280/mo home insurance
10% reserve for capex and maintenance
5% vacancy rate
2% annual rent and expense increase
We’re going to live in one bedroom and rent out the rest of the rooms. That means we’ll be renting out 5 bedrooms - given the property is right next to Duke’s campus, we’ll try to rent out all of them to undergraduate or graduate students. Renting to students comes with its own challenges, but students are generally willing to pay more and the renter demographics of this area skews heavily towards students. Here’s the floor plan of the property.
The demand for quality student rentals in a college town like Durham is fairly high, but we only have a small window before the school year starts in August to rent out our rooms. If we don’t rent something out by then, it’s very possible that it’ll stay vacant until the next semester or even the next school year. Looking at rental comps in the area on Craigslist, it looks like single bedrooms of similar quality go for $1,000/mo. If we rent out all 5 bedrooms at that price, our total monthly rental income comes to $5,000.
Plugging these numbers into our house hacking calculator (reply to this email and I’ll send you the link!), we get the results below.
Our monthly outlay for mortgage + insurance + property tax comes out to $5,317 and we’re bringing in $5,000 in monthly rental income. Subtracting the two, we’re losing $317/mo in our first year living in the property ($3,804 for the whole year).
We’re also putting aside $9,000 ($750/mo) in the first year for capex, maintenance, and vacancy. Rolling that into our calculations, our year 1 out-of-pocket living cost comes out to $12,804. We accrue $5,863 in home equity in our first year, so the net living cost comes to $6,941 or $578/mo.
These numbers aren’t great, so let’s see if we can pull any levers to break-even in our first year. Since this is a student rental, two things come to mind: providing furnished rooms and bundling fast WiFi and utilities into the rent. For furniture, let’s say it costs $1,000 per bedroom to furnish and we can charge an additional $150/mo per bedroom. Let’s assume our furniture lasts 3 years and any damages are paid out of the tenant’s security deposit. That means our monthly furniture cost per room is roughly $28 and we make $150, netting $122. Across 5 rooms, thats $610/mo in additional income!
Then there’s the possibility of bundling utilities. When I was a student, I hated the hassle of thinking about and paying for utilities and would have loved for it all to be bundled into my rent. I’d happily pay a bit extra to not have to think about it. Here you should get the fastest, most reliable WiFi and bundle it into the high-level rent number along with water, electricity, and whatever other utilities you have. You should aim to make an additional $40-$50/mo in net income from each tenant, totaling $200-$250/mo across all the rooms.
Adding up the results from these two strategies, we get an additional $810-$860/mo in net income - that more than covers our net living cost of $578/mo! We’re still out-of-pocket a little bit of money every year (if you don’t include equity buildup), but the property starts to cash flow in year 5.
Would I buy this property? If it aligned with my living situation, yes! It’s a tough strategy to execute, and not everyone wants to live with students, but it’s a prime piece of real estate right across the street from one of the most prestigious universities in the country. If you can stomach handling students as tenants/roommates, I think there’s a lot of upside here in figuring out how you can charge premium rents for a premium living experience. I outlined two strategies above but there’s definitely many other levers you can pull to juice the numbers.
Thanks for reading until the end - see you next week!