Investor Rents Home to Students In a College Town and Profits

This article was originally published on April 27, 2006

The investor: Steve Miller, 45, is a computer programmer. He was an "accidental landlord" once before when he bought a home in Florida in anticipation of a move that never happened. This house is his first deliberate real-estate investment purchase.

The property: The 1910 Victorian home in Cobleskill, N.Y., has a 3,600-square-foot main house with two units. There is also a 2,000-square foot carriage house that includes two apartments. Situated in a historic neighborhood, the property has broad exterior porches and old mahogany on the interior. The main house has a first-floor apartment with one bedroom and one bathroom, and a unit that occupies the second and third floors with five bedrooms and two bathrooms. The carriage house has a 700-square-foot studio and a 1,300-square-foot unit with three bedrooms and two bathrooms. The town is home to the State University of New York at Cobleskill, which has expanded its curriculum to offer bachelor's degrees. The university's proximity (15 minutes away by car) and its lack of student housing presented an opportunity to make money from undergraduate renters, Mr. Miller says.

Purchase price: $130,000. Mr. Miller closed on the home in August 2004 and pays about $1,000 per month for its mortgage.

Additional investment: $40,000. Mr. Miller spent $19,000 to re-roof both structures, replacing the aging slate with shingles, which he says are more durable. He also overhauled the plumbing systems in both buildings, paid for construction permits and renovated the main home's attic to add two bedrooms to the two-floored apartment.

The strategy: He prefers to buy and hold real estate, but he's selling this property because he's moving to Texas later this year, Mr. Miller says. He chose to rent to college students, he says, because he can ask for higher rents. While he can receive $5,200 total per month by renting to students, he would get just $3,000 total if he relied on local tenants, he says. Because the student rents are so lucrative, he offers the apartments through a 10-month, August 1 through May 31 lease. He handles major projects and property repairs during the summer months, when the units are vacant. Since the property is already leased for the next school season, the new owner will have tenants secured for the 2006-2007 academic year -- which is a major selling point in the eyes of some prospective buyers, he says.

The pitfalls: He can fetch much higher rents from students than from local families, he says, but doing background checks on these younger renters and maintaining the property is more time-consuming, he says. He had to handle an eviction during his first year of renting, he says. Students can be hard on the house with their parties, by letting trash accumulate and forgetting to close windows, he says. On the upside, the undergraduates rarely complain and are patient about handyman issues, he says.

The payoff: $133,650 to $176,150. If Mr. Miller gets his asking price of $275,000, the math works this way: $275,000 - $130,000 = $145,000. After subtracting $21,750 (for capital gains tax at 15%) and $40,000 for renovations, his total is $83,250. From this minus a maximum of two years of annual carrying costs ($29,600) and a maximum of two years' worth of mortgage payments ($24,000), to get $29,650. Then add to this two years' worth of student rent ($104,000). As of mid-April, Mr. Miller has received 10 offers on the property, the lowest of which is $275,000 (his asking price) and the highest of which is $325,000. If he gets the highest price, his payoff, excluding capital gains tax payments ($29,250), would be $176,150.

Write to Jane Hodges at rjeditor@dowjones.com