From a great distance off, the Kiddie Condo program that FHA has offered for quite some time looks great.  Parents can purchase a condo close to the university of their children’s choice and reap the rewards as values appreciate and equity gets paid down during the students collegiate experience.  It’s particularly appealing because it’s basically the only low money down option for parents who don’t have a lot of cash that they can tie up in a property investment.  So what’s the problem?
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The problem isn’t simply finding borrowers who qualify, the problem is finding properties that qualify!  In order for the FHA to loan money on any condo, it has to be “warrantable”.  You can read the previous blog posting to understand more fully what a warrantable condo is.  In most university areas you have a high percentage of investor owned properties.  Campus area condos have long been a safe place for property investors to piece together portfolios due to consistent renter pools and high rental income.  The closer to campus the more appealing the property is to a student, thus to an investor who is concerned with demand for his property.  If any single property has more than 50% of the units recorded as investor owned, the property doesn’t qualify.  So in a 10 unit condo complex, if 6 of them are listed as investor owned, it doesn’t qualify.  The second nail in the coffin is percentage owned by a single investor which can’t exceed 10%.  So, in this same 10 unit complex, if a single person owns 2 units, it doesn’t qualify.  In a 5 unit complex, a single investor-owned unit would make up a 20% thus eliminating eligibility.
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Of the hundreds of potential condo projects that surround the University of Texas in Austin, there is seldom more than a couple that manage to qualify.  To make matters worse, these ratios are constantly changing as investors flip properties in and out of their portfolios and students graduate resulting in their parents selling the condo.  There is no way to know which properties qualify at any given time without a great deal of investigation into each property’s home owners association who tracks which units are owner occupied Vs. investor.

In the end, the program gets an E for “effort” but fails in functionality and its ability to adapt to the true university market.  There is an opportunity here for private money to step up and fill in the gaps.

Who watched their net worth erode over the past few years as the economy took a sudden nose dive?  Well, that’s most of us.  Our retirement savings and financial investments lost between 30 – 40% of their value!  Unless of course Madoff was your financial planner, then you got to lose it all!

Some people however did manage to make some money on their investments.  I recently sold a two bedroom condo for a client of mine located in West Campus at the University of Texas.  The purchase price was $210,000.  We purchased this condo just over three years ago for $164,000. After closing costs were paid, my seller cleared approx. $30,000.  That is 18.3% more than what was invested.  Or approx 6% per year!  Not bad during a time when most people’s portfolios lost twice that in a couple of months.

Not only was there a profit of $30,000, my client was able to lease the 2^nd bedroom to a friend of his daughter’s at a market rate of $600.  Over three years, that’s an additional $21,600!  The income produced by the extra bedroom and the appreciation realized over three years was more than enough to cover the cost of the daughter’s education.  Nothing like a free ride!  There must be something to this college real estate!

Benjamin Franklin

Hot off the press!  Be on the look-out for increased sightings of the wildly popular and historically famous Benjamin Franklin. The man may have passed away a long time ago, but his portrait is showing up in ever increasing frequency!  But how? Where?  Look in your wallet!  Well, maybe not YOUR wallet, but certainly the recipients of all the Stimulus money going around.  Now I’m all about using cash injections to get this economy rolling again, but that debt will have to get paid back.  One advantage that the United States has in issuing debt is that it’s denominated in dollars.  That’s right, we borrow dollars from other countries to finance our debt.  Well, the unfair advantage that the US has over any country dealing in dollars is that we get to control the presses (money supply)!  That’s right, depending on our fiscal policy we can increase or decrease the flow of Ben Franklins coming off the press to achieve a wide range of objectives.

The Fed is quite intelligent I believe and would never risk their reputation as fiscal conservatives with a tight grip on our monetary policy.  After all, who would continue to finance our debt spending if we didn’t protect our reputation and demonstrate self-control?  Ok, the fact of the matter is that the Fed will slowly increase the money supply in order to pay off their debt, which will slowly erode the value of the dollar (inflation) which means that the dollar you are holding in your hand today will be worth less than a dollar in your hand a year or two from now.  Your bank account will generally offer a level of interest that is just above the rate of inflation so that while your money is in their care, it’s value is maintained.  What happens when inflation grows at a rate higher than what your savings account will pay you for interest?  And what the heck does this have to do with College Real Estate?

Here is where I’ll tie it all together.  Historically, during inflationary times, people turn to hard assets to protect their wealth (houses, land, or equipment).  The idea is to purchase an asset that will adjust for inflation.  Why does buying a house/condo make the most sense today?  As inflation takes off, the Fed will raise interest rates in order to slow the flow of money.  As rates increase, fewer people will look to purchase homes due to the increased cost of servicing the debt.  Those people will rent.  As the rental market grows, so will the rental rates.  As inflation erodes the value of the dollar, rental rates will adjust to reflect the real market value.  And to top it all off, the money you borrow today will be worth a fraction of that by the time you have paid it off in 30 years!  The reason being, your loan does not adjust for inflation.  So if you borrow $100,000, in 30 years that same amount of cash might be the equivalent of your monthly grocery bill!

Are two better than one?

As with most answers to these types of questions, it’s a big Maybe.  It all depends on the context of the person and the place.  Let’s say that you have approx. $300,000 in financing available.  You or your parent have met with their bank or mortgage consultant and have been pre-qualified based on credit and income.  The conventional next step would be to begin searching for your home or condo that can be acquired for what you have been approved for, right?  However, that’s only one possibility.  Another option might be to instead look for two possibilities that would get you to the same value.

For example, instead of purchasing one home at $300,000 let’s say you bought two condos at $150,000 each.  You might not end up with a home that is as big and nice as you were hoping for, but what do you end up with?

The pros are as follows

First of all, you have spread out your risk base.  Some neighborhoods do better than others and particularly in campus area real estate, some properties pass from being the cool place to live into being yesterday’s news.  Secondly, if you end up renting the property out as an investor, you have also reduced your exposure from a single tenant to multiple tenants.  It will be easier to keep two smaller units occupied than it might be to keep one larger.  Also, if you are unable to find a tenant for one of the two units, you will at least be at 50% occupancy.  With one unit, it’s all or nothing!

There are the cons as well

It will most certainly mean more work as you have doubled your management obligations from one to two properties.  It could double your maintenance calls, with two properties comes two kitchens, two HVAC systems and generally two sets of tenants to keep happy.

If you’re in the market for a campus area property, run the numbers.  You might find that in the end, two ARE better than one!

If you are a student landlord with rooms to fill, or thinking about embarking upon that journey, then listen up.  With an 8 bedroom house and 6 of those rooms to fill each year, my brothers and I learned a thing or two about attracting good solid roommates (tenants).  By solid I mean emotionally stable, dependable, honest, able to pay their rent, and able to resolve conflict like adults.  Now with 6 rooms to fill, we couldn’t always be so picky, thus I have more than a few stories to tell that won’t show up on this blog due to protecting the identities of those involved and protecting myself from injury or harm!

So in order to find good roommates, the more you have to choose from the better.  It’s a numbers game and the more applicants or interested parties you have, the better quality you’ll find and the higher rents you can charge.  Increasing the number of potential roommates is what we’ll discuss today.  Here are a few suggestions from those that have tried it all!

·        Create a Buzz – This takes times but will prove to be the most effective in the long run.  You’ll need to name your house or condo and start to call it that.  Our first house was named, “The Big Blue House”.  Not very creative, but it stuck.  Even when the color on the house changed, it was always “Big Blue”.  Some friends of ours lived on Cedar St. and called their house, “The Cedar House”.  It doesn’t matter what the name is, you just want people talking about it.  “Where is the barbeque this weekend?”  “Oh, it’s at The Cedar House.”  Then, as people rotate through the home each semester or year, you’ve got people asking the question, “Who is living at the Cedar House next year?”

·        Host activities, events or parties – This goes along with creating the buzz and it also takes some time.  You want people to know where you live and know your home.  Host barbeques, parties, birthdays or even study sessions.  Depending on what types of roommates you want to attract, cater your hosting to that demographic.

·        Use your network – In the days of social networking I’m not sure that I need to expound much on this concept.  Just put the word out there.  Throw it up on your facebook profile or twitter update.  “Looking for a roommate at the Cedar House next semester, let’s talk!”  Word of mouth is still very effective.  Just let your friends know and they will let their friends know, etc.  Several rooms of ours were filled by people we didn’t know personally, but who were friends of friends.

·        Go to the Web – www.craigslist.com is probably the most popular in college towns and it’s free.  You’ll want to update your posting every 3^rd day so that it doesn’t get buried.  Two other sites you might try are www.roommates.com or www.collegesublease.com .

·        Tear-off flyer – Every college town is filled with cafes, restaurants, book stores and campus boards that allow you to post items for sale or promote special events.  This is where you go if your network isn’t hooking you up.  Be very clear and specific about the type of roommate or roommates that you are looking for and put the flyer up in places you normally frequent.  We actually found a really great roommate this way from a tear-off flyer at Free Birds Burritos.  Ask some very specific “get to know you” questions and make sure you feel comfortable with whomever you are inviting to live with you!

·        Visit a local leasing office - I worked in a campus leasing office for a few years and was surprised at how many people came in looking for roommates and not apartments!  We never really had much to offer them.  Let your local leasing offices know that you will rent a room if someone comes by needing it.  You will have to offer them a leasing commission, typically 50% of what you are charging for rent, but well worth the investment for a good tenant!

That’s enough to get you started.  Be creative and choose your roommates wisely!  There is nothing worse than being stuck living with someone you can’t tolerate.

I apologize for those of you who reside outside the State of Texas.  Not because Texans are a proud people, but simply because you might not understand how boring the drive between Austin and Dallas/Ft.Worth is along I-35.  And if you don’t understand how boring the drive is, you might not understand the need for something exciting to do along the way.  At almost exactly half way between the two major cities sits a small town with a Big 12 identity.  The city is Waco and the university is Baylor University.

Baylor is the largest Baptist University in the Nation and the oldest college in the state of Texas.  Despite being around the longest, total enrollment hovers at just over 14,000.  What this sleepy town needs is some action!  Well, look no further.  At least look no further than a proposed and very ambitious plan to pump large sums of public and private money into this old town and the University that occupies it.

The brain child behind this large project is Developer Rick Sheldon and he’s got the high-tech animated video to push it.  (http://www.1000friendsofwaco.com/ ) The project includes significant development in Hotel, Retail, Parks & Public Areas, Bridges, Walkways, Convention Center, Marinas and a 55,000 seat domed stadium for those fierce fighting Baylor Bears.  There is also a very agressive project for expanding the I-35 bridge that connects North and South Shore of the Brazos River.

The overall project is way to comprehensive to cover in this post. What I would like to do is pose the question, “how does this affect the Baylor real estate market in Waco?”  Well, first of all, this project is a proposal at this point.  It would require significant cooperation from local, state and federal governments as well as significant private investment.  We’re talking easily in the Billions from start to finish.  At the end of the day, this dream might be a pill that is just too large to swallow.  So don’t go buying up land in Waco just yet!

On the other hand, if you’re interested in purchasing property in Waco, it might not be a bad reason to push you over the hump.  As with any investment, risk is conversely acquainted with reward.  The best way I have heard this explained is that “scared money don’t make money!”  I wouldn’t necessarily be the first one in on this land grab, but I would be careful not to be left out either.  Take a look at the master plans available, make some decisions on what areas will be the most desirable for a student whose focus is study but needs to get out and enjoy the city a little.  The seeds of change have been planted in Waco.  Vision is something that people respond to, even in tough economic times.  I would be real surprised if nothing came of this push to bring Baylor’s home town of Waco into the modern age of capitalism.  The picture has been well painted, now we wait and see if the paint dries the same color.

Change is hard for most everyone. And whenever it comes, you see people falling into one of two categories. There are the Optimists who see opportunity, possibility and potential. On the other hand are the Pessimists who see tragedy, consequences and fear.The small Boston community of Allston is no different.

Harvard has been eating up acreage across the Charles Riverin Allston for a long time. They began to invest more aggressively starting in the late 80’s with an official announcement not coming until the late 90’s on their 52 acre acquisition that included some industrial and commercial properties. Since that time it has been a bit more difficult to fly under the radar. Of course Harvard doesn’t announce their intentions at this point without knowing they have acquired the key pieces to their puzzle. So how come we didn’t see this coming sooner? All properties purchased by Harvard over the years were bought by a company that would keep confidential the identity of the actual buyer. This protects large investors from being taken advantage of and is not considered to be unethical in practice but often times necessary. It wasn’t until the change of the century that Harvard made public their private ambitions to grow and expand across the river and into Allston.

Since then, local residents have been asking to see final plans for the expansions and how it will impact current transportation infrastructure as well as other public services. Many residents fear that their comfortable and cozy neighborhood will be over-run with students and the collateral damage that comes with any large student population such as high traffic, high density and of course the bars and venues that students frequent.

I suppose those are fair questions and fair arguments. However we are talking about one of the most prestigious universities in the world moving into some new territory. If my primary concern is property value and investment potential for Allston, I’d say the upside is huge. Harvard has not begun their ambitious development plans as of yet due to economic uncertainties, but Harvard has always taken their time and measured their steps carefully before executing moves. Would you expect anything else from a university that has the reputation for being one of the best and brightest in the World?

Allston is not only home to Students attending Harvard University in Cambridge, but also a number of other universities including Boston University, Boston College, Northeastern University, MIT and Emerson College.

All said, if I’ve got plans to attend Harvard University or any of the other surrounding schools within Boston, I’d take a long hard look at Allston and see if there might be an opportunity. For updates on the project as well as development maps and information, you can visit the official website at http://www.allston.harvard.edu/ai.htm.

The days of 0% down have almost evaporated just as quickly as they came onto the scene several years ago. However, it has always been somewhat difficult to discover low money down programs in university real estate markets. In fact, most university areas posses some unforeseen obstacles that might not exist in other markets. It’s called warrantability. If you’re buying a house, it’s not something to be overly concerned about. But for most buyers looking in university markets, their price range limits them to a condo or townhome. Lenders evaluate risk on loaning money for certain properties based upon a specific criteria. Meeting this criteria is also required for the loans to be “conforming” and thus able to be sold on the secondary market.

Warrantability is affected by two primary indicators. The first looks at how many of the condos within a given complex or community are owner occupied and how many are investor owned. Typically, lenders want to see that over 50% of the ownership within a complex is held by owner occupants. The second indicator is how many units are owned by one single investor. If a single investor owns more than 10% of a complex it gives that investor an uncomfortable level of influence over voting issues. Condos are held as TIC’s or Tenants in Common. It’s a democracy of sorts that is governed by a set of approved by-laws. Any changes to those by-laws must be approved or voted on by the owners. An investor has one thing in mind, bottom-line. An owner occupant may have another, such as preserving the appearance, security, etc. So, if an investor is able to acquire a majority stake in a complex, whatever he wants goes. You can see how lenders are a little nervous with any one person having that much power over the value of their investment.

It’s easy to see why warrantability becomes such an issue in college real estate markets. Due to the number of investors who favor these stable markets, you get an unusually high level of investor owned properties.

Some condo communities do qualify for less than 20% down, but make sure that your real estate agent knows which ones those are if you are depending on going the low money down route. If the complex is warrantable OR you end up buying a house, the FHA offers one of the best loan products on the market called The Kiddie Condo. The kiddie condo program deserves its own post and explanation. So stay tuned for that one to come.

What do these three things have in common? Well, if you’re from Texas you probably guessed it. The new George W. Bush Library is slated to go down on the edge of the Southern Methodist University in Dallas, TX. The addition of the George W. Bush presidential library makes the 3rd to call Texas home, behind the Lyndon B. Johnson library in Austin, TX and the George H. W. Bush library in College Station, TX. Regardless of how you feel about the decision to locate the latest presidential library to SMU instead of somewhere like Midland or Waco, my question is how will this decision affect the SMU real estate market?

It’s safe to say that the collegiate atmosphere surrounding SMU has yielded some mixed emotions to the coming of this library. Not to mention the faculty AND the University itself who was at one time disputing the ownership of the proposed land to be built on. At this point, it appears that the library effort will move forward and even be completed by 2013.

This is an excerpt from the official website for the library…

“The site of the Bush Presidential Center occupies a prime location in the heart of a rapidly growing urban city in the middle of the country. Located just five miles north of downtown Dallas on approximately 25 acres on the SMU campus, the Bush Presidential Center will overlook the downtown skyline of Dallas and serve as the eastern entrance to the university campus.”

I bolded some of the key words that are “value vocabulary” when talking about any piece of real estate. The truth is, these descriptors are fairly accurate for this area and market. One thing is for certain; this area is already an expensive real estate market. With 25 acres being taken off the potential market, this perhaps makes an already tight market even tighter.

Although these presidential libraries are touted for their economic impact as a result of tourism and research, it begs the debate on whether the impact to surrounding real estate values will be positive, negative or completely neutral. Although average prices for real estate are high in this market, I believe that they have a ways to go. If you look at where SMU sits within Dallas, growth is constrained by several geographic barriers. Bordered on all sides by interstate and conveniently close to downtown, you can’t go far from campus without running into another sub-market. Both DFW and Love Field airports are also within a few minutes providing ease of travel for business or pleasure. I would say that regardless of how you feel about George W. Bush on a political level, the arrival of his library is more likely to drive surrounding property values up than down. I suppose that time will tell us.

With the state of our current economy, who is investing any money into the stock market?  Not that we have any spare change left to invest.  I suppose one could argue that the Market only has up to go, but I stopped investing in stocks back in 2001 when we last saw our fictitious wealth evaporate due to corporate mal practices (i.e. Enron, WorldCom, Arthur Anderson, etc.) and the implosion of the tech bubble.  So, that begs the question, unless you’re a day trader making millions on the market metrics and patterns, how do you save or invest for the future?

Well I wanted to propose one possibility in today’s blog entry.  More specifically, I want to speak to how my family is saving for our children’s future college education.  As the cost of living and tuition increases each year, so does the amount of cash we need to save in order to afford our children’s education.  Why not purchase your children’s future accommodations today?  It’s paying present value as opposed to future.  I know it sounds strange, and let me try to explain a little as the multiple “what-if” scenarios arise in your minds.

This whole investment model implies two things.  The first, is that you are living within or below your means.  More specifically, you aren’t biting off more than you can chew financially.  The second implies that you have the money to invest and the desire/risk tolerance to do so.

We have chosen Austin, the University of Texas, as the University that our children will one day attend.  We are admittedly biased to this fine institution of higher learning as alumni, but you’ve got to start somewhere.  Let’s suppose that our children have no desire to attend this school, no problem, there will be plenty of demand by those who do and we can sell our condo at an appreciated market value and use the proceeds in a 1031 exchange to avoid tax penalties and reinvest that money into a condo or home in a different college town.

In the meantime, we will be landlords.  If the position of landlord doesn’t appeal to you, think about hiring a management company to handle all the collections, maintenance, leasing, etc.

The truth is, with the deficit growing at an alarming rate, the government at some point will have to start printing more money.  When the money presses start rolling out new paper, this devalues the money that we hold as a result of inflation.  I predict that we might see liquid capital being rolled into hard assets to whether the storm.  Of course my guess is as good as anyone else!  Just something to get your college real estate minds thinking.