Turning College Housing into an Investment Strategy

Forbes has released its list of the top college towns to invest in. Phoenix – Mesa- Scottsdale came in at #7. From the article:

The good news is, college doesn’t need to be so hard on the wallet–at least when it comes to housing, an area that becomes more absurdly expensive with each passing year.

Total room-and-board expenses at private undergraduate colleges averaged $7,791 during the 2005-2006 school year, up 5% from the previous academic year, according to The College Board’s annual report on college pricing trends. But consider the alternative: investing in real estate. If done wisely, this nontraditional approach could not only save you the cost of college housing, it might even help you turn a profit.

Rather than shell out a small fortune for a ratty dorm room or an overpriced apartment, parents can build equity, generate cash flow and eventually benefit from real estate appreciation–assuming they are willing to be landlords and invest some cash up front.

Rhonda Butler, sales manager at Fonville Morisey Realty’s Chapel Hill, N.C., office, near the University of North Carolina at Chapel Hill, breaks down a local example.

“Say you have a $200,000 townhouse,” she says. “You can take four students and charge them each $700 a month for rent, and suddenly you’re going to have a positive cash flow on the transaction.”

With 10% down, a 30-year mortgage and a rate of, say, 7%, monthly mortgage payments would total about $1,200, for a net of $1,600 per month.

And though home prices around the country appear to be flattening out after a few years of sharp increase, college housing markets tend to experience less ups and downs.

I ran across a real world example Here

Homeownership – The Road to Serfdom?

I came across an interesting article today by !PDF Warning!Michael Hudson – Distinguished Professor of Economics at the University of Missouri–Kansas City. After reading it I thought I had never read anything that was so completely off the mark.

From the Article:

The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.

This paragraph makes two faulty assumptions. First and most egregious is the idea that there was a master plan set forth by the Fed to enslave Americans to mortgage repayments. I’m not a big fan of Owner-Occupied housing, as i see it as a liability and not an asset, however the flip side of paying rent and claiming no interest deduction and no possibility of equity gains is even more patently absurd. The second is that these new homeowners will never be able to pay off their loans. We are in a period of extremely low interest rates. Even now when the average loan is running 6.5% for 30 year fixed paper (and falling I might add). How long ago was it when we thought a 7.5% fixed interest rate was reasonable? This means of course that as a percentage of payments a buyer is paying less on interest expense than at any time in recent history. That one percent drop in interest rate just negated a 10% rise in home values. Lets not forget either that a god number of the homes sold during the recent boom were locked in at 5.5% or lower. A full 20% increase in buying power when compared to pre-boom financing.

I also find it hard to take the author seriously when he compares homeowners to the sharecroppers of the south at the turn of the century:

Debtors were medieval peons or Indians bonded to Spanish plantations or the sharecropping children of slaves in the postbellum South. Few Americans today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.

Yes! That enticement is called lower interest rates!

Interest rates dropping! Homeowners let out collective sigh

Everyone knows the stock market is in bull mode but one of the pieces of news getting lost in the shuffle is that this isn’t hurting the housing markets. Over the last month I’ve watched the yield on the ten year note drop from 5.13 to 4.87. Here was today’s activity:

bond yield curve

What does this mean for interest rates? A drop from roughly 6.375% as a par rate to 5.875%.
This number doesnt exactly correlate to an APR as a lender will assess some points and fees and of course their are always closing costs which will increase the APR of the loan, but this is good news for people looking to purchase a home or refinance out of their existing ARM’s.