Robert Grunnah Investor Learns the Pluses Of Being a College-Town Landlord

The Wall Street Journal
By Jane Hodges

The Investor: Robert Grunnah, a 32-year old software manager turned full-time investor, bought his first investment property at age 24. The single-family house he purchased for $98,000 in 1998 sold for $215,000 the week he was laid off from his software job in 2001. The proceeds from the sale made it possible for him to take a six-month backpacking trip to Asia and Australia, during which he decided to become a professional real-estate investor, he says. He now owns 23 properties in central Texas.

The property: The 1973 duplex is in the "Barton Hills" area of Austin, near the University of Texas campus, an area with numerous trees and natural springs. The neighborhood is popular with undergraduate and graduate students, professors and professionals. The 2,400-square-foot property sits on a 9,000-square-foot lot and includes a three-bedroom, two-bath unit and a two-bedroom, two-bath unit. The apartments have gas stoves and fireplaces, plus two uncovered parking spaces each. Both units are rented to students.

Purchase price: $230,000 in March 2006. Mr. Grunnah made a 10% down payment and took out a 6.25% fixed-rate loan. In addition to the mortgage, he pays $120 monthly in mortgage insurance fees, which he will soon be able to eliminate when he reaches more than 20% equity in his property, he says.

Additional investment: $25,000. The work included major foundation repair ($11,000), and he spent another $14,000 on new carpeting, countertops, flooring, plumbing, lighting fixtures, interior painting and stainless-steel kitchen appliances.

The strategy: He plans to hold this property, one of 17 duplexes he owns in the area. He says he likes investing in Austin duplexes because their rents generally exceed those of single-family rentals and also resell well. In the past three years, duplexes appreciated in value by 12% to 25% a year, depending on their location, he says. He earns $625 a month from this property after deducting expenses associated with the mortgage, taxes and insurance, he says. Mr. Grunnah says he's realizing he can make decent money from college rentals. "I'm moving toward buying properties that appeal to students," he says. "Housing near [the University of Texas] has always been at a premium." Of the university's approximately 37,000 undergraduates, 19% live on campus, according to the College Board. Mr. Grunnah rents out the larger, three-bedroom unit for $1,350 a month and the smaller, two-bedroom unit for $1,195 per month and has a waiting list of interested renters if vacancies crop up. The rates he charges are higher than what he expected to fetch, but he set the rents to test the market, and to his surprise, both units leased within three days, he says. He requires a 12-month lease (longer than the school year) from his tenants -- which most accept because demand is so high, he says. He says the third- or fourth-year undergraduates and grad students are less demanding on his time or on his property manager's time. He also doesn't need to deal with calls from nervous parents. "That's rare," he says. "Freshmen may end up doing that, but not older students."

The pitfalls: The property required extensive renovation --the previous owner admitted that many potential buyers had hesitated to make or complete an offer because of the amount of fixes required, Mr. Grunnah says. When his contractors repaired the duplex's foundation, they had to place 40 support piers around the property at a cost of close to $11,000. With local home prices still rising, one pitfall Mr. Grunnah says is that his "exit strategy" will most likely involve selling the property as a primary home rather than to an investor. The home's eventual selling price might prove to be too high for another investor to make enough money from rents to cover housing costs, he says. He expects that whoever buys the duplex will live in one unit and rent out the other, he says. That said, he isn't planning on selling the property soon.

The transaction: If Mr. Grunnah were to sell the property today, he estimates that based on local comparable sales, it could fetch between $375,000 and $390,000, at least $145,000 or 63% more than his purchase price just 12 months ago. That's above his zip code's median housing value of $329,472, according to Cyberhomes.com, and beats the approximately 33.4% price appreciation homes in his zip code have seen since the duplex's purchase date, according to Zillow.com. He expects to be able to garner a higher price because of the home's desirable location near the University of Texas and because he invested money to make much-needed repairs, he says. Duplexes are a popular form of housing in Austin, he adds.