Investing in a College Town Rental Market: Ann Arbor, Michigan

College towns are attractive markets for investors in rental properties for several reasons. Students and faculty create large and dependable markets of tenants. Local economies dominated by academic institutions are remarkably stable compared to those based on manufacturing or agriculture. Larger universities create hundreds of non-academic jobs in research centers, medical facilities, and new companies spun off by technologies developed locally.

Ann Arbor, Michigan, home to the main campus of the University of Michigan, is an excellent example of a campus-based economy that is much larger than its facility and student body. One out of three local jobs are in educational service, and an additional one out of ten are in technical, professional and scientific services. At $39,235, Ann Arbor’s average per capita income and its median family income of $102,615 are 20% to 30% higher than national averages.

WalletHub ranked Ann Arbor, the nation’s fifth-best college town and the best small city college town in 2020 based on academic, social, and economic opportunities for students. It also ranked Ann Arbor, the nation’s “most educated city in 2020,” outranking San Jose, California, and Washington, D.C. It also placed first in educational attainment and quality of education and attainment gap.

Read: 5 Reasons Why You Should Still Buy an Investment Property

college university student leaving librarycollege university student leaving library

Affordability is Under Fire

Popularity can have a downside, and Ann Arbor is experiencing the price of success in rising housing costs and decreasing affordability, especially in Washtenaw County as a whole.

As of February 2020, the average monthly rent in Ann Arbor was $1,580 for an 882-square-foot apartment, a 3% increase over 2019, higher than the national median for a comparable apartment ($1,468) and considerably higher than nearby Detroit ($1,069) or East Lansing ($1,294), home of Michigan State University. Half of Ann Arbor tenants spend 30% or more of their household income on rent. HUD defines cost-burdened families as those “who pay more than 30% of their income for housing” and “may have difficulty affording necessities such as food, clothing, transportation, and medical care.”

“Ann Arbor – and its central driver, the University of Michigan – is a magnet for highly educated households with upward mobility and significant disposable income. With some exceptions, Ypsilanti (City and Township) and their challenge of being overloaded by a disproportionate number of at-risk households and homes with negative equity – is where the most affordable options exist,” stated a 2015 Washtenaw County housing study.

“Ann Arbor will become more costly, and less affordable, especially to non-student renters in the short run and eventually, to aspiring buyers as well. The driver for higher costs is a combination of high livability and quality of life, great public schools, resulting in sustained demand by households with discretionary income, and resulting expectations of stable and continually rising property values,” the study concluded.

Read: Investing in a College Town Rental Property: Charlottesville, VA

The Ann Arbor Rental Market is Vast and Profitable

In many ways, Ann Arbor is a great rental market. The massive student body drives demand. About 70% of the University of Michigan’s 46,000 students live off-campus and the current cap rate for Washtenaw County apartment buildings is a respectable 7.6%. (The capitalization rate is the ratio of rentals’ net operating income to property value. Low cap rates imply lower risk, and higher CAP rates indicate higher risk.)

Living off-campus is so popular; the university maintains web pages listing rentals and providing advice and information for off-campus renters. This summer initiated a “virtual housing fair” to help students find rentals for the 2020-2021 school year.

group of young college students hanging out at homegroup of young college students hanging out at home

Homes.com lists 1,235 properties in Ann Arbor, with a median home value of $355,600, about 17% above the national median of $304,100 in July. Of the total homes in Ann Arbor listed on Homes.com, 60% are for sale, and 34% are rentals.

Read: What to Know Before You Rent to College Students

Though several new high-rise apartment buildings recently opened and more are under construction, single-family rentals still dominate the market. Homes.com lists more than 200 single family homes for rent in Ann Arbor. Smaller rental households are a result of the above-average presence of single-family rentals relative to apartments. The average household size for Ann Arbor rentals is 2.2 people, compared to 2.3 for Michigan and 2.5 for the nation as a whole.

COVID-19 and Ann Arbor, Michigan

COVID-19 delayed the University of Michigan’s plans for the fall semester but did not cancel fall apartment rentals. The university’s plans include both in-person and remote classes, a new academic calendar, and the elimination of breaks and changes centered around preventing the spread of the coronavirus.

Despite the pandemic, Ann Arbor is still one of the best college town markets in the nation. As in most markets, acquisition is a challenge. Property prices in Ann Arbor are rising, and the smaller, less expensive homes that make ideal single-family rentals are few and far between.  Otherwise, conditions are good for single-family rental owners and will improve as the nation returns to health.


Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.

Source: homes.com

How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000

Millennials are not the only ones saddled with the obligation to pay back massive amounts of student loans. Many parents take out loans in their names to help their children pay for college, and in many cases, these loans are getting in their way of achieving their goals, like retiring. 

Under the federal student loan system, parents can take out Parent PLUS loans for their dependent undergraduate students. One of the major differences between Parent PLUS loans and the loans that the students take out is that there are fewer repayment options available for Parent PLUS borrowers. Parent PLUS loans are only eligible for the Standard Repayment Plan, the Graduated Repayment Plan and the Extended Repayment Plan.

There are other strategies for managing Parent PLUS debt, however. When consolidated into a Direct Consolidation Loan, Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) Plan, in which borrowers pay 20% of their discretionary income for up to 25 years.

Currently, ICR is the only income-driven repayment plan that consolidated loans repaying Parent PLUS loans are eligible for. However, when a parent borrower consolidates two Direct Consolidation Loans together, the parent can potentially qualify for an even better repayment plan and further reduce their monthly payments. 

Nate, the high school math teacher

Let’s take a look at Nate, age 55, as an example to see how a parent can manage Parent PLUS loans and still retire as hoped.

Nate is a public school teacher who makes $60,000 a year and just got remarried to Nancy, who is also a teacher. Nate took out $130,000 of Direct Parent PLUS loans with an average interest rate of 6% to help Jack and Jill, his two kids from a previous marriage, attend their dream colleges. Nate does not want Nancy to be responsible for these loans if anything happens to him, and he is also worried that he would not be able to retire in 10 years as he had planned!

If Nate tried to pay off his entire loan balance in 10 years under the federal standard repayment plan, his monthly payment would be $1,443. Even if he refinanced privately at today’s historically low rates, his payments would still be around $1,200, which is too much for Nate to handle every month. Also, since Nate’s federal loans are in his name only, they could be discharged if Nate dies or gets permanently disabled. Therefore, it is a good idea to keep these loans in the federal system so that Nancy would not be responsible for them. 

In a case like this, when it is difficult for a federal borrower to afford monthly payments on a standard repayment plan, it’s a good idea to see if loan forgiveness using one of the Income-Driven Repayment plans is an option. In Nate’s case, his Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) plan if he consolidates them into one or more Direct Consolidation Loans. If Nate enrolls in ICR, he would be required to pay 20% of his discretionary income, or $709 a month. Compared to the standard 10-year plan, Nate can cut his monthly burden in half by consolidating and enrolling in ICR!

But that’s not all …

Double Consolidation

For Nate, there is another strategy worth pursuing called a double consolidation. This strategy takes at least three consolidations over several months and works in the following way:

Let’s say that Nate has 16 federal loans (one for each semester of Jack and Jill’s respective colleges). If Nate consolidates eight of his loans, he ends up with a Direct Consolidation Loan #1. If he consolidates his eight remaining loans, he ends up with Direct Consolidation Loan #2.  When he consolidates the Direct Consolidation Loans #1 and #2, he ends up with a single Direct Consolidation Loan #3. 

Since Direct Consolidation Loan #3 repays Direct Consolidation Loans #1 and 2, it is no longer subject to the rule restricting consolidated loans repaying Parent PLUS loans to only be eligible for ICR. Direct Consolidation Loan #3 could be eligible for some other Income-Driven Repayment plans, including IBR, PAYE or REPAYE, in which Nate would pay 10% or 15% of his discretionary income, rather than 20%.

Reducing Nate’s monthly payments

For example, if Nate qualifies for PAYE and he and Nancy file their taxes using the Married Filing Separately (MFS) status, only Nate’s $60,000 income is used to calculate his monthly payment. His monthly payment now would be reduced to $282. If he had chosen REPAYE, he would have to include Nancy’s annual income of $60,000 for the monthly payment calculation after marriage — regardless of how they file their taxes — so his payment would have been $782.

Double consolidation can be quite an arduous process, but Nate decides to do it to reduce his monthly payment from $1,443 down to $282. 

How Parent PLUS borrowers can qualify for forgiveness

Since Nate is a public school teacher, he would qualify for Public Service Loan Forgiveness (PSLF), and after making 120 qualifying payments, he would get his remaining loan balance forgiven tax-free. 

Since Nate is pursuing forgiveness, there is one more important thing he can do to further reduce his monthly payments. Nate can contribute more to his employer’s retirement plan. If Nate contributed $500 a month into his 403(b) plan, the amount of taxable annual income used to calculate his monthly payment is reduced, which further reduces his monthly payments to $232. 

Summarizing Nate’s options in dollars and cents 

  1. With the standard 10-year repayment plan, Nate would have to pay $1,443.26 every month for 10 years, for a total of $173,191. 
  2. With a consolidation, enrolling in ICR, filing taxes using the Married Filing Separately status and Public Service Loan Forgiveness, he would start with $709 monthly payments and pay a total of around $99,000 in 10 years.*
  3. With double consolidation, enrolling in PAYE, filing taxes using the Married Filing Separately status and Public Service Loan Forgiveness, his monthly payment starts at $282, and his total for 10 years would be around $40,000.
  4. For maximum savings: With double consolidation, enrolling in PAYE, filing taxes using the Married Filing Separately status, Public Service Loan Forgiveness and making $500 monthly contributions to his employer retirement account for 10 years, Nate’s monthly payment starts at $232, and his total payment would be around $32,500.      He would have contributed $60,000 to his 403(b) account in 10 years, which could have grown to about $86,000 with a 7% annual return. Comparing this option with the first option, we can project that Nate pays about $140,000 less in total, plus he could potentially grow his retirement savings by about $86,000.

As you can see, there are options and strategies available for parent borrowers of federal student loans. Some of the concepts applied in these strategies may work for student loans held by the students themselves as well.

An important thing to remember if you are an older borrower of federal student loans is that paying back the entire loan balance might not be the only option you have. In particular, if you qualify for an Income-Driven Repayment plan and are close to retirement, you can kill two birds with one stone by contributing as much as you can to your retirement account. Also, since federal student loans are dischargeable at death, it can be a strategic move to minimize your payments as much as possible and get them discharged at your death.

Also, loan consolidation can be beneficial as it was in this example, but if you had made qualifying payments toward loan forgiveness prior to the consolidation, you would lose all of your progress you had made toward forgiveness!

As always, every situation is unique, so if you are not sure what to do with your student loans, contact a professional with expertise in student loans.

*Note: The projections in Options 2 through 4 assume that, among other factors such as Nate’s PSLF-qualifying employment status and family size staying the same, Nate’s income grows 3% annually, which increases his monthly payment amount each year. Individual circumstances can significantly change results.

Associate Planner, Insight Financial Strategists

Saki Kurose is a Certified Student Loan Professional (CSLP®) and a candidate for the CFP® certification.  As an associate planner at Insight Financial Strategists, she enjoys helping clients through their financial challenges. Saki is particularly passionate about working with clients with student loans to find the best repayment strategy that aligns with their goals.

Source: kiplinger.com

MintFamily with Beth Kobliner: 3 Ways Your Kids Will Redefine the American Dream

A friend’s 20-something son shocked his parents with his post-graduation plans: He was moving to Southeast Asia to sell selfie sticks.

Millennials in a nutshell, #amiright?

But who can blame them for taking non-traditional paths, given the poor financial hand they’ve been dealt: record levels of college debt, uncertain job prospects, stagnant wages, and more. It’s why one in three Millennials is deeply dissatisfied with their financial situation, according to a much-quoted new study from George Washington University and PwC.

Findings from a recent Harvard survey cut even deeper: half of Millennials say the American Dream is dead. Yep, that cornerstone of post-war America—the house, the car, the upwardly mobile career track—is about as relevant to them as black & white TV. To parents raised on the mythology of the American Dream, that’s grim news.

But the situation may not be as dire as it appears.

As they’ve done with everything from communications to careers, Millennials are redefining what it means to lead a “better life” (something parents see as key to the American Dream, according to a 2015 60 Minutes/Vanity Fair poll). This new paradigm is rooted in the experiences of people who came of age after the financial crisis of 2008, and reflects how they see the world. It offers a flexible lifestyle (one that some might see as transient) and a reworking of the traditional measures of success.

Here are three ways that our kids will make their own American Dream—and thrive.

1.  They’ll rethink what college means—and how to pay for it.

Two-thirds of parents say the American Dream includes sending their kids to college, according to a September poll from the youth media company Fusion. These moms and dads are right to think this, as college grads earn about $1 million more over their lifetimes.

For Millennials, cost and career aspirations are informing this major life decision more than ever (call it pragmatism if you want). Gone are the days of selecting a school based on its bucolic campus or dominant football program. Kids (and parents) want more value—and less debt.

That’s why it’s so critical to start the college cost conversation early—like 9th grade-early. Want an incentive? A start-up called Raise.me allows high schoolers—as early as freshman year—to earn “micro-scholarships” from over 100 colleges. Got an A in chemistry? Won the lacrosse playoffs? Volunteered at your local animal shelter? Each awesome achievement can earn your kid $500 to over $1,000 from various colleges. Even “mayor” of Millennials Mark Zuckerberg backs it: Facebook is one of Raise.me’s main supporters.

Best way to avoid the college cost guessing game? Fill out the FAFSA (Free Application for Federal Student Aid)—the key to scholarships, grants, work-study, and low-rate federal loans. The form is notoriously long and complicated, but it’s getting better! Starting this year, you can access the FAFSA on October 1, 2016 (up from January 1, 2017). Why the new, early start? It means you’ll be able to auto-fill the form for the 2017-18 school year using your 2015 tax return data. (More details here.)

Parents of kids who excel in hands-on environments can encourage them to consider the growing trend of apprenticeships (a traditionally European idea that’s catching on here in the U.S.), particularly programs offered in tandem with a community college degree.

2.  They’ll understand that owning your own “home sweet home” is only sweet when you can afford it.

In 1986 (back when I was graduating from college!), 76% of young people saw owning a home as essential to the American Dream. Today that’s down to 59%, according to the Fusion poll.

That means your kid is more likely to bunk with you—or rent—than take on a mortgage she can’t afford (so don’t turn her bedroom into a home office just yet). If she does move in with you, make sure she uses this time as an opportunity to save! (And work out any financial details in advance with this helpful guide from eHow.com.)

Renting has traditionally gotten a bad rap, but it lets your kid explore—new towns, new jobs, new people!—without being stuck in one place. Take our selfie-stick seller: his Southeast Asia stint lasted less than a year before he was back in the states and settling into a new city and new gig. Like his fellow Millennials, he’ll probably rent for several years. Buying may not even cross his mind until his early 30s. A Zillow study shows the average first-time homebuyer is now 33, up from 29 in the 1970s. Of course, you’ll want to talk to your kid about the realities of owning a home, including how to sock away a chunk of money for a down payment once she’s ready.

3.  They’ll value happiness and independence over a huge paycheck.

The entrepreneurial goals of Millennials can sometimes seem a little, er, lofty (like the selfie stick plan that didn’t exactly take off), but thankfully, many are starting to pace themselves.

A study from Upwork, a company that helps businesses find freelance workers, showed that 62% (mostly Millennial) freelancers planned to work a full-time job and moonlight on the side for two years before quitting to follow their dreams. Two years may not be a magic number (a specific financial goal would be safer), but at least they’re earning—and learning—prior to taking the leap.

Today’s young people aren’t all work and no play, either. Millennials’ drive for success, salary, and even entrepreneurial goals pales in comparison to their desire to spend time with family and friends, which they rank as “one of the most important things” in their lives, according to the Harvard survey.

The takeaway? We’re raising a generation that demands independence, flexibility, and a true work/life balance. Perhaps that’s the new American Dream.

Sounds like something we can all believe in.

How do you define the American Dream for your kids? Tell me on Twitter using #NewAmericanDream.

© 2016 Beth Kobliner, All Rights Reserved

BethKobliner

Beth Kobliner is the author of the New York Times bestseller Get a Financial Life, and is currently writing a new book, Make Your Kid a Money Genius (Even If You’re Not), to be published by Simon & Schuster. Visit her at bethkobliner.com, follow her on Twitter, and like her on Facebook.

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