There was a time when I first examined the rental profitability of properties in Savoy. This area, adjacent to Champaign where the University of Illinois is located, has a steady demand for student rentals. The first question that came to mind was whether it was a viable investment despite the low rental prices compared to the purchase price. I will share the process of unraveling that curiosity step by step.

Let's check the numbers. The recent median sale price in Savoy was around $347,900, and the median rent in the area is reported to be $922 per month. Dividing the annual rental income of $10,064 by the purchase price results in a total return of about 3.2 percent. This leads to the next question: is this level of total return sufficient for investment?

To get a clearer picture, we need to calculate the cap rate. The effective property tax rate in Champaign County, where Savoy is located, is 2.06 percent, which is higher than the Illinois state average of 1.90 percent. For a home priced at $347,900, the annual property tax alone exceeds $7,000. When factoring in insurance, maintenance costs, and vacancy losses, the net operating income may fall short of half the total rental income. This raises the question of why there are still investors considering this area.

According to the 1 percent rule, a property priced at $347,900 should have a monthly rent of at least $3,479 to pass the test, but the actual median rent of $922 is far below this benchmark. In smaller towns, it is common for rental prices to be lower compared to sale prices, making it difficult to determine investment viability based solely on the 1 percent rule, as this case illustrates.

The answer lies in the stability of student rental demand. Areas near college campuses tend to maintain low vacancy rates, so even if the total return is low, the actual drop in cap rate may not be as significant due to minimal vacancy losses. However, this is just a general trend for the area, and it is necessary to check vacancy rate data for each specific property.

Nevertheless, the reason areas like Savoy continue to attract investor interest is that the low vacancy rates help maintain a stable cap rate, and in the long term, gradual price appreciation and asset growth from loan principal repayment contribute to total returns. It seems more realistic to approach investments based on steady rental demand rather than expecting short-term capital gains.

So, how can we view the cash-on-cash return? In a region with a low purchase price, the amount of cash put down for the down payment is also relatively small. Even with a 20 percent down payment, in Savoy, it would be around $70,000, and at this level of cash investment, changes in interest rates can significantly impact the cash-on-cash return. It may be helpful to create multiple scenarios based on different loan conditions when reviewing properties.

In small towns like Savoy, which are adjacent to college campuses, it is often more important to first check student rental demand and vacancy patterns by semester than to focus on school district information. If families are considering moving from out of state, they should also factor in that property tax levels in Illinois may be higher than in their previous residence.

Tax benefits from depreciation are also an essential part of total return calculations. The building value, excluding the land value from the sale price, can be depreciated over 27.5 years, allowing for a deduction from taxable income even in areas like Savoy where the sale price is low. However, the exact proportion of building value should be assessed with a tax professional to gauge the actual tax-saving effect.

Adjusting rental contracts to align with the start and end of the semester is also a common strategy in college town markets like Savoy. I have heard several times that managing rental conditions flexibly during the summer break helps prevent vacancies before the September semester starts.

Property tax and rental regulations may vary by county, and this article does not constitute investment or legal advice. Please consult with a professional before entering into any contracts.