Should you invest in student housing? Pros, cons, & tips for college rentals

Should you invest in student housing? Pros, cons, & tips for college rentals
by Brad Cartier, posted in Investment Strategy

This is a guest post from Emma Dudley over at SparkRental

 

College campuses create enormous demand for housing. From undergrad to graduate students, professors and administrators to janitors, and the many secondary businesses fueled by all those warm bodies, colleges drive local rents skyward.

According to the College Board, about 44% of college students reside off campus. As the housing boom continues and it remains difficult to find good deals, don’t overlook student housing. However, renting to college students can add extra work and stress to landlords. Before diving into the world of student housing, consider the following pros, cons, and tips for success.

Pros: Why Should You Rent to College Students?

For all its (more obvious) downsides, renting to college students comes with plenty of perks.

1. High Demand

Most colleges and universities do not offer four years of on-campus housing. They simply don’t have the dorms and housing inventory to do so.

This means millions of enrolled students need a place to live while completing their degree. That keeps vacancy rates extremely low in most neighborhoods surrounding college campuses.

Additionally, new college students arrive each year so the pool of renters never runs dry.

2. Higher Rents

High demand for housing means higher rents.

Once a student decides to spend four years pursuing a degree, they need to live somewhere — most students do not have the option of commuting from home or living on campus for all four years. That makes for a captive market.

Most college students live with multiple roommates. With several people sharing a space, you can often charge higher asking rents because each person is paying their rent separately. If you were to rent that same space to a family, you would not be charging each family member separately, you would be charging the family as a whole. For example, a four-bedroom house might rent for $2,000/month to a family, but you could make an extra few hundred per month renting to four students paying $600 a piece.

3. Cosigners Guarantee Payment

Concerned about receiving rent in full and on time each month?

As a landlord, you can require cosigners to sign the lease agreement alongside student tenants with little credit history. By putting a parent or guardian legally on the hook, you’re likely to receive the rent in full.

4. Organizational Lease Renewal

Especially among social groups, such as sports teams, fraternities, sororities, or clubs, certain homes are extra desirable. This may be because of the location of the house, the space it provides, and in some cases, sentimental value. Believe it or not, among the Greek life community, it is very popular to have the “next generation” move into the house that their sisters or brothers also once lived in. This is known as “keeping the house in the family.”

Rent the house to members of that community once, and you may never have another vacancy.

5. Lower Expectations for Property Condition

Not only can you earn more money renting to college students, but you can potentially also save. College students cannot afford luxury housing, therefore they are more willing to settle for less. Because of this, you don’t necessarily have to repaint the walls, shine up the windows or keep the house looking as spiffy as you would if you were trying to rent your property to a family.

In other words, student housing doesn’t always need the same level of finish as units rented to professional adults.

Cons of Renting to College Students: What are the risks?

While there are several benefits that make renting to college students desirable, as you may imagine, it can also come with challenges.

1. Inexperienced Renters

For most college students, off-campus college housing will probably be their first time living on their own. Therefore, these renters can be irresponsible and inexperienced when it comes to their relationship with their landlord. Communication isn’t always up to par with your normal adult tenants, which means you might need to manage your tenants more directly.

Beyond poor communication, college students aren’t known for their hygiene and cleanliness. That could lead to expensive problems like mould or pests such as house rodents and cockroaches.

2. Damage Costs

If the students are irresponsible with the property, you could end up paying an extensive amount in damage repairs. Not only does this add extra stress to the renting process initially, but it will always be a risk because even once one group of college kids move out, the same exact demographic could be arriving.

3. Inexperience with Finances

College kids are young. Not only do they have no experience with living on their own but they also do not have money management experience. If the students do not have a guardian co-sign on their behalf, you are fully trusting that a college kid will consistently pay his/her bills in full and on time.

Most college students only have time for a part-time job, usually at minimum wage. That does not offer much of a financial cushion if they need to quit or get let go. In a situation where a student can’t pay rent, you may be forced to evict the tenant mid-lease. But finding a new tenant halfway through the school year can prove problematic in a college town, as most other students already have their housing for at least the rest of the term. In this case, you may have a vacant property for a few months while waiting for the next round of kids to rent to.

4. Annual Turnovers

Landlords incur their greatest labor and expenses during tenant turnovers. It takes time and money to clean up the property, advertise it for rent, collect rental applications, run tenant screening reports, sign a new lease agreement, conduct the move-in walk-through, and so forth.

It’s precisely why experienced landlords aim for high tenant retention. More turnovers mean higher maintenance costs, higher vacancy rates, and generally lower returns with more labor.

5. Breaching of Lease Agreements

Although you might clearly state that only three people can reside in the house, college students are not always trustworthy. They may squeeze one more person in so that they are spending less money each month, unbeknownst to you. College students may also ignore your rules regarding noise or large parties. This could affect your relationship with your neighbors as well as cause damage to the property.

6. Summer Vacancies

In most instances, college students return home after the school year ends. That can leave you with several months of vacancy that can be difficult to fill.

Tips to Successfully Rent Houses to College Students:

After looking through the list of cons, you may be hesitant to rent out your property to college students. Try these tips to maximize your odds of success.

1. Require a Cosigner

If you require a cosigner on the lease contract, they become legally liable to step in and pay the rent even if the student loses their part-time job and cannot pay. It costs you nothing to require a cosigner, but can make the difference between collecting rent or filing for eviction.

Just remember to put cosigners through the same tenant screening process you use for residents.

2. Require a (Hefty) Security Deposit

College students aren’t known for their responsible behavior. Protect yourself and your property by requiring a steep security deposit.

It serves as a deterrent to risky behavior, which hopefully leads to more respect for your property. And if they do cause damage, you have more money to cover the cost of whatever needs fixing.

Protect yourself and your property by charging a high security deposit, and by maintaining comprehensive landlord insurance.

3. Automate Electronic Rent Payments

Forcing your renters to send or drop off a check in the mail could potentially cause more stress than just setting up automated online rent payments. If payments are required to be automatic, you are ensured to always receive the rent payments on time and in full and never have to stress about reminding them to pay you.

4. Charge Them for Utilities

Don’t offer all-inclusive utilities.

Whether you force renters to sign up for utilities on their own or bill them, charge college students utilities separate from rent. The downside to your renters paying directly is that you won’t necessarily know if they fall behind. The downside to billing your renters yourself is that you can get stuck paying their bill.

Creative Option: Rent a House to College Students with a “Kiddie Condo Loan”

If you know multifamily house hacking, you know that owner-occupied financing lowers your down payment and interest rate, compared to a rental property loan. But it still comes with that pesky requirement to actually, you know, live in the property.

But one clever way to house hack involves letting your grown children meet that requirement for you. When you house hack with a kiddie condo loan, you partner with your children to buy a property. They move in, so you don’t have to.

The strategy goes like this: You partner with your child on a property near where they attend school. They move in with a friend or two or three, and the roommates each pay rent. You and your child save money on housing, and after they graduate, you’re left with a rental property with cheap financing.

Fair Housing Laws: Can You Refuse to Rent to College Students?

In most cases, the answer is no. The Fair Housing Act would consider refusal to rent to students to be discrimination based on age (most college students are between the ages of 18-25). However, the only exception that would allow you to deny college students from renting would be if your property falls under federal subsidized housing programs. Students don’t qualify for Section 8 housing, so if you’re a Section 8 landlord, you can decline students.

So, Should You Rent to College Students?

Consider student housing a niche. Some landlords earn outstanding returns by renting to college students. But it requires experience and strong systems in place to protect yourself and your property.

Before entering this niche, ask yourself a series of questions. How important is it for you to keep this property in pristine condition? Are you willing to do business with college-age students? What protections do you have against property damage and defaults?

Ultimately, it comes down to your real estate investment returns. Make sure to calculate net cash flow before buying, and use conservative estimates for all expenses — especially where college students are concerned.

Do you plan to invest in student housing and rent to college students? Why or why not?