Renting to College Students: Does the Reward Outweigh the Risk?
When it comes to renting to college students, I always refer to it as ‘high risk, high reward.’
You can make significantly more money on a similar-sized property renting to a student versus renting to a consumer. However, they are many things to consider before you decide to invest in student housing. Below are some tips to help you make an informed decision.
Educate yourself on the university regulations/restrictions regarding off-campus housing. Most colleges require freshmen and sophomores to live on campus, limiting your tenant pool to juniors and seniors. Understanding potential tenancy terms can help you forecast turnover costs as you hold the property. In this example, your potential max tenancy would be two years before you have to find more student tenants.
Get familiar with the specific zoning regulations for student housing. Each municipality will have specific rules for student housing. Make sure you understand the rules and stay compliant to get the best chance at success. For example, some municipalities forbid renting by the bedroom or issuing individual leases This means you would have to rent the property as a whole with all of the students on one lease that arrive together and leave together. This is actually the only way I recommend drafting leases for student housing. You want all of them on one lease with a jointly and severally clause to ensure that if one student leaves, you don’t sacrifice your bottom line. Jointly and severally means they are responsible for the term of the entire agreement. If rent is $2,000 a month, it would be the same with one or five students living in the residence. Additionally, some municipalities may also have regulations on how many unrelated persons can be living on the property. For example, let’s say you buy a six-bedroom home thinking you can rent to six students and you find out that the municipality only allows up to five unrelated occupants at a time. This could have a negative impact on your financials if you didn’t know that prior to the purchase of that six-bedroom property.
Research the enrollment data as well as recent historical data. Knowing the demand for student housing in the area before jumping in with both feet will help you analyze your potential competition and risk. Most universities will post this information on their websites. You will want to find out the anticipated enrollment and how many students they can house on campus. A high enrollment and lack of on-campus housing can be great for your opportunity to rent with ease, consistently. If the other is true, enrollment is low and there are a lot of options for housing, your competition will be fierce.
Know your competition. Know what your competition is doing before you decide what your terms are. Find out the market rates being charged in that local area for on- and off-campus housing. What is customarily included as far as utilities? Are the lease terms twelve months or are there many options for lease terms? Do you offer parking and other amenities? How far is the walking distance to campus? These are some of the questions that will attract or detract from your campus housing. Do the research. It will be invaluable to you as you plan for occupancy.
Collect the maximum security deposit. I always recommend collecting the maximum security deposit allowable by the state in which your property is located. In Pennsylvania, you are allowed to collect a maximum of two months of security. This is the little extra cushion you may need when it comes time to complete a turnover of the unit between groups of students.
Student housing can be a great way to diversify your portfolio
As with all investments, there are risks, but if you take the time to analyze the area, the market and the college, the rewards can be big. Here are just a few of the rewards to student housing:
Higher rents. The average rent per square foot of student housing is significantly higher than the rent per square foot to consumers. Students and their parents recognize that the cost of living on campus is very high. Rental rates and mandatory meal plans for on-campus buildings are usually very expensive, adding to the cost of living on campus. Let's not forget the freedom! Students tend to like the freedom that comes with off-campus housing. Many students are also willing to pay a premium to be off campus.
Tenant consistency. Tenant consistency is typically higher with student rentals. Students generally come in groups—like the basketball team or the field hockey team. Once you “get in” with one of those groups and they like the property, they’re likely to declare it as the “Basketball House” or the “Field Hockey House” and they’ll pass it on to their teammates each semester. It’s normal to advertise all year long and pre-lease for upcoming semesters sometimes two- to three-years in advance. You could never achieve that when renting to a consumer.
Payment consistency. With parents typically paying the rent you’re likely to see consistent, on-time payments. They’re more responsible and financially stable. In addition, many students get aid with the cost of their education which may include housing allowances.
From a personal standpoint, I have had a lot of success with renting to college students. I have never had to evict a student or had damages that exceeded their security deposit. In general, when you combine all of the student housing factors such as demand, higher cost per square foot for the building and a higher-than-average occupancy length, you can really reap the rewards of student housing. Each college and investment property has pros and cons, and you have to do your research. While I do not recommend putting all your eggs in one basket, investing in student housing can prove to be a positive addition to your portfolio and a profitable way to increase your passive income.
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