Student Housing: What Investors Should Know About Pros, Cons & Profitability
Student housing can be one of the most profitable niches of buy and hold real estate around. In fact, it’s how my father got started in real estate. Back in 1989, he bought his first house near the University of Oregon and just kept going from there.
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Now, what I mean by student housing is houses and apartments nearby a university that are rented primarily to its students. They come with a few major advantages and, of course, a few disadvantages as well.
Advantage 1: Higher Rents
In the right market, the same home can rent for substantially more to college students than it can to a family or other individuals. This is because 1) college students place a high premium on being near their university, whereas families are generally less specific about location, and 2) student housing is usually based off rent/bedroom and it’s often not that hard to add bedrooms.
So for example, we have a six bedroom house that rents for $695/bedroom. Or in other words, we are renting a house for $4,170/month! Obscene? Perhaps a little, but that’s what the market will bear. That’s a rather extreme case. But needless to say, families won’t pay nearly that much for the same home.
Advantage 2: Guaranteed Rents (Almost)
Our economic occupancy is extremely high on student rentals, about 99 percent. First, we have a built-in tenant base, which makes marketing easier. Then to help these students pay their rent, there are student loans. But the main reason economic occupancy is so high is that we require a co-signer for each student, and so we have their parents to back the lease. It rarely comes to that, but it makes it almost unheard of for us to lose out on rent for one of our college properties.
Disadvantage 1: Annual Turnover
Unfortunately with students, they aren’t going to stay for the long term. Sometimes you can get two or maybe even three years out of a tenant. But usually you will need to turn over the property each year.
Disadvantage 2: College Students Are College Students
You won’t believe this, but college students can actually be pretty destructive to a house or apartment. One would think that frat boy antics wouldn’t cause any serious damage, but you would be wrong. Beer pong may not cause much damage, but those weekend ragers can do a number on just about any rental property.
What to Look For
Now, in my opinion, the advantages outweigh the disadvantages when you can find the right market. Unfortunately, student rentals got “discovered” a few years ago, and in many college towns, there has been a lot of overbuilding. Around the University of Oregon, this has certainly been the case, with multiple, large developments being finished in the last few years. It’s also been a trend nationwide.
If you intend to go into student housing, the most important thing to look for is that the market isn’t oversaturated. Ask around and try to get an idea of vacancy rates. Also look at home and apartment prices. In some markets, they’ve been bid up so high that the advantages of higher rents don’t help.
The other major thing to look for is what kind of college it is. Many smaller schools or community colleges are “commuter colleges,” where there really isn’t a group of homes and apartments that could be referred to as student housing. Yes, students still live there, but there’s no real premium for it.
In other markets, there will be student housing with a premium, but you need to look very carefully to see how far this area goes. Sometimes students will live very far off campus in order to pay less rent. The way you should look at these situations is that this is housing that students live in, not student housing. Student housing is housing that students will pay a premium for because it’s close to the college itself.
There may be several zones, for lack of a better word, around each campus. So for example, Zone 1 is very close to the campus and students pay a large premium. Zone 2 is approximately five to fifteen blocks from campus on the west and north side only, and students will pay a decent premium. Beyond that is hit or miss.
Make sure to do your research ahead of time. It’s critical not to buy a house or apartment with the plan to make it student housing, when in fact it’s too far away or the market is oversaturated. I’ve seen this happen, and it doesn’t turn out well.
Tips on Managing Student Rentals
Remember, with student rentals, you are renting these houses and apartments out by the bedroom. That means that whatever you can do to add bedrooms (within reason) is something you should do. My dad has made a living off of doing things like buying a 3-bed home and turning it into a 5-bed house with a few creative room additions.
This does two things. First, with student rentals, more bedrooms equals more rent. With homes for families, other than the difference between a 2-bed and a 3-bed, there isn’t a huge advantage to adding a bedroom unless you’re also adding square footage. This is not so with student housing. A 3-bed house that’s 1500 sq. ft. may rent for $695/room (depending on the market). That same house made into a 5-bedroom home may rent for $595/room. That’s a huge value add!
Second, these students are young, not related and have no parents to tell them to pick up after themselves. Usually they will keep their bedrooms in decent shape. But the common areas will be subject to the tragedy of the commons and get more or less destroyed. Furthermore, large common areas are an invitation for raging parties, which college students have been known to throw. Anything you can do to convince them to throw such parties in someone else’s house is a good idea, and smaller common areas will help with that.
It’s important to systematize your turnover as much as possible. The one nice part about annual turnover is that you know when it’s coming. You should have a date set to request a renewal that gives you plenty of time to find a new tenant if they say no. Also, you want to start looking before students go home for the summer. Of course, every market and college is different, but most students want to arrange their housing for the next year before they’re done with the current year of school. So get on the marketing early.
Before a tenant moves out, line up your turnover staff or contractors to start as soon as the tenant leaves to shorten the time between vacancies. And unless the market doesn’t allow for it, demand that students sign a year lease and rent the property in the summer, as it’s much harder to rent a property for just the summer and you don’t want to suffer three months of vacancy.
Student housing can be very profitable when done in the right way and in the right market. But just as with any niche, you need to understand its potential pitfalls before getting in.
Would you add student housing to your investment portfolio? Why or why not?
Let me know with a comment!