Want to Invest in Student Housing? Now's the Best Time to Start

As COVID-19 hit the United States, many states started imposing eviction moratoriums. Some of these stated that landlords couldn’t evict tenants even when they stopped paying rent. These tenants shouldn’t be evicted simply because they lost their job and have an increasingly dwindling emergency fund.

What we have also seen is that even many commercial properties such as large malls and apartments started having tenants who couldn’t pay rent. I actually had several colleagues who purchased apartments or single-family homes who are struggling with this very problem right now.

With all the unpaid rent, is now a good time to invest in real estate?

My answer is a resounding “yes!”

The most obvious reason you should invest now is the historically low interest rates that resulted from the Federal Reserve stimulus efforts. By locking in a low interest rate, you’re literally saving yourself thousands on your mortgage. Let’s just say you put 20% down on a $300,000 house. If you were to get a 2.5% interest rate vs. a 4% interest rate, you would save $197.50 per month in interest payments, which is $2,370 per year. Over 10 years, that’s $23,700 saved.

The second reason why now is the best time to invest is that real estate is a time game. If you ask any real estate investor what their biggest regret is, it’s almost always along the lines of, “I wish I had bought more properties earlier when I was younger.”

Why is time so important in real estate? Real estate builds wealth in three ways.

Appreciation: This is the steady increase in the home’s value over time. We’ve all heard the story about how a young real estate investor bought properties a long time ago in an up-and-coming area or even in a big city, and 20 years later, they’re a multi-millionaire because they held onto them. That’s because appreciation is the biggest wealth builder for most real estate investors.

Rent increases: In most markets, you can increase the rent as wages go up to keep up with inflation. While your mortgage monthly payment stays the same, each payment will get easier and easier to pay off over time because your rental income and cash flow go up.

Tax benefits and depreciation: Real estate is one of the biggest tax-advantaged vehicles to invest in. Not only can you deduct nearly all expenses incurred on the property, you can also deduct “phantom money,” known in the real estate world as “depreciation.” Basically, the IRS acknowledges that properties have wear and tear. So they take the purchase price, subtract out the land value, and whatever is left is divided by 27.5 years (this is considered the “useful life” of a residential property). This annual depreciation can be deducted each year as a loss against the rental income you generate.

Now that we’ve talked about the general benefits of real estate investing, let’s dive into my niche.

How I built a 6-figure rental portfolio in less than 3 hours a week

No, it’s not because I got lucky. In fact, you probably don’t want to go to Vegas with me because I’ll lose all your money. Instead, I invest in a market that’s eviction-proof, highly profitable, and scalable. And that’s the student housing market.

Most real estate investors are leaving half their cash on the table by only renting out a single unit. If I had rented one of my single-family homes as one unit I would only get $1,419 per month as of March 2021. Instead, I added two extra bedrooms to make it a five-bedroom house and charge an average of $620 per bedroom to make $3,100 per month instead. So I more than doubled my rental income in each of my rentals.

I purchased one rental each year. And after just four years, I now own four rentals, making $10,755 per month in rental income. Not only that, but I was able to do this while working as a busy full-time pharmacist.

Now before you go, “Whoa, you mean you’re renting to those partying college kids?” I’ve never had to keep security deposits due to tenant-inflicted house damage in the five years I’ve been investing.

How to invest in student housing

I’ll break it down into three steps.

Step 1: Choose the right college

You can filter out a lot of the party-type tenants by simply choosing the right college. Focus on colleges that are prestigious and academically the cream of the crop, where you’ll likely need a near-4.0 GPA just to even be considered. Most of the students will be serious about their academics and degree.

Step 2: Choose the right deal

You need to choose a house that’s not too expensive but has the ability to add extra bedrooms to bolster your cash flow. Make sure there’s enough market demand to charge the prices you wish to charge. And make sure you purchase in close proximity to the university.

Step 3: Choose the right tenants

Usually it’s the parents paying the rent, so you never have to worry about unpaid rent. No parent would risk their child being evicted from where they’re staying during college if they can help it. But you do need to screen the student tenants and choose the right type.

I focus on picking students in professional schools such as medicine, pharmacy, dentistry, or nursing. That way they usually have matured and need to study hard to get their professional degree because those classes are tough.

I’ve also found that law, engineering, and computer science students work out well. I look through their social media for any smoking, drugs, alcohol, or party pictures. This ensures you find responsible tenants that will really take care of your house.

How I have 100% occupancy with paying tenants during COVID-19

Now the biggest question you’re probably asking right now is, “With COVID-19 going on and classes moving online, how are you getting student tenants?” In fact, I’m at 100% occupancy for my 17 bedrooms. There are actually three big reasons why housing near universities is in high demand even during this time.

Students still want to live some of the college life. And the best way to do that is to stay in a house with their friends. Many of the students love to study together or even watch lectures together. Colleges still have plenty of activities where students must collaborate. And several colleges, especially professional schools, still require students to do on-the-job training and/or lab work. I’ve noticed graduate students especially need to be close to campus because they need to finish their research projects using the instruments the university provides.
Students can’t focus at their parents’ house. Several of my tenants have told me about their parents’ place being too cramped and chaotic for them to focus on their studies. I know whenever I was living with my parents, I’d get easily distracted and have trouble finishing my schoolwork.
College students like their independence. Imagine having a girlfriend or boyfriend and having them over at your parent’s place for a romantic movie night. It can get awkward fast having your parents around during “alone time” with your significant other. Many college students also enjoy the feeling of being free from their parents telling them what to do.

This isn’t to say achieving a six-figure rental portfolio is a piece of cake. There are six specific skills you need to master for any market, but especially for student housing.

How to commit

Mastering these six skills took me from making only $1,280 on my first property to building a portfolio that makes $10,755 per month in less than four years.

Communication. This involves being assertive, confident, and able to articulate exactly what you’re looking for. Being able to defuse conflict quickly and make sure your expectations are clear is so essential to successful real estate investing.

Offer/deal analysis. This involves knowing your numbers and figuring out the market demand wherever you invest. Study investing terms like NOI, CAP rate, and CapEx if you don’t know them already.

Marketing. If you have no tenants, you have no income. Period. Learning how to market yourself so that you always get a steady stream of high-quality tenants is a skill I had to spend the last five years perfecting.

Management. If you don’t want real estate investing to become a full-time second job, then it’s important to create systems and processes that help you to automate the whole management process for yourself. You can always hire a property manager, but they take a significant chunk of your profit—typically 8-12% of your income.

Invite negotiation. The key to getting a great price on any deal is negotiating and helping the seller also get what they want so a win-win scenario is created. We shouldn’t shy away from negotiation. Instead, we need to embrace it.

Team building. As a real estate investor, to go far, you need a team you can count on. It’s more important to get expert advice on something than waste years trying to do it yourself. If you want to fix your iPhone, you’re probably not going to try to go through programming school for the next four years to fix it. Instead, you’re going to walk over to your local Apple store and have them fix it for you. If I want to replace a sewage line, you bet I’m hiring a contractor I can trust to do that job for me.

And finally, you need to commit to success. Meaning that you make it happen no matter what.

You get a nasty tenant or have to drop some hard-earned dough on a costly repair? So what? Pick yourself back up and you’ll know better next time. You’ll figure things out along the journey because nobody knows everything before they even start.

That’s why I recommend practicing these skills by being in the game, not on the sidelines. Even better, get a coach who is doing exactly what you want to do who can help you develop and master these six skills and show you what’s truly possible for yourself.

Remember, real estate isn’t a “wait then buy” game. It’s a “buy then wait” game. The worst thing an investor can do is stay stuck in analysis paralysis watching others build wealth for their families, forever wondering when it will be their turn. If this is you, let me tell you, your turn is now.

Once you decide to make it happen, you’ll find things will naturally start to fall into place. People will help you along the way. At least that’s been my experience. One of the best ways you can get started in real estate investing in the midst of COVID-19 is by investing in student housing. This is not only a safe bet, it’s also a proven, highly profitable strategy with low to no eviction risk.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.