Multi families in college towns

15 Replies

Looking to hear success stories and horror stories (if they're out there) regarding purchasing multi families in need of repair near colleges. My biggest fear is that you know you'll need to find tenants every year and will your property get trashed to the point where it's just too much to deal with.

You could always collect a larger deposit and have the parents co-sign the lease. You would also be able to tell who the "good" students are from the party crowd. I would say that would be safe enough. But the pros of having a continuous supply of tenants, being able to rent rooms individually (which will make you much more cash flow) are huge pros for college rentals. Also, you may not need to find new tenants every year. Most students stay for at least 4 years, so they would probably renew their lease anyway!

@Pat McCandless have you listened to Podcast #153 by Linda McKissick? She is probably one of the biggest and most successful real estate investors out there and she invests in college towns almost exclusively. She has a lot of great information on that podcast. This is an area we are focusing on for buy and holds, also. Some of the reasons we like this strategy are: college towns often have stronger economies than non-college towns because the universities themselves have such a large employment base; demand for rentals; ability to get 1-year leases; parents will usually co-sign; low vacancy rates. Yes, property damage can be an issue, but you're not limited to renting to students. You can rent to faculty and the various support services personnel around the University. Good luck!

I was looking to buy my first in a college town, once I found my banker he recommended the twin south of the one I was looking at. Turns out that was a great move, because I can still rent to the students but cash flow is better in the town I bought in. I don't pay anything other than mortgage, insurance, taxes. Whereas in the college town they expect water/sewer/garbage and even Internet sometimes. With the turnover you can't not pay for those things there.

thanks @Chris Low and @Pratik P. for the feedback. It definitely sounds more appealing from your comments. One question I have is the size of the school. It sounds like a larger school would be more promising than a smaller school. The property I have my eye on is a 6 minute walk to Fitchburg state college which is a 6k student school. Is it still worth my time?

Hey @Pat McCandless

I have a triplex which is a couple blocks from the UIUC in Champaign, IL and have had the property for 5 years now.  When I bought the property it was an ugly duckling, to say the least.  Over the past 5 years I have continued to improve the property both on the exterior and interior of each unit.  In addition I added amenities like in-unit laundry which are what a lot of the students in our area expect for a rental.  Through the improvements in the property I have been able to raise the rent by over 40% during the time I have own the property.  So, my advise would be to look for a property which have upside whether that is from mismanagement, below market rents, deferred maintenance, or opportunity to add amenities.  I would caution you that proximity to campus is not enough to indicate the property would be a good student rental, some of the closes areas to campuses are not always the hot areas for student rentals and every campus will be different.  Do your homework and talk to current students to ensure you are buying in the right spot which will have demand.  I Don't have many horror stories but that is probably because the students know I own, manage, and keep a pretty close eye on the property.  I am quick to respond to their needs and show the students I have pride in my units and in turn they usually respect the property.  Another benefit I am enjoying is students as expected have no issue with technology so they have no problem using technology like, text, or venmo which makes things easier to manage.  

Best of Luck

Scott Dixon

Great points @Scott Dixon this property definitely needs work and is not quite in a rentable condition so it needs more immediate rehab than something that will take place over years like you were able to do.  Also, this is out of state (MA and I'm in CT) so any advice as to how to find out if this is a good area for renting to students, since I can't talk to students myself?

Schools that have issues with overcrowding may also help you by listing your property.  

I'm not sure if this would apply to a school as small as the one you're talking about but I've had great success with grad students. They are busy enough that they're not likely to host a huge party. So far they've been treating it very well and like being treated as adults by me. Every year at least one person renews the lease and fills the rest of the rooms with his friends so I don't even advertise anymore.

@Pat McCandless it just depends on how it cash flows. Have you looked into the market to understand how many rental units are available? What are local rents on the property size and type you're considering? 6,000 students isn't big, but then again, it's bigger than some towns that we invest in. Call some property management agencies in the area to see what rents are and what rental unit demand is like. Look up other local investors in that area - you'll be surprised how much they'll share with you. Try to find a local real estate investor's group to find out more about that area. Go on sites like Zillow and to see what the type of units you're looking at are renting for. These are the numbers that matter. The size of the school is secondary, at best. Think of it this way: If a local employer employed 6,000 people would you think that had a big impact on the local economy and housing market? I would.

@Pat McCandless sorry that was my autocorrect. I meant the town south. We bought 30 minutes south of the college town.

@Pat McCandless @Chris Low @Ty Goulding @Scott Dixon

I want to challenge real estate investors on this issue! I feel that people are too optimistic on college towns.

I don't like the idea of investing in anything that depends on the performance of something else

Follow my logic if you would:

  1. You invest in a college town that has 10,000 year round population and 25,000 during the school year. (Assume year round residents are mostly home owners.)
  2. Everything is good...  Enrollment is up, town is busy, economy is good
  3. Slight downturn hits the economy, student loan bubble pops (look into this)
  4. Lenders stop underwriting student loans or make them much more difficult to get
  5. Enrollment drops 15 - 20%
  6. Now the student population shrinks by 3,000
  7. Rents shrink significantly, vacancy increases significantly
  8. Cash flow is squeezed, some investors suffer foreclosure, no profit, etc.

I believe that there is a bubble in student loan debt. I believe that this will hurt highly levered universities who will then have to reduce expenses, headcount and cut back on development projects and academic program upgrades. These are the things that made the schools popular in the first place so a permanent decreased enrollment is possible. 

I like cities that have year round populations that are stable. If you invest in areas where there is volatility in the renting base, then you might be taking more risk than you realized at first. 

Student loan debt has been expanding drastically for 20 years. I would certainly pay attention to the performance of these loans and the companies that underwrite them. 

I'm glad that you guys are doing well in college towns and wish you all continued success. I just want to see how you would all look at this form a different angle. I could be 200% wrong here but these things have crossed my mind. 

@Pat McCandless  

Hey Pat, there are a lot of investors on Bigger Pockets that live and invest in the Fitchburg area. If you search for Fitchburg you'll see them come up. I recommend talking to them and some real estate agents that work with investors in the area. I have some names I can pass on if you want to PM me. 

Anywhere near Fitchburg State you're likely to get some college students who want to live off campus, but make sure your numbers work at the regular rental rates since it's not a guarantee. 

If you check the schools website too, they have a number of requirements to allow you to list through them, one of which is some type of onsite manager or security which most investors don't deal with in the area. This is why there are currently only 3 companies on the schools offsite list. 

I highly recommend talking with the local investors before making your decision. Fitchburg can have a lot of pockets and a 6 minute walk can make a bigger difference than you might think. It can definitely be worth it, just make sure you do all your due diligence. 

Good Luck! 

I think @Cary Ferguson Jr makes some great points. College towns have enjoyed a boom over the last 10-15 years thanks in large part to government policy that has been shoving money into students' pockets. As prospective college students and their parents start to wake up to the student loan scam and online education becomes more accessible, not only will the loan "bubble" pop, but the traditional 4-year on-campus college "experience" may become a thing of the past altogether.

Since the economy in many college towns is almost 100% reliant on the University (and thus government & private loan programs, donations, etc.), any downturn in that corner of the economy will drastically affect your rental business. I would look really hard at enrollment numbers, what kinds of degree programs are offered, where the University gets its funding etc. If it's a school with many technical, engineering, and medical degree programs then it will probably weather the coming storm better than a small/private liberal arts college.

Alternatively, if Hillary Clinton wins the presidency and introduces basically a single-payer system for higher education, maybe these problems go away and college will just become like second-high school for most students.

I know my alma mater, a large "State" University saw a "surprise" decrease in enrollment this fall and immediately was talking about cutting staff and the like because their budget has been based on the perpetual growth of enrollment and tuition costs as seen the last 10 years. They've already had to temporarily mothball some of the brand new student housing they built because of fewer new students needing to live on campus.

Hey @Max Householder

All good points and from a high level I think we can all agree that the growth in student debt is not sustainable and something has to give.  Currently I only invest in the University of Illinois area (Urbana/Champaign) and even though the state is a mess in terms of budget the University has strong roots as a top public institution.  There are significant head winds in both student loans and online learning platforms that will continue to pressure Universities to adapt and focus on providing value to students.  Honestly I am looking for our market in Champaign / Urbana to continue to build a strong research park that connects academia to industry.  The U of I Research Park is growing at a steady rate and is positioned well to become a formidable hub for the advancement of Big Data in Agricultural.  

I personally will not invest in University areas which don't have some type of world class College or Department that will help to ensure strong student demand for the foreseeable future.  I know in Illinois smaller schools are in a very tough situation with the lack of state funding and absolutely could fail in the next couple years.  This is a real issue and should be taken very seriously by any investors looking to get involved in such markets.  In addition many markets including ours have been overbuilt in the higher-end student rentals with significant competition and what I would consider to be unacceptable vacancy rates.   

I guess only time will tell but would echo your points on "Buyer Beware" in the student rental markets.  

All the Best

Scott Dixon

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