Investing in College Towns
Real Estate Agent · Hayden Lake, ID · Member since 2020 · 7 posts · 8 votes
Hey everyone,
I was looking into buying a duplex or single family home in a small college town of about 20,000 people and the school size is about 30,000. During the summer 90% of the university students leave, not sure if that means much if I advertise a 12 month lease. The town revolves about the University not to much here besides the University and a engineering facility.
Just wondering everyones pros and cons of buying in a college town!
Hi @Dan Talmi I am an agent in Albany, NY. The student market is generally very lucrative here. SUNY Albany and St Rose create a very high level of demand for student rentals in the area. That being said I have been hearing that the schools might not bring everyone back to campus right away. So there could be some decreased demand. The numbers on a typical student rental look like this... Purchase price: 225k, Rents: $2800-$3000 monthly. Operating costs are usually generally hover around $1100-$1300 and your mortgage would account for another $800-$900. You can usually make most student rentals cash flow $1000 per month if you get it at the right price. Some challenges are finding a property manager if you need one. There are those who do it but aren't that good. And those who are good usually don't like to deal with students around here. I find managing it yourself to be the best way to go generally. Please feel free to reach out if you have anymore questions about Albany student rentals!
@Matthew Konkel in generally I think pros of student rentals are that you can get more rent than long term rentals in many markets and depending on the situation a lot of the times the rent is very secure. Whether it is parents or a student loan paying for the housing. Downfalls are that you generally have more work to do in terms of turnover and management. Other things to watch out for is making sure you have accurate rental rates. In my market the rent is paid monthly year round (even when the students aren't there). In other markets they may advertise it as "X monthly" but in reality they get semester payments and don't get paid for the summer and winter. Despite some negative I believe college rentals are a great investment avenue. Hope this helps!
@Alison Walden if you're investing those numbers are slightly off because almost all reputable lenders require 25% down. Mortgage payment with taxes and insurance is 1459.80/month. Annual debt services is 17500, NOI is 23000, yearly its making the difference aka yearly its making $5500.
@Account Closed 25% down payment will only make the payment lower which will only increase cash flow. But you don’t have to look that hard for a commercial lender or even a traditional lender that will do a 20% down loan on an investment property. (CapCom FCU).
The only time I’ve ever seen 6% closing costs is through a quicken loans or rocket mortgage. If you use a local lender like CapCom or SEFCU all of the fees (bank fees, mortgage recording fees, title fee, attorney, inspections, appraisal) would come out to around 3% and that is on the high side.
As for lawn maintenance and snow removal...sure if you want to hire those things out your cash flow will be lower. But what I said is “you can get your properties to cash flow $1000 per month.” So like anything if your going to hire someone to do part of the work your going to make less. But I would still take a deal that cash flows $950 a month all day.
I noticed a few others mention missing expenses as well and I understand there could be some other costs to consider. But those costs are going to depend on what the persons goal is. If you want to scale then yes maybe you need to advertise and need a website. If you want to be a smaller time landlord (like myself) it’s not very hard to get a property rented with the high demand in Albany.
Please feel free to let me know if I’m missing anything else! Only will help us all grow!
@Nate Monson everything you said isn't incorrect - but when I"m running numbers I make sure I have everything incorporated into my spreadsheet, I want the absolutely worst case numbers possible. I'd rather be safe than sorry and that's exactly what I tell my clients too, most of the investors that are looking here are obviously not from within the same location they're looking to invest into - so those maintenance costs are kind of a necessity. Regardless - you're not wrong that it's not hard to find a lender to do less downpayment, but as I mentioned - i want worst case numbers. 6% closing cost is what I've noticed while using homestead funding - they've always been quick to close loans - but you end up paying for it. Unless you're doing units more than 4, you'd be losing money using a commercial lender because they're looking at lower terms.
@Account Closed I hear what you're saying man. Trust me I want the worst case scenario too, but I also want to run realistic numbers otherwise you end up analyzing properties forever and not buying anything ever.
I'd check out some of the stuff that other banks have. I've had a few clients who have wanted to use Homestead before too for a few clients and they are quick but a few days of speed isn't really worth double the closing costs in my opinion.
@Matthew Konkel I had looked at a few MF dwellings in a small college town in Midwest this spring. Ultimately, we did not move forward, but the one thing that worried me and that you should take into account is that many students have their housing figured out for the fall semester already. With this in mind I personally would build in a larger near term vacancy reserve.
Pros: Consistent income, very low vacancy, potentially higher rent
Cons: Entitled and irresponsible student tenants, helicopter parents, high turnover, management intensive
Note: 1 and 2 bedroom units are much easier to manange than 3+ bedrooms. 3+ bedrooms means many people, many parents involved and roommate changes.
The college town where I went to grad school had 12 month leases in most cases. There are 7 month leases available for more per month.
I explored investing in a student rental before covid (not in a college town) since my new job locates inside the university. However I am glad I didn't because I am concerned about the future of American Universities in general, especially second and third tier ones.
With students doing virtual classes till who knows when, they're not going to need off-campus housing. I know most of the universities seem very optimistic about reopening in fall, but spikes of cases in states that reopened bars and restaurants have not been very encouraging. Students and parents are also going to perhaps find out the education they get is not worth $50k a year on tuition, room and board. On top of that, many state universities receive a large chunk of their revenues from international students who pay hefty out-of-state tuitions. Most of them are likely not coming back this fall due to expanded travel bans and health concerns.
Covid might be a catalyst for some long term changes of the American Universities, much similar to the potential long-term change it might bring to remote-working. I can see growing number of students enroll in massive online courses taught by prestigious professors at top-tier universities, saving tens of thousands per year while getting better education.
Personally I decided not to invest in student rentals, even though I work on the campus of one university, and live near another. I would suggest taking into consideration what's laid out in this New York Times article, from a NYU professor, especially when investing in a college town with little to no alternative industry to support quality renters.
Our strongest performing asset currently is in a college town. (NOT student housing)
We bumped rents up $200 after acquiring pretty in a fairly short amount of time.
Returned all capital to LPs after a refi and now playing with house money.
Currently performing strong through Covid with a current 69% projected IRR.
All depends on how you approach these college towns :)
I recently made the plunge into student rentals myself (Binghamton). It has the advantages of higher cash flow since you are renting individual bedrooms, and with most students out every summer, that gives you an opportunity to take care of maintenance and upkeep. COVID-19 is temporarily disrupting college education, but that will soon pass. The bigger issue, as mentioned earlier in this thread, is the future necessity of college education given its huge expense for frequently minimal benefit. Conversely, it's important to keep in mind that, in addition to education, colleges also provide jobs in associated industries such as research and health care. I think that, from a real estate investment standpoint, one can mitigate any future adverse effects on college education by focusing their investment activities on large public universities which have the advantages of larger student populations and lower tuition.
I didn't see any comments above on the following, but surprisingly (or not), some state governors identified areas around universities, airports, and other commercial centers as Opportunity Zones in addition to the lower income areas that we typically associate with OZs. So while certainly not the deciding factor in any investment, it is worth looking into if OZ treatment is in play for the college towns that you evaluating.
@Matthew Konkel
@Paul DeSilva-That’s Crazy! WSU announced a couple weeks ago that students are going to come back in for the Fall semester. With that being said we are averaging 3 new cases a day, so I would not be surprised if that changed. Definitely something to watch before I Buy!
The tenant who told me this is a music teacher, he said no IN person music classes until fall 2021, (I'm sure you can see why). From what he said some classes will most likely resume in the fall or spring depending on the class. IMO I don't think that college dorms or student rentals will be the same for a while, here in NY anyway.
Also here in NYC and surrounding areas, I personally don't see anyone wanting to rent by the room or have roommates for a while. If your town has more cows than people maybe it's a different story where you will be investing.
@Matthew Konkel looking back at this post and watching the news the past few days, I think that college rentals are probably one of the most risky if not the most risky investments that can be made right now!
I love the idea of juicing rents with college rentals, corporate rentals, or airbnb. But the biggest mistake I see from newer investors in that space is their underwriting of the property at those inflated rents, and subsequently paying (above) top dollar for the property.
What happens when that corporation closes their doors, the college builds their own housing facility, or covid19 all but shuts down airbnb rentals? Then you're stuck with a property you paid above retail price for, and you can only lease it at market rate rents.
Always always ALWAYS underwrite the property at an annual market rate lease amount. If that 4 bed, 2 bath home will lease for $1,500/m to an All-American family, then you underwrite it at that amount.
Shout "Hallelujah!" if you lease it out to a group of students for $600/bed and it brings in $2,400/m, and all that excess cash flow goes straight to the bottom line. But worst case scenario, with a market rate renter, you know it will still cash flow.
@Matthew Konkel looking back at this post and watching the news the past few days, I think that college rentals are probably one of the most risky if not the most risky investments that can be made right now!
I agree. From the university reopening plans we have seen so far, only about half of students will be allowed on campus in any semester. For those on-campus students, many classes will still be entirely online or partially online. I would guess even some of the on-campus students will opt to live at home, if they live within two to three hours to the university and they're only required to be on-campus less than a third of the days of the entire semester. This proportion might be substantial for second and third tier universities where more students are in-state. This means demand for off-campus student rentals will be half or even less for the next school year. Very curious to see how this plays out. Hopefully reality is not as bad and the situation resolves within the next year.