Nearing 1,000 College Student Tenants: Here's what I've Learned
All:
I've recently spoken to a few REIA groups in my area about my business and I thought it would be a good idea to share this info in the forums.
I've been investing in college student rentals for 12 years and currently have ~50 units (SFHs and duplexes, mostly) within a 3-4 mile radius around the University of South Carolina in Columbia. I've rented to close to 1,000 students since I started at the age of 25 and wanted to offer some insight. It's my belief that because of the age, maturity level, number of decision makers (parents & their child) that it is one of the hardest niches in buy and hold investing. I have several landlord friends that have tried to rent to students and said "never again." But it can be done and done successfully
As I see it there are 4 major reasons why you'd want to rent to students:
1) CASH FLOW:
They pay a whole lot more than non-students. In my estimation, somewhere between 20-100% more. I have a SFH home with a cost basis of 60k that rents for $1725, a 170k duplex that rents for $5,000, and a 90k that rents for $3,500. I pay no utilities and these are all one year leases.
2) THEIR CREDIT RATING
College students almost always pay their rent. At least the ones that I rent to. Out of all the students I've had, only had four (4) did not pay their lease in full since I started. Over 4 million dollars of leases and only ~$3500 was not paid. That's over 99.9%. And I do this without parental guarantors.
3) ABILITY TO RAISE RENTS
Raising the rent $100/month on a family is a big deal. Raising it a $100/month on a duplex that 4 students are sharing is only $25/person. The fact that they split the rent up makes it much, much easier to raise rents on students versus non-students.
4) CONSISTENCY OF THE TENANT BASE
Barring a catastrophic occurrence, the University will be there for a long time. Every single year 5,000-6,000 new students will come in needing housing. I know when they need to move in and when they need to move out. Companies and even military bases can close down and move away, but this is highly unlikely with state University.
There are roughly 8,754,999,549,142 reasons why you'd NOT want to rent to students but here are my top 4.
1) DEALING WITH PARENTS
This is usually surprising to a lot of other investors. My least favorite thing about the student rentals are not the students. It's their parents. They're usually well meaning, but when they get involved with the leasing process, a repair issue, a neighbor complaint, etc, it always escalates the issue. And it's because they're only getting 20% of the story from their child. Dealing with and communicating with 6 nineteen year old girls living in a property together is hard enough, I can't and won't deal with their 12 parents.
2) DEALING WITH NEIGHBORS
Neighbors in my market don't like student rentals just as they don't everywhere else on planet earth. They usually have the expectation that students should be respectful, not park in the yard, have loud parties, etc. And they're right. That's what students should do. However, that is not realistic. These same neighbors are living 3-4 blocks from 30,000 students and 25 bars. I've been able to curb a lot of this through large fines in my lease, but even having to pay $1,000 will not always dissuade my tenants from continuing that behavior.
3) IRRESPONSIBILITY OF THE TENANT
If you're renting to students forget about ever getting them to admit to anything. They lie all of the time. "I don't know what happened" or "It was that way when I got home" are the constant excuses I hear regarding damages to the property. I've had over 100 broken windows in the last decade and only had 4 of those admit to breaking it on their own. Full disclosure I was the same way when I was in college. They're not bad kids, but they are kids.
4) CONSTANT TURNOVER
80% of my properties turn over every single year. This makes the summer an incredibly busy time, especially with a lot of these turnovers happening within an 8-10 week span. We tried to expedite these turnovers by using the same wall paint, ceiling paint, trim paint for all of the properties. If you're looking for long term tenants, student rentals are not for you. I've only had one group stay for longer than 2 years and that was only for 3 years.
Hope this insight can help if you're thinking about renting to students. And if you do, Godspeed!
@Staci Kou I think it's a good idea to show them the lease ahead of time and they can show it to their parents if they like.
However, it's been my experience that the "take it or leave it" route is the best way to deal with students in pretty much every aspect. You have to show them boundaries and that includes sometimes before they even sign the lease.
Students in my market aren't super motivated just yet. If you've already gotten kids who want to sign in December, you should have plenty to choose from in February or March.
@Staci Kou I feel like @Will Gaston's advice is pretty solid here. One lease is much stronger for a variety of reasons (many of which you prob already know) than individual leases but mainly for students, it protects you from a tenant bailing on the house bc of an issue that you have nothing do with, i.e. roommate drama.
From a bigger picture standpoint, I would just say to go with your 'gut feeling' which is already telling you to hold out for the right group. I just went through a similar experience with my first student rental and also thought I needed to lock in the first group that stepped up. But with students (and their parents), it's so crucial to lay out your rules/policies bc once you acquiesce at the beginning, it makes for a loooong year
@Michael Lee ,@Will Gaston thanks so much! I passed on that group and got a signed lease from another group yesterday morning so it worked out well. Excited to have our first rental rented out and officially call myself a landlord!
Good luck @Staci Kou. Hopefully, it all goes well. Let me know if you get into any sticky situations you need help with.
@Will Gaston, @Michael Lee and others with SFH student rentals -- in your properties, how many people do you have sharing a bathroom? I've got a 5 br house, 2 bedrooms have private bathrooms, while three of them share the full bathroom off the hall (which is also the "public" bathroom for guests). I'm thinking of putting in at least another half bath or a small full w/shower. With 5 guys cooking, I also got a second refrigerator. Just wondering what others do.
Mine has 6Br, 3full baths, 6 people. That is a better ratio than most. My daughter lived in a house with 6 girls, 1 bathroom, and she said it was fine. Doesn't seem fine to me, but they made it work.
@Anna Watkins @Michael Lee a 3 BR/1 Bath and a 3 BR/2 Bath rents for the same amount (in my portfolio). Where it gets tricky is when it gets past 3 BRs per bath. Students will make anything work based on the location and the bedroom size. In my market, it's unlikely that a half bath would increase the rent.
I've tried to dig really deep on how students make their leasing decisions. It seems to always be an emotional decision (i.e. it's going to be fun living here!) rather than a rational decision (it's got an extra storage or a washer/dryer).
@Anna Watkins Based on my experience, bathrooms are not as big of a deal to students especially when there are other attractive factors about the property (as mentioned by @Will Gaston). But if it's more than 3 people having to share one bathroom, it may be more of an issue. With yours being a 5/3, I think that should be fine. Maybe they will figure out a way to divide the rent so the two with their own baths pay more and the three that have to share, pay less (not saying you should suggest this to them). But I likely would not add a half-bath based on what you briefly described.
@Will Gaston - I spent the afternoon reading through this thread - excellent information and I really appreciate your willingness to share your experiences. I'm working on obtaining my first student rentals in MN this year, with a goal to hit 50 properties within 5 years.
As I work through the underwriting process for our first offers , one sticking point I'm hitting is insurance. The broker I work with has a few provider options; however, some exclude student rentals completely while others exclude water damage and fallen trees (not a risk I'm willing to take). We're going to purchase our first few properties personally; however, I can only use our current insurer (Encompass) for 4 rental properties before that is tapped out as an option.
As a reference point, a policy for ~$100,000 SFH is $800 annually through Encompass. Once we acquire a 5th property and jump to a different provider, the annual premium doubles ($1,600). Have you found more expensive insurance is simply "the nature of the beast", or is there a better way my broker and I can go about keeping costs down on that side? The deals I'm pursuing should work well regardless, but I'd like to shave as much as possible on the expense side (without taking unnecessary/ill-advised risks).
If things take off properly we'll setup an LLC and move into a commercial loan portfolio for the long term, so I would be curious whether that helps/hinders options as well.
On another note, is there any chance you'd be willing to share a generic copy of one of your leases? I'm currently in the phase of adjusting a stock lease from a PM and it sounds like you've got some great tips for how to keep things on track.
Any insight is much appreciated!
Keith Linne
Encompass will issue/cancel upon inspection that it is a student rental in most cases. Not saying this to be a downer. But as a precaution to you.
1. If they ask the question, is this student housing, answer truthfully. If you don’t, they can void the policy post-claim. Which is not ideal.
2. If they inspect and cancel (they have the perfect right to do in the first 60 days), then your stuck with your second best option, so make sure it cash flows even at those numbers.
But any large student housing owner is not using their home/ auto carrier to protect their butt. Find a commercial independent broker, they’ll get you on the right track.
As for us, we don’t even play in student rental coverage until about $30-50k in premium which is about 20 houses min. So none of the above advice is to induce you to contact me, but to caution your plan.
@Derek Lacy - thanks so much for the feedback! I originally used $1,800 as my insurance placeholder during underwriting for this first property (assuming for a commercial style policy), so I’ll still be safe cash flow/return-wise. I have to say, I was hopeful $800 annually would be attainable, but figured it wouldn’t be likely. My understanding is that Encompass doesn’t specifically ask the dreaded student housing question on their app (I certainly have no intention of lying on an app); however, if I’m understanding you correctly, it sounds like regardless they reserve the right to inspect in the first 60 days and cancel if they determine it is a student rental? Would you happen to have a recommendation for someone who might be able to help out a small fish on the commercial front in MN? I’ll do some networking as well, but a warm connection is always preferred.
BHHC tends to be good on the under 20 student rental market. They are a subsidiary of Berkshire Hathaway.
@Keith Linne I agree with everything @Derek Lacy says. Find the right insurance from the beginning and you won't have to worry about them canceling a policy. I looked at my last policy for my last purchase and it looks like it was from a company called Penn-America. A friend of mine who owns a Nationwide agency found it. I've also had pretty decent luck with Auto-Owners. Hope this helps.
@Derek Lacy, @Will Gaston - Thanks for the additional insight regarding potential providers as I'm getting started in the student rental space. I'll look into BHHC and Penn-America. I have Auto-Owners for my general contracting GL policy, so will look into that as an option as well. After some networking with other local investors I've come up with a few smaller shops that should have good insight into the best avenues, so will pursue that as well. Great to finally be jumping in!
@Will Gaston Thanks so much for this post this was just what I was looking for. a few questions:
1. I know you said that you don't have parents co-sign. How do you verify the creditworthiness or ability for the students (or their parents) to pay the rent? How do you find out their parents occupations (i.e you mentioned some parents were Lawyers) if the parents are not filling out applications?
2. When purchasing and getting the home ready for rent.. many of the homes in the college towns in our area are built 1900-1930s. There are a lot of properties that have additions that are not permitted (I.e. Bathrooms or bedroom add ons). Would you spend the time to bring those houses up to code and have them permitted? Or would you just fix it up nicely and rent it out as it is? Id love to hear your thought on that.
Thanks again for your time!
Originally posted by @Jennifer Matsumoto:
@Will Gaston Thanks so much for this post this was just what I was looking for. a few questions:
1. I know you said that you don't have parents co-sign. How do you verify the creditworthiness or ability for the students (or their parents) to pay the rent? How do you find out their parents occupations (i.e you mentioned some parents were Lawyers) if the parents are not filling out applications?
2. When purchasing and getting the home ready for rent.. many of the homes in the college towns in our area are built 1900-1930s. There are a lot of properties that have additions that are not permitted (I.e. Bathrooms or bedroom add ons). Would you spend the time to bring those houses up to code and have them permitted? Or would you just fix it up nicely and rent it out as it is? Id love to hear your thought on that.
Thanks again for your time!
1) I don't do any of that. I charge very high rent for a properties that are right beside college bars and/or the football stadium. 99.99% of those who respond are students. The other .01% come take a look and realize it's not somewhere they want to live, especially at the price I'm asking. I don't think asking for cosigners is a bad idea, it's just been my experience that it's not necessary. The administrative headache and the additional phone calls from parents are not even close to worth it. I'm in the minority on this in the industry but it's worked great for me.
2) It's a case by case basis but I almost always err on the side of making the houses nicer. Almost all successful student landlords that I know have the same mindset. Vacancy is a killer in this business and so you need to differentiate your house from all of the others out there. I've never once regretted making a property nicer (maybe even too nice) than it should be. Definitely regretted not doing enough, however.
Amazing post, thanks to all who have posted here, especially @Will Gaston. A few questions now, and please forgive me if they are stupid questions, as I am pretty new to this game.
How do you fill all vacancies in each property? Do you advertise the number of tenants you’ll accept, and just leave the ad up until its filled?
How do you handle the lease signing? Is each tenant signing their own copy of the lease and you just maintain each one in a master file, or do they all have to sign the same copy?
I’m just trying to understand the basic logistics of this…also, how do you handle 1st/last month’s rent and security deposits? I’m assuming each tenant pays a percentage, but just wondering if you did something different.
Lastly, with one lease, what are your options if one of the kids wants out? Do you even entertain the notion of them finding a replacement, or do you just say adios, as long as you still get full rent for the remainder of the lease? Thanks so much!
Here's how I do it:
1) Filling vacancies in my market hasn't been a problem, we have to turn some away. They come with pre-formed groups. The rent is the rent for the whole house. It's up to them how many students they want to share the house/rent with.
2) One lease, they all sign the same lease. They are all equally responsible for all requirements of the lease, peer pressure works, use it to your advantage.
3) 1st/last month’s rent and security deposits. They are all equally responsible, it's up to them how they contribute, in what %. Some rooms may be more desirable than others. Up to them who gets the best rooms and how much they pay, as long as I get the total rent I don't care what agreements they come to among themselves.
4) If one kid wants out they have to find a replacement (I must approve the candidate), or the remaining kids have to pick up the slack. Do you see a theme here?
@Tim S. yep, I definitely see the theme! As for payment, do you just pick one of them ("house dad/mom") and say they are responsible for collecting all rents or fines and submitting them to you in full each month?
I can definitely see how college rentals are more headache, but I think the upside outweighs the downside, and I'm very interested in trying it out.
@David Sussman I do it the exact way @Tim S. describes. Almost word for word. Sounds like he's had a ton of experience as well. Putting them all on one lease is crucial. Peer pressure works 1000x more than anything I would ever say to them.
As far as collecting rent, we use Appfolio. It requires that the entire rent amount be paid to be able to submit the payment. So it's an all or nothing proposition for the house.
We won't chase rent and don't have to even if we did. We usually have 3 or 4 months a year when all ~150 students pay their rent on time. They know we're serious about late fee enforcement.
@David Sussman They are adults, it's up to them to figure how the money is collected and paid. They know how much is due, by when, and how to get the funds to me. I don't micro manage them.
For maintenance issues I do ask that they choose one person to be the point of contact, gets too confusing to deal with multiple people.
Another great point @Tim S. I also do that as well. We call them the "House Mom" or "House Dad" and make them decide who that person is going to be at the lease signing. That has helped with tremendously with communication, which is always a challenge with this niche.
Do any of you require the tenants to obtain renter's insurance? If so, how do you enforce that? I'm just thinking that students being students, they're going to try to get away with anything they can, including immediately cancelling a renter's insurance policy right after moving in...
I learned it all from you @Will Gaston thanks!
@David Sussman I do. We require that each tenant provide proof of insurance before moving in. You can have them list you as additional insured if you're concerned that they're going to cancel the policy. You would then get a notice from the insurance company if they quit paying.
Although I've never done it, you maybe could also require that the pay the premium in full before moving in and provide proof of that.