Student Housing: A Case for Adding Condominiums to Your Portfolio

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I have been investing in real estate since 1998, and I have never wholesaled or held condominiums in my business. I found out early on that most real estate investors just aren’t interested in those types of properties. The main reasons are the HOA (Homeowner Association) fees. All of these communities have monthly fees that the homeowner pays in addition to the regular mortgage.  HOA fees might include the water, garbage pickup, the master insurance policy on the main structure, or may include other things on occasion such as your heat. The fees will also include exterior maintenance, including lawn care, and snow removal in most cases.

As you know, the typical mortgage payment will include property taxes and insurance. When a retail buyer is purchasing a condo, they will add those association fees to your mortgage payment when they are qualifying you for a loan.

If you are a landlord that is renting a condo to a tenant, it can be much more difficult for the property to cash flow with these additional fees. That raises the question of whether or not these properties are ever a wise investment over the long term.

Why You Might Want to Add Condominiums to Your Portfolio

I have recently changed my thinking where condos are concerned. If you live in a city that has a major university, you are probably aware that student housing has become a big issue in these areas. Older students and graduate students in particular, are looking for other living arrangements outside of the dormitories and student apartments on the university campus. I personally know several real estate investors that now specialize in this type of housing.

I recently heard about a condominium that is part of an estate in a nice area near the University of Louisville. I believe that after some cosmetic updates you would have a total investment of $45,000-$55,000 for a typical unit. They have two bedrooms and one bath with a total square footage of about 950-1030 sf. Not bad compared to dorm living.

At first glance the HOA fees seemed really high at about $265.00. After doing some checking I found out that these fees included everything except the electricity.  The building has steam heat and that is included along with the water. Students would know what their expenses would be every month.

As a landlord, you would never have to think about replacing a roof, the heating system, or other major items in this property.

How Much Would It Cost Me for A Typical Condo In This Building?

If you were to get a $55,000 loan at an investor rate of 6%, for example, the monthly payment would be about $330.00 on a 30 year loan. If you were to add another $65.00 per month for property taxes in my area, you would still be at about $400.00 per month.  After adding the $265 HOA fees you are at $665 per month or $7,980 per year. Not bad at all.

How Much Do Students Currently Pay?

Well I did a little checking on dorm fees for a normal state university; not anything fancy. And I looked at the actual costs for my area. Rates were given for 4 month semesters.

-Dorm fees for a shared double room were $2300-$2400 per semester per student. (In addition to this, there is a required food plan for any dorm without a kitchen that adds another $1460 per semester). So a regular dorm room for 2 students for two 4 month semesters would cost $9200 – $9600 for a 2 semester school year. You can add another $4600-$4800 to that if the students attend school year round. You would then be looking at about $14,000 annually. 

-Now for a university student apartment, the fees for 2 bedrooms with single occupancy (one person) in each room and a shared living room are $2754 per student per semester or $11,016 for two semesters. Once again, that number is higher for 2 year round students ($16,524).

-The final option I looked at is a nice, newer privately owned for profit student housing complex near the campus. I only compared 2 bedroom units. One difference to note is that all of their units have a bathroom for each bedroom.

These student apartments are priced by the bedroom and leases are for 12 month terms. (In reality, they are only 11 ½ months but students are charged for 12 months.) The leases run from August 17th of each year, to July 31st of the next year. That gives the complex 2 weeks to turn an apartment between semesters.

The prices for these are $715 per bedroom per month or $1430 per 2 bedroom apartment for an annual total cost of a whopping $17,160.

How Much Was Our Condo In the Example?

Our condo had an annual cost of just under $8,000 per year. The privately owned student housing cost just over $17,000. What a big difference!

As a real estate investor, think about the opportunity here. Your rental income would be well above average even if you charged less than the “for profit student housing complex” in the example. You could create your own market for your niche housing.  And, if you have a child that is about to leave for college, you could save some serious money and build equity in a property at the same time.

Photo: Daniel Borman

About Author

Sharon Vornholt

Sharon has been investing in real estate since 1998. She owned and operated a successful home inspection company for 17 years. In January of 2008 she took the leap of closing her business to become a full time real estate investor.

14 Comments

  1. Did you end up purchasing the condo?

    The one thing that people do need to be made aware of is the ability of the HOA to not only raise their fees, but to issue special assessments. Like any other property, condo buildings still have capex and the big things (new roof, etc) will still show up in your pocket book in many cases in the form of that nasty special assessment.

    • That’s true Josh. Those HOA type of fees can and do go up over time.A buyer would need to know this.

      I just looked at the property today did the inspection. One of the big questions I have about this property is who are the folks are that receive these fees and take care of this property. They are getting almost $36,000 per year for these 12 condos. It is an older brick building with a metal roof. The boiler is a 2003 and they last a long time. The water heaters look brand new but there were no inspection stickers on them. Overall, the condition of the property is good. But there are definitely some things that should be taken care of by this association.

      One thing that concerned me was that there were a couple of steps out front that had large pieces broken off of them. That is a red flag for me since this is a safety concern. A repair like that should have been done. I plan to make an offer on this unit and then wholesale it if my offer is accepted. My offer would be subject to getting satisfactory answers to these questions about the HOA.

      I know a couple of investors in my area that work in this niche now but truthfully, I had never taken a close look at the opportunities here.

  2. Is it possible to look up any sort of public records or business history of the HOA? Are things like past liens, court cases, etc. bits of public record? It seems it could hinder wholesaling if the public record on the HOA is spotty.

    • I have gotten the info on the HOA, and they are a local company. It shouldn’t be any problem to contact them and get the information we need. I guess if there were any legal action taken in the past, that certainly would be public record.

      I will make this a contingency in the offer for sure. I want to see those documents that pertain to the HOA.

  3. Sharon,
    As a side biz or hobby investor, I read many of your posts, most are very enlightening. As a professionalin this business you have a ton of great experiences to share. The points many of the commenters are making about the HOA are spoon IMHO. I avoid anything with an HOA, just for this reason and from past experience with family owned resispdences. The HOA like to increase dues. If the building or community becomes sparsely owned the double hit of increased rates and poor maintence can become a nightmare leading to as Josha pointer out, special assessments. A list of past assessments is also good to have.

    I must admit also that in this case I don’t understand the math presented in the original post. Doubling the dorm costs for two semesters for a two bedroom is appropriate, however adding the meal plan to “rent” seems a stretch. As most students take the summer off, the property has a greater than average chance of going vacant during this period. Many of the student rentals in Raleigh, charge slightly higher rates for a two semester lease, providing the “out” for the kids and their co-singing parents.

  4. Kevin –

    This particular property is in a very desirable location not only for students, but just in general. The HOA fees are relevant to the extent that your expenses for this property (if it were to be rented to a student) would still allow it to provide above average cash flow. The meal plan was only for information purposes, it is not in the figures at all.

    This living situation is not really intended for 2 semester students. Those students would most likely live in the dorm. The students in the privately owned housing complex in this example live there year round. They either go to school year round, or they get a job in the summer and continue to live there. The person I spoke with told me that in general they are a few years older than those just entering college, and they only do leases for a 12 month period; nothing less. This type of niche housing would only work with 12 month leases. Also, the lady I spoke with at that complex told me there is a waiting list for those pricey units every year. I would have never guessed that.

    One of my best tenants that I ever had was a 20 year old student that rented one of my houses, and he stayed there through graduate school. He was a responsible adult that took care of the property.

  5. I definitely agree, Sharon. Rental housing around universities has its perks and can be a great investment so long as the total monthly expenses do not outweigh the rents. My wife and I just started our real estate portfolio last year after buying a triplex near our local university. Although we looked at several condominiums we eventually pulled the trigger on a house instead. However, apartment complexes with HOA fees are never off our radar. I don’t believe HOA fees should be a deterrent for investors, because good deals are out there with every type of real estate.

    • Jason –

      I think it’s either a deal or it’s not. The numbers have to work no matter what. The thing that was so interesting about this was the location and the potentially low price. I’m still trying to see if we can work it out. I do think you have to have the parents sign on the dotted line in case they do a lot of damage.

  6. I think rental properties can not only be beneficial in the long term but if you’re lucky enough like myself to rent near a college and do it by the room then you can often end up making money every month above and beyond the cost of the expenses.

    Now that also depends on how much your mortgage payments are and how much money you put down but I manage to profit a few hundred dollars which help me out with my other house.

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