Student housing can be a particularly lucrative real estate investment niche. In fact, investing around the University of Oregon was how my father originally got his start in real estate. (You can hear him talk about his story on the BiggerPockets Podcast here or me and him discuss the ins and outs of student housing here.)
But student housing is not some easy A, nor is it something you want to jump head first into after pulling an all-nighter cramming. While student housing can be very profitable, it comes with a variety of dangers that you need to be well aware of beforehand.
As I note in this article, student housing has several distinct advantages and disadvantages, which broadly speaking are:
- Higher rents
- Mostly guaranteed rents (because you will require the parents to co-sign for the students)
- Annual turnover (most students leave each year)
- More damage to the units (and more parties the police might get called out to)
If you do want to take the plunge into the student housing niche, these are the steps you should take.
1. Pick a school and confirm it is NOT a commuter college.
The first thing you need to do is pick a university. Preferably, this will be a fairly large university, probably over 15,000 students. But it can work with smaller universities as well. The key is to make sure it’s not a commuter college. A commuter college, as CollegeVine puts it, “…is a college to which a student commutes for classes, rather than living on or off the actual college campus. Instead, the student typically continues to live at home while commuting to school just as one would commute to a job or other commitment.”
The problem with such schools is that since the students aren’t making any special commitment to live near the college, there is no premium on student housing near the campus. While investing near such a school can make sense, it’s just regular, good-ole real estate investment, not student housing investment.
Almost all community colleges and trade schools will be commuter colleges. Smaller schools made up mostly of working professionals taking night classes would also be commuter colleges. Large universities with a lot of full-time students (such as the University of Oregon), on the other hand, are perfect for student housing.
Some universities will be hybrids. For example, the University of Missouri in Kansas City (UMKC) has just shy of 17,000 students. Many are full-time students, but many are not. Its MBA program, for example, is a part-time program with night classes. There are student housing opportunities around UMKC, but substantially fewer than there would be around the University of Oregon or the larger University of Missouri campus in Columbia, MO.
Some colleges have also been “discovered.” Basically, they’ve been overbuilt by large developers that found out how lucrative student housing can be. The University of Oregon is, unfortunately, one of these universities.
Related: How My Investor Friend Grew a Student Housing Empire Using Private Money
The best way to determine both whether a campus has been overbuilt and whether its a commuter school is to talk to people. Ask local property management companies, other investors who do student housing as well as the students themselves. Do you see a lot of student housing be listed for rent near the end of the school year and during the summer? That’s a good sign that the college has been overbuilt. On the other hand, if you don’t see rental ads for properties near campus that highlight that it’s near campus, the school is probably a commuter college.
2. Find the right “zone.”
My dad breaks student housing into three “zones,” which are as follows:
- Zone A: Walking distance from campus (approximately half a mile from campus)
- Zone B: Biking distance from campus (approximately a half mile to a mile from campus)
- Zone C: Driving distance from campus (approximately a mile to two miles from campus)
Of course, you can walk a mile or bike two, but this is just shorthand. Visually, it would look something like this:
Unfortunately, life doesn’t put things into simple circles for us. Regarding the University of Oregon, for example, most of the student housing is to the west and south of the campus. It would look more like this:
This isn’t a perfect drawing by any means, but as you can see, it’s not simple circles.
Again, the best way to find out where the student housing is located is to talk to property managers and other investors, as well as students that go to the university. Finally, look at the rental ads and see where the bulk of rentals are that highlight its proximity to campus. And if the university still has a student paper with classified ads, you can also check to see where the properties being advertised to students are .
My dad’s recommendation is to aim for the B and C zones. As he put in on the BiggerPockets Podcast:
“[What] I’ve tended to do is not buy in A areas because they’re so expensive, but look for the C and B areas that are a little farther away from campus and to focus on those where you have home owners who aren’t thinking about campus rentals, but their house would make a perfect campus rental. It’s a little farther away, but if you made it attractive to students by thinking with them in mind as you rehabbed it or if that would make a great student rental and so you’ve saved by not spending so much in the purchase price, but you still get the advantage of having higher rents than you would normally get.”
The more of a presence you have, the further you can go from the university as well. As students start looking at your properties more, it’s easier to advertise properties that are further away. But when you’re getting started, it’s important to be careful not to go too far away or students may pass you over entirely. For new student housing investors, I would aim for the B zone.
3. Seek out bedrooms, bedrooms, bathrooms and more bedrooms.
The great part about student rentals is that you get to rent the property out by the bedroom instead of as a whole. This is because students think of renting “their room” and not collectively renting the entire property. That means that a 1,500-square-foot, 3-bedroom student rental house may rent for $600 a bedroom ($1,800), while a 1,500-square-foot, 4-bedroom student rental may rent for $550 a bedroom ($2,200).
That’s $400 more just by adding a bedroom! With family rentals, the premium for an extra bedroom may be only a few bucks if anything at all.
My dad would add bedrooms wherever he could. Normally, I’m against basement or attic conversions, but with student housing, I make an exception. If you can cut a large bedroom in two or take part of a large living room and make it a bedroom, I recommend doing it. This serves two purposes. First, as noted above, student housing (especially houses, but apartments as well) are rented by the bedroom. And second, students tend to treat their bedrooms decently and obliterate common areas. Houses with large common areas are also party-bait, and you would very much prefer to have your tenants go next door for that post-game rager on Saturday night!
Finally, I should note that you shouldn’t skimp on bathrooms either. Some of the newer student housing developments I’ve seen are bare-bones 3-bed, 1-bath or 4-bed, 1-bath apartments. These have generally rented very poorly. Students like to have their own bathroom, so especially in oversaturated markets, try to buy properties with (or add) as many bathrooms as possible.
4. Learn how to manage student rentals.
This could be a whole article unto itself, but I will give the basics here if you decide to manage yourself. First of all, most full-time students will not have sufficient income to rent a property. So make sure to get their parents to sign co-signer agreements in case their kids don’t pay their rent. This has ensured that our Oregon operation consistently collects over 99 percent of the rent its owed.
In some cases, you may need to rent out apartments and houses by the bedroom. I would only do this if you’re having trouble renting it to a group though, as it’s more likely there will be drama if the tenants don’t know each other going in. When you rent to a group, make sure to have them elect a house manager who will be in charge of collecting the rent from the other tenants, making the payment and communicating with management. This way you’re not dealing with four or five different people for every property you’ve leased out. And it should go without saying, but you cannot demand that a property only be rented by students. The price you set will be higher than families will generally consider, but fair housing dictates that you cannot discriminate against anyone.
It’s also important to note that in some municipalities, they have restrictions on the number of unrelated adults who can live together. For example, in Eugene, Oregon, no more than five unrelated adults can live together. But we have houses with nine bedrooms (yes, you read that correctly). Fortunately, you can often get around this by making your property something called congregate living. Each municipality is different, but you will need to check the rules before you start investing.
Finally, it’s important to remember that most students will leave each year and will do so at about the same time. We have enough properties in Oregon that we make sure to space them apart a few weeks so as not to overload our turnover crews. Furthermore, we have systematized this turnover process so that each property is pre-leased for the coming school year and all of our turnover and cleaning crews get in right after the tenants leave. This way, we have a very short vacancy period before the new tenants move in. You will want to keep this in mind as you accumulate more student rentals because screwing this part up can cost you dearly.
Student housing is very profitable, but only if done right. You can’t just skip class and show up for the exam and expect to make a profit. However, if you follow these steps, do your homework ahead of time and pick the right university, you should be able to do very well.
Would you consider investing in student housing? Why or why not?