Beginner’s Guide to Buying Student Housing: Pro’s & Con’s

Student housing for college students is quite expensive.  Student housing generally means apartments and houses that are located within a reasonable distance of a university or college. Sometimes, condominiums in big cities that are favorably located can also be considered as a student housing option.

Because of the fact that on-campus student housing is relatively more expensive, it opens up an opportunity for an investor to create some income. Besides the high rental factor, student housing may also lose favor in case a student wishes to live outside a conventional dormitory or outside of the campus area.

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Why Invest in Student Housing?

From an investor’s perspective, rental housing can provide several advantages. Firstly, an investor in student housing can earn much higher rentals from such real estate than residential real estate. The higher rentals are possible when students place a premium on being able to live close to a college campus.

Average families may not place as high a premium on being close to a college campus. Hence, they may not be willing to pay as high a rent as a student may for a favorably located property.

The second advantage of renting out to students is the low probability of default. If the deal is structured right, then a student would normally sign the lease along with a co-signer. The co-signer can be a parent or a family member of the student who effectively provides financial backing to the investor’s lease.

Besides, student loans may also be availed by student-tenants to pay the rentals for the property. So, the economic occupancy rate for student housing is often as high as 99%. With the backing of parents and other sources of funding, rental housing generally does not see any major defaults. It can prove to be a reliable source of income for an investor.

Student housing is also quite predictable. At the beginning of fall, students will flock to a college town or a city area with a university. Given the volume of students who will search for rental housing, an investor should see reasonably strong demand.

When the semesters end, many students will go away for a few months. Some students who stay back for summer school, research, or internships will still need housing. So, time-wise and demand-wise, student housing can be more predictable than other types of real estate.

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Some Risks with Student Housing

While the demand is predictable and somewhat stable, one must remember that there is a high likelihood of student housing going vacant for about three months in the summer. Most of the campus is quiet during that time as regular semesters finish by mid-May.

One can always reserve the summer months for maintenance work, paint jobs, refurnishing, etc.

The other thing to understand about student housing is the high turnover rate. An investor will not be seeing five or ten year leases with student housing.

Students tend to change housing after two semesters or about 9 months. Hence, the investor has to be prepared for finding tenants every year or so. There is a good chance that the investor will have to do some sort of sales and marketing each fall.

Another issue that may arise out of short-term tenancies is the upkeep of the property. Student lifestyles and the short-term nature of the lease may result in greater wear and tear on the property. A family or a long-term tenant is likely to be a more responsible tenant than a college student.

The investor would have to make sure that the ground rules are laid out and clearly communicated to students who wish to rent the property for a few semesters.

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The Economics of Student Housing

A student might pay around $2,000 to $4,000 per semester depending on the location of the college or university. A dorm without a kitchen might also require the student to purchase a meal plan (many schools make this mandatory) which may cost anywhere between $1,000 and $1,500 per semester.

So, per year room, board, and meal costs can run up to $25,000 to $44,000. If summer months are also considered for students who take summer classes, then the yearly expense goes higher.

Now, if you can find a 2-bedroom house for $300,000 and aim to earn a yield of 10%, then the rental would work out to around $30,000 which is cheaper than on-campus housing or almost comparable to it. A double-digit yield would be considered pretty impressive in a real estate investment.

A condo in a big city or an independent house in a college town can be found around a $300,000 range.

By creative thinking, a 2-bedroom house can be converted into a 3-bedroom property and that would bump up the rent even higher.

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The Expenses of Investing in Student Housing

You can either manage your student housing property yourself or you can hire a property manager. A manager might charge a commission in terms of a percentage of the monthly rental or a fixed monthly fee irrespective of rental levels.

Other expenses might include maintenance costs, property taxes, utility expenses, etc. If the student housing property is a condo, then a homeowners association fee is to be paid by the property owner. This fee would include taxes, water charges, garbage pickup, and other utility charges.

Another major expense would be property insurance. Whether you own a condo or a house, you will have to purchase insurance as per state laws.

Since the turnover rate in student housing is relatively high, the marketing costs to lease out your property will be recurring. There is a good chance that you will have to spend on sales and marketing every 2 semesters or at times twice a year, once during Fall before school starts and once during summer.

If you buy a property that is not in great shape, then you will have to incur one-time expenses on upgrading or touching up the property.

Bathrooms may have to be re-done, the roofing or the heating might require some work, and a paint job may be needed.

Be prepared to spend on upgradation. A clean and welcoming property will get leased out more easily than a shabby-looking property.

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Other Tips for Buying Student Housing

If you do decide to dip your toes into rental housing, then make sure you select the market well. There are some places like Eugene which have a lot of new supply. There has been some overbuilding in the case of the areas surrounding the University of Oregon.

Overbuilding leads to a fall in rentals. Make sure you ask around and do ground research to find out vacancy rates in a particular town/locality.

An investor also has to think about yields. There is no point in buying a property that has been bid up so high that it would take an investor a few decades to break even. Rentals may be high, but the purchase price for the property could be disproportionately higher.

An investor should study the type of college near a potential acquisition candidate. A large independent university is what one should look for. Community college and smaller regional colleges that are attended by city/town locals are no good.

These smaller colleges are “commuter” colleges. Students will already have a place in the city/town and will simply commute to the college for their classes. Even if students live near such colleges, an investor cannot expect a significant premium in rentals.

While zeroing in on the property, study how the rental rates trend with the distance from the college campus.

For example, housing very close to the campus may attract the highest rental premium, housing a few minutes away may attract a lower premium, and housing an hour away may attract no premium. Select the location of your investment wisely.

Converting a property into housing for students when the property is too far away or is located in an oversaturated market will not deliver reasonable rentals.

Most student housing is rented out by bedrooms. So, if you can legally add another bedroom, then that is extra rental yield on your investment.

If you can think creatively and turn a 3-bedroom house into a 5-bedroom house, then that will add to rentals even if no additional square footage is being added.

Adding more bedrooms does not work with family tenants because they expect square footage to also increase.

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