Renting out to college students is one of the most lucrative and at the same time risky endeavors. Each year new wave of freshmen move out of their parents’ houses and look to rent a student room in a close proximity to the university. Acquiring a buy-to-let property in a college town can guarantee you high tenants turnover, low vacancy rate, and a stable income.
Why is it a good investment?
Perhaps you are a cautious investor and reluctant to add this risky demographic group into your financial equation. This way you are missing a large chunk of the population, which keeps expanding its market share in the rental sector. Just look at the numbers:
In 2017, around 20.4 million students attended American colleges and universities, which is 5.1 million increase since 2000.
Growing number of older Americans are going back to schools to obtain a second degree or change their current occupation. In 2009, only around 40 percent of college students were 25 and older, while by 2020 this figure is expected to rise to 43 percent or9.6 million.
The United States is the main educational hub, which attracts countless international students. In 2017, the number of international students reached 1.18 million and keeps growing at 2% per year. That opens a big market for those who can provide room and board to overseas students.
There are whole industries that are built around college towns. Bookstores, coffee shops, diners, entertainment venues which exclusively serve the student population. Most of the chain retail stores, such as Target, Walgreens, Walmart operate near big universities and offer discounts and deals for students. They derive sizable incomes from the constantly growing student population, why shouldn’t you?
Return on the investment from the residential neighborhood is highly dependent on the state of the economy, the presence of jobs in the area and the residential trends. Once it was popular to live in a single-family home with a green lawn, now it is trendy to reside in an urban loft or a condo.
In the same time, college towns can sustain a constant demand. The high demand for rentals is permanent and maintain the level of rental prices in the area even when the rest of housing market is failing. Students will always be inclined to live near campus. Therefore, forget about vacancies and low turnouts, the lease agreements are sold out years in advance. You also don’t need to spend plenty of time marketing the property because the location sells itself. A smart investor will always consider buying a house to rent out to students.
Pitfalls to consider
Investment in student housing can give you a great financial boost, but it also can eat up your fortune. You need to do a thorough research on the topic, explore the area you want to purchase property in, learn about colleges and universities nearby. Some of the university areas are already oversaturated by rental property. Real estate agents and brokers already divided spheres of influence.Those areas already have an established market and it would be really hard to squeeze in.
Certain areas, especially in the South, are dominated by big student housing developments that are specifically designed to host college students. Those companies build and operate their property. They have maintenance crews, gardeners, and guards on site. This kind of student housing offers exclusive conditions for the affordable price since they sell in bulk. In order to survive in this market, you need to provide exceptional services, be flexible and be ready to offer significantly lower prices.
However, there is still plenty of untapped waters in various college towns and especially in urban campuses. If you invest time and effort into the analysis of the market you can find a property at a reasonable price which can guarantee good financial yield. Nevertheless, before engaging in this risky business consider difficulties and costs of renting out to college students.
Problems with student renters
No credit score or credible background. You will not be able to apply traditional screening criteria to student renters. Majority of them just moved out of their parent’s house, still covered under parents insurance and does not have a sufficient credit history. They do not have a track record or landlord references. Additionally, even if they have a part-time job, it would not generate adequate income to pay rent and they have to rely on student loans and parents support. Therefore, the standard assessment will not able to verify if the student is capable to pay rent on time.
High depreciation rate. For the big portion of students, it is their first time to live on their own. They still need to learn how to take care of themselves and their residence. Regular cleaning, proper use of amenities and appliances, changing light bulbs or faded curtains might be really burdensome for them. Students usually have small regard for the rental unit and can be really reckless about its exploitation. This attitude can cause minor damage and accelerate the wear and tear.
Conflict Environment. College students lack experience not only in maintenance but also in sharing the space and resolving the casual conflicts. The possible conflicts may range from roommate quarrels about cleaning dishes to hostile situations with neighbors annoyed by the noise. Students have yet to learn respect to personal boundaries, reach tacit roommate agreements and build trust with the neighbors. A landlord might need to occasionally step in and mediate those conflicts.
Strategies to mitigate the risk
Demand a guarantor or a co-signer. The absence of employment history and good credit score does not signify that the student would be a bad tenant. Nevertheless, you need to install additional safeguarding mechanism. Guarantor or a co-signer is legally obligated to pay rent or reimburse the landlord for damage in case if the student fails to do so. Student co-signers have to show a verifiable income and good credit score. You need to screen them thoroughly to secure your investment.
Perform Alternative Screening. Student rental application should be assessed differently. Despite the fact that you cannot check student’s financial behavior and money habits, you can still access their character. Conduct a thoughtful interview, ask about their lifestyle and hobbies. You can also request university records to check for disciplinary actions or to review their academic standing. Academic performance can tell you a lot about student’s ability to commit, be responsible and play by the rules. Recommendation letters from former professors or sports coach can be an additional resource for that matter.
Collect security deposit, consider insurance. Security deposit is your ultimate protection from anything that goes beyond the wear and tear. In case if the student stops paying rent or causes property damage, you should require the biggest legally allowed security deposit.
Compile a detailed lease. When it comes to setting the terms of the lease you shouldn’t just let it roll. You need to formalize every possible situation that might occur with the tenant. Establish strict rules and guidelines for the tenant’s behavior. Make sure that the tenant acknowledges all the right and obligations, including an obligation to pay rent and all the corresponding fees in case of late or missed payment and obligation to uphold house rules. Outline in the lease the quiet hours, number of guests allowed, rules for drinking and drug use, norms of using common areas. Consult with the lawyer, the more detailed and articulate the lease agreement is the easier it would be to enforce it.
Provide guidance and support. It can be intimidating to first rent a place, navigate in countless rules and regulations. In order to facilitate renting experience for both parties, you should provide students with some instructions. You can send them small reminders about upcoming payment deadline, provide instructions on maintenance, compile the fact sheet with the most important facts and figures. You need to clearly explain all the terms and conditions of the lease and make sure that tenant understands them. The main thing always is in contact and ready to respond to any tenants inquiry.
Renting out to college students has its risks and perils. Students are certainly a difficult demographic group to deal with. However, plenty of students are bright, honest and trustworthy and if you establish a proper relationship they can stay with you for the whole duration of their college life. The student population is not very picky and can reside in the low-income apartments. Moreover, there are plenty of security measures and time-honored solutions you can use to be immune from fraud and reckless behavior.