Investing in College Town Real Estate

By on January 7, 2019

Every fall, droves of college students, staff and faculty flock to college towns to prepare for a new school year, and they all have one need in common – housing. This consistent demand for accommodations is a boon to the savvy real estate investor. Most colleges and universities have huge deficiencies in the amount of on-campus housing available for students, so if you intend to target college students, do some research into which schools have the biggest need for off-campus housing.

Buying property around a college town can be a smart investment but it may require some diligent planning and hard work.

Should You Purchase Investment Property near a University?

College towns make attractive investments for a variety of reasons. If you are considering buying a rental property near a university or college town, weigh the pros and cons carefully before approaching your trusted financial advisor to run the numbers.

Why College Town Are Attractive Markets for Real Estate Investors

  • Large Tenant Pool
  • Stable Rent Prices & Fewer Defaults
  • Fewer Vacancies
  • Location, Location, Location

In a college town, there is a large population of renters. Each semester, new professors and students enter college looking for a place to call home. If your investment of choice is rental property, a college town can provide you with a large pool of prospective renters to choose from. And you should not have to spend much time marketing since buyers and demand is practically built-in.

The biggest draw for real estate investors to college towns tends to be the large number of prospective tenants. Of course you have college students – who will need a place to stay for the approximately four years they attend school. One big advantage of renting out to college students is that they are willing (and generally looking) to rent single rooms. That means if you buy a big house with five or six bedrooms, you can potentially get five or six tenants out of it. While a single tenant wouldn’t pay $2,500 to cover your mortgage for the entire property, five separate tenants may pay $500 each. By renting your property by the room, you are able to increase your profits substantially.

And since most college students don’t have jobs, they don’t have to worry about losing one. In fact, the worse the job market gets, the longer students will likely stay in school. So if job prospects are weak, they may elect to go to graduate school – delaying the job search, and making themselves more attractive to employers with the additional education in the process. With the number of students attending college higher than ever before, there isn’t likely to be any dip in students looking for rental around their school.

While students tend to be the first potential tenants that come to mind when you think of college towns, they are by no means the only tenants. One of the often overlooked facts about college towns, is that businesses tend to flock to the more educated parts of the country to operate or recruit the educated employees they need. Since college towns are more educated overall than typical towns, they make attractive places for businesses to open up. All these new businesses need employees, and those employees will need housing.

Another often overlooked source of tenants in college towns is retirees. College towns actually make great places to retire with numerous cultural and sporting activities. The cost of living tends to be attractive for those on a set income. And today’s retirees aren’t happy to just sit around all day, they want to enjoy their retirement, expand their knowledge and many return to school for second careers or to turn a hobby into a business.

Beyond the stability of tenants, college towns make great real estate investments because of the market stability. Since the rental market in college towns is centered around the college – and demand in generally steady – they are not affected by economic contractions and real estate slumps.

This demand may also help to keep rental prices in the college area strong. In addition, off-campus housing is often paid for by the student’s parents, by the college itself or a students school loans, so you may be able to command a higher rent for the property. This tend to lead to fewer vacancies since there is always the next student or college employee looking for a place to call home.

College Town Real Estate Does Have Its Pitfalls

  • Property Damage
  • Transient Population Bringing ‘Off-Season’ Loss of Income
  • Not a Passive Investment

Since we covered the reasons you should consider investing in college town real estate, we should at least mention the drawbacks. The biggest problem, and subsequently hesitation, investors have with investing in college town properties happens to be the same reason that makes them so attractive – the students. The sheer number of students means potential tenants not in short supply, however, if college kids are notoriously irresponsible tenants.

The occasional party is to be expected – they are young and likely living away from their parents for the first time – and most are still learning how to take care of themselves, let alone someone’s else’s property. Property damage is common and is often in excess of the amount you have collected as a security deposit. Damaged floors, stained carpets, holes in walls from tacks and bumping furniture, broken cabinets, doors and even windows are not unusual when renting to college students.

While there is a large rental market in a college town, this market is often transient – moving out each summer or leaving permanently after graduation. They stay in town while they are attending school or working at the university and then move on. Without the stability of a job or family, students tend to change housing each year, so don’t expect your tenants to sign long leases. You will be lucky if you get a student to sign a one year lease, so you should be ready for high tenant turnover.

Since fewer students attend college in the summer, you need to plan for covering your expenses and mortgage during the summer months. One way is to have all your tenants sign a twelve-month lease instead of a month-to-month lease or a nine-month school year lease. This way the tenant is responsible for paying you whether or not they will be living there in the summer months. If the responsibility is passed onto them, they will likely find a person to temporarily sub-let their room. Plus, few college students want to give up their prime locations near campus.

Finally, it is important to realize that property investing in a college town is not a passive investment. This is particularly true if you are renting to students. With high tenant turnover, potential damage to the unit, noise complaints and roommate squabbles which could lead to one or more tenants breaking their lease, you will have to become a hands-on property investor to prevent major (avoidable) losses.

Tips for Investing College Town Real Estate

While it might seem a little counter-intuitive, you may not want to target students for your college town rental property – especially if you are worried about potential property damage or vacancies. What’s the point of investing in a college town if you aren’t going to rent the property out to college students? Well, there are other sources of tenants and the increased market stability. By avoiding college students, you can potentially avoid the biggest disadvantages from the equation. Even without college students, the rental market in college towns is good.

When targeting non-students for your rental property, you also have the ability to expand your property search beyond the general borders of the school. While most students don’t have cars, that is not the case with other tenants like teachers, high-skilled employees and retirees.

Although, the farther away you get from the school the more affordable property tends to be, it’s important not to invest in real estate too far away from the school. You could lose some of those benefits we discussed earlier and you still want your property to be convenient for tenants in the event they work at or nearby the school.

To Buy or Not to Buy?

College towns have historically made great places to invest. – with their huge tenant bases, educated populations and relative market stability – something that is unlikely to change anytime soon. If you don’t fear renting out your property to students, as an investor you can enjoy great cap rates – especially if rent out your property by the room.

And if you like the benefits of buying real estate in a college town, but aren’t interested in renting out your property to college students, no problem. It is possible to have the best of both worlds. College towns have a lot to offer residents and real estate investors alike.

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