Last week I was at lunch with a group of friends. Several of their children were graduating from high school and getting ready to head off to college. We seasoned vets were asked our advice and I just had to chime in on the great opportunity to buy a house with built in tenants. But, even if you are not thinking about buying in a college town for your own student, it can be a very profitable investment.
Advantages of ownership of rental property in a college town:
- First and foremost is the large number of prospective tenants. These tenants are going to need somewhere to live for at least four years. There are dorms but most colleges and universities have a huge housing shortage. Some are worse than others; it is simple to find this out.
- Most students have a budget. If you buy a large home with four to five bedrooms, you can get rent per room which will usually add up to more than the standard house would rent for, which increases the profit.
- Students aren’t the only potential tenants. With college you also have the population of educational professionals and administrative staff.
- There is also a new trend of retirees heading to college towns. Why? Because there are activities such as cultural events, sporting events and lectures to name a few. Today’s retirees want activity and stimulation and college towns provide this lifestyle.
- There is great stability in these kinds of locations. Not only because of the tenant population but because colleges and universities are a stable industry. In fact when there is an economic down turn, colleges and universities usually see an upswing in enrollment.
Disadvantages of ownership of rental property in a college town:
- Turnover – the likelihood is that you will have a new tenant or set of tenants every year. Most students will change where they live an average of three times in their college career.
- Condition of the property – students tend to be less conscientious than other tenants (and most tenants aren’t as conscientious as a property or home owner). Most people worry about the party aspect of student life. That can be an issue but I’ve found the bigger issue is the lack of communication when something is wrong. For example, they won’t tell you if there is a slow drain or leaky faucet. These kinds of issues unaddressed can create a much larger problem down the road.
- Reliable rent – this can be an issue if you don’t properly screen the tenants and get the correct lease (see the tips section for solutions to this issue).
When deciding how to rent/market the property you have a couple of options. For example, say you have a 3 bed 2 bath home near campus but it’s in a family neighborhood and the monthly expenses are $1150.00. Here are a couple of ways to think about it:
- Rent out each bedroom for $450.00 a month for a total of $1350.00 month. Make sure you have a lease from each tenant individually and a security deposit. You should also have a parent sign the lease and guarantee the rent. Also, in today’s market, the lease should be for one year. No one really rents for the nine month school year. You might want to have a clause about subleasing in the summer.
- Find a young family, maybe a member of the administrative staff, who wants to be close to work but in a family neighborhood and rent it for $1200.00 a month.
There is a new movie out called “Neighbors” about a young family who has to live next to a fraternity house. It’s a fun film but I’m not sure it clearly depicts living next to the average college student.