Things to Consider When Buying a Rental in a College Town
Real estate is a quality investment option for your portfolio, but you can select from different types of real estate when considering it as an investment. Apartments, duplexes, single-family homes, shopping centers, and storage units are various forms of investment property. Each type of real estate has its advantages and disadvantages.
The right location is also important when selecting investment property. You want to make sure the property will be in demand so that you’ll have a constant stream of rental income. One option you might want to consider is investing in real estate in a college town. An investment in real estate in a college town can be lucrative, but there are many pros and cons to this type of investment. You need to evaluate them before making a financial decision.
Large Tenant Pool
College towns, especially ones near a major university, have a large number of renters. College students are not interested in buying property but each fall, a huge volume of them who need housing flood into off-campus housing. They need a place to rent. That creates a huge pool of potential tenants and you will be able to find renters who can afford to pay rent each month.
Stable rental rates
You want to have a dependable source of income from your rental property, and that means a property with stable rent. College enrollment continues to increase, and that means an increasing demand for housing. Around 20.4 million students enrolled in universities across the nation in 2017 according to National Center for Educational Statistics. You are pretty much guaranteed that rent will increase and not decline in a college town due to the growing demand.
Renting a property is about supply and demand, and in general, rental properties have been in demand since the Great Recession. According to the Federal Reserve, rental vacancies were at 6.9% at the end of the fourth quarter of 2017. This level hasn’t been seen since the 1980s.
The demand for housing is even greater in a university town. A university or college creates a huge demand for rental properties and that means you will have fewer times when the property is vacant.
Increasing real estate prices
When you purchase a rental property, you want to buy in a market with appreciating real estate. You can make money both on the monthly rent and when you sell the property. Because the property is in demand in college towns, real estate is generally increasing. In recent years, college towns like Boulder, Colorado, Austin, Texas and Madison, Wisconsin have seen significant increases in real estate price. It would be profitable to buy real estate in these markets.
High turnover rate
Renters in college towns tend to be transient. People live in the town for a few years while attending college but move after graduation. That means you are often faced with a high turnover rate on a rental property. As a landlord, that’s something you want to avoid. Turnover is one of your highest expenses. You have to fix anything that is broken and you can go a period of time without rental income. Some studies have shown that cost of a renter moving out at around $1,000, but others have pegged the price higher.
Slow summer season
A university town is an entirely different place in the summertime. After college students move out in May or June, the rental unit can stay vacant for a period of time. It can be a challenge renting the property until the students return in August and September. That means you might have to live without rental income for an extended period of time in the summer.
Potential damage to property
College students are often living out of the house for the first time and the college life isn’t necessarily conducive to taking care of a property. Students can throw parties or have no interest in keeping the property clean. The lifestyle can be hard on a rental property. Students have the potential of doing more damage to your property than the value of the deposit and you get stuck with the repair costs.
Must be actively managed
A rental property has to be managed, but often this is more so in a college town. College students are usually less willing to fix problems at the property and you often have to find new tenants more frequently. That means you either have to hire a property management company or you have to manage the property yourself.
College towns can be expensive
Buying a rental property in a college town can be expensive. You might find it difficult to purchase property in a college town and still charge enough to make money. You are also most likely competing with institutional investors, and that can be challenging as an individual. Institutional investors usually pay in cash for a property. You might want to look at places like Muncie, Indiana, the home of Ball State University or Cleveland, Ohio, where Case Western Reserve and John Carroll University are located. These are markets where real estate is less expensive than college towns like Berkley, California or Chapel Hill, North Carolina where real estate is expensive.
Some additional tips:
- Always compare the rent to other college towns.
- Try to look at duplexes and apartments rather than single-family homes.
- Be sure to look to see if the town has multiple institutions like a local community college.
- Is the university in your vicinity public or private? Tuition is higher at a private school.
- What are the university’s rules about renting off-campus housing?