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Buying, Renting a Home

Should You Invest in a College Town Rental?

More and more parents are buying a college town rental when a child starts at a university to solve their housing needs for the next four years. Is this the right decision for you?

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It’s back-to-school time and college towns are bustling with students settling into their campus housing. Students are choosing between apartments or single-family rentals while parents are being introduced to the booming business of college-town land-lording.

More and more parents are buying a college town rental when a child starts at a university to solve their housing needs for the next four years. Roommates pay rent to cover the mortgage and expenses, then,  after graduation, the property continues to generate rental income and appreciates. Generous parents will sometimes turn the title over to their child to begin their investing career.

It’s a formula that works for many families, but college rentals don’t always have happy endings. Owning and managing a student rental is significantly different from a traditional rental, and even investors who have been successful in other markets can fail in college towns.

College students

Here is a list of pros, cons, and solutions when deciding whether or not you should invest in a college town rental:

Reasons to Invest in a Campus Rental

  1. Low vacancy rates. In addition to providing housing for a child, college rentals typically have low vacancy rates during the academic year. The market for college renters is larger than the undergraduate student body.  Graduate students, faculty, and college employees increase the demand for rentals as well. Many investors report 100% occupancy.
  2. Better than average appreciation.  Colleges, especially larger private and state universities, create local economic stability. Most grow over time to serve expanding generations and to develop their research and post-graduate offerings. Potential investors should research cap rates, competitive environment, and the financial viability and growth potential of local schools. The National Center for Education Statistics predicts college enrollment in the U.S. will reach 19.8 million students in 2025, an increase of 14% from its 2014 enrollment of 17.3 million.
  3. Low marketing expenses. Some universities will post ads for rentals for free as a service to students. Advertising on sites popular with students, like student newspapers or other hyper-local campus sites, is inexpensive and sufficient.
  4. Higher rent. Most college town landlords who rent to students charge rent that’s a little higher than they would in other markets because they can base rents to room and board fees at the college.

Challenges of Campus Rentals

  1. Local ordinances that hurt rental profits. Investors in college towns report that their most significant and unexpected problems result from ordinances, local regulations, and college policies designed to protect students from unscrupulous landlords or boisterous students. Examples include bans against more than three unrelated people living in the same rental, limits on rent increases, restrictions on security deposits, school requirements that first-year students live in dorms, and outright bans on renting to undergraduates. College towns that have housing shortages are far more likely to pass these rules, possibly after receiving some pressure from the college itself.
  2. Timing is everything. Students and their parents prefer nine-month leases, but landlords prefer 12-month contracts so that they are not stuck with a summer-long vacancy.
  3. Constant turnover. It’s not unusual for 80 to 100% of college rentals in a market to turnover every year. For landlords with a portfolio of nine-month leases, the summer can be a hectic time as landlords clean, repair and try to rent properties as quickly as possible.
  4. Irresponsible behavior: damages and late rental payments. Most undergraduates have never been responsible for a rental. If they (or mom and dad) have already made a security deposit, irresponsible students may have no qualms about leaving a rental  disorderly, which could cost up to three times as much as their base security deposit. For some students who are not mature enough to worry about their credit ratings, making timely rent payments may be a problem.

Solutions

  1. Hire a qualified property manager but stay involved.  Investing in college rentals is not for distant owners who are new to real estate investing. Even seasoned investors will find renting to college students a different experience. Consider hiring a local property management company that is experienced in dealing with local colleges and universities. They will know the local rules and regulations, college administrators, and the local marketplace.
  2. Tailor the lease. Have your attorney craft a special lease tailored to renting to college students. It should include co-signers as well as clauses on noise, maximum occupancy, and damages/repairs.
  3. Do a thorough credit and history check on the students and parents. Use a screening service that can do a national criminal search and a national eviction search as well as a credit screen.
  4. Insist on a 12-month lease. A 12-month lease is an industry standard. If your tenant is not staying through the summer, they are free to sublease it.
  5. Have parents co-sign. In most cases, parents will be paying all or part of the rent. Add both parents to the rental agreement as co-signers since minors can’t enter into legally binding contracts. Consider having parents co-sign even if the student isn’t a minor. By co-signing they accept liability.  Review any rules on rental payments with both parents and students. Make it clear that in your eyes, the parents share the responsibility for the conduct of their child and his/her roommates.
  6. Consider asking for rent payment in advance.  If you have any doubts from the screen or your contacts with the tenant or parents, ask for full payment of the rent one month or one semester in advance.
  7. Ask the students to pay the utilities. Have them share the responsibility for energy-efficiency.
  8. Enforce limits on roommates. Check your local zoning laws for any limitations on maximum capacity. Make sure your tenants know and abide by the maximum.
  9. Visit occasionally.  Let your tenant know that you would like to stop by to see how they are doing. Meet new roommates and make sure they know your rules. Take the opportunity to inspect for damage. 

For more information about buying, selling, or renting, visit Homes.com  find step-by-step guides!

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Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.

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