WARNING: This Post Contains Graphic Images….Oooooo, really???
Until now. And have I got a story for you. So buckle up cowboy, it’s gonna be a wild ride!
Why Do Investors Purchase Student Rental Properties?
For the same reason that investors do anything: to make money! Real estate investors want to maximize their return on investment, and renting housing to students is an excellent way to do that.
Why? Because residential properties that are near a university and are appealing to students, will never be vacant. Seriously, NEVER. This axiom holds true because college students practically have the word “TENANT” stamped on their foreheads. These individuals need short-term housing and often have no savings or credit history. In fact, they would not purchase a home even if they could because they are in college. They are concerned with a completely different set of issues…
So no, these are not a pool of possible homeowners; they are tenants. And these tenants are often locationally constrained as well. They may not have access to a car, or they may not be able to get a good parking spot on campus. They usually want to walk, bike or bus to their classes.
These college student constraints (no money, no transportation and no clue) combine to make them a captive pool of tenants. They need a place to live – any place – and your place will do.
The Pros and Cons of Student Rentals:
Students are Low Demand Tenants
Most students are not preoccupied by the little deficiencies in their housing, thus they place few demands on you as their landlord.
PRO: They will not call you if the ceiling fan stops working, or the refrigerator makes a funny noise or they see a cockroach in the kitchen. They will not hassle you about the small stuff.
CON: They may not notify you of the large stuff either – the situations that truly require attention and will only grow worse over time. An example would be a leaky pipe under the sink that keeps dripping on a hardwood floor. Whereas the initial repair would have been as easy as tightening a valve, you could now be faced with a warped hardwood floor that requires replacement and adds substantially to your maintenance expenses.
Students Often Pay a Premium
Students typically band together to rent an apartment or house that has multiple bedrooms. For instance, say that you have a four bedroom home that typically rents for $1800/month. A group of 4 students may be willing to pay $500/person (or $2000 total rent) because it is still their most affordable living arrangement (even the dorm is charging $600/person).
PRO: The real estate investor reaps a higher return per square foot and more cash flow.
CON: The investor is usually able to charge higher rent from students because they are generally considered to be less desirable tenants (lacking established credit, a rental history, a source of income, and maturity). In other words, with riskier tenants, comes higher rewards.
Students Can Assist with Leasing
Students often have friends and connections in their college community who would like to move into your rental property when your current tenant graduates or moves on.
PRO: The Investor saves time and money by not needing to advertise or hire a leasing agent for the rental.
CON: Students rarely want to remain in a rental property longer than a year or two. So even if you can easily find new tenants, there will still be turnover. And with any turnover, an investor will incur costs in cleaning, maintenance and minor repairs.
The Chaos of Student Rentals:
Considering the pros and cons of student rentals, real estate investors typically either swear by them or they totally shy away. I actually like them, with conditions. Why conditions? Let’s do a case study, shall we?…..with illustrations.
Here is a quaint home I own in Los Angeles, located near a private college:
Before Student Rental:
After Student Rental:
Hmmm…Is that a…?? WHAT THE WHAT???
Yes, the entire house was covered in a layer of indoor paintball meets psychedelic porn graffiti – even the mailbox took a hit (as you can see from the picture at the top of this post).
If you are curious about what kind of drugs these college students were taking…well, I am too! This group of students, upper-class young men attending a private Jesuit college, did a level of damage that left me shocked and deeply disturbed for a long time.
So, if that’s the case, why would I still consider owning student rentals?
Two Conditions For Owning Student Rentals
In the graffiti case study, each of the tenants had signed a lease which would hold them liable for any or all of the damage they inflicted on the house. SO WHAT?? Who are they? They are students with no money, no credit, and no assets to go after to get the funds to repair the damage they caused.
But their parents…now that’s a different story. When these college students submitted their rental applications, each of their parents was required to submit one as well. The parents proved that they had steady income and good credit. Then, the parents each signed a Guaranty, a legal document promising to take responsibility for all of the tenant’s obligations under the lease.
So when the damage was done, the parents were on the hook for the repair bill. The parents paid almost $8,000 to clean up the mess.
As for the graffiti case study, I have to admit, I feel partially to blame. I accepted as tenants a group of Sophomore boys. That’s four 19-year-old boys. Oh, what was I thinking??? But I learned the hard way (the way I always seem to learn the best!). I now accept only graduate students.
Graduate students are older, more mature, more studious, and more serious…and sometimes they are even earning income in stipends and grants. They usually resemble the budding adults that you want to be dealing with as tenants – not the overgrown babies with crayons and paint and a penchant for anatomically correct scribbling.
The Student Rental Upshot
I still rent to students….graduate students, that is.
I make solid profits, while providing comfortable housing for a group of people who need it. And, except the graffiti case study, I have had very positive experiences with my student rentals. It’s all good….
And when it’s not, you can pick up your paint roller, add a new coat of Swiss-Coffee White, and move on.
Would you invest in student rentals? Do you currently invest in student rentals and have any horror stories to share?