Investing in Student Rentals: the Pros, the Cons and the Chaos

student rentals for real estate investing

WARNING: This Post Contains Graphic Images….Oooooo, really???

I never thought I would begin a real estate investing post with a warning about graphic content, but I’ve never written about investing in student rental properties before!

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…

Real estate investing in student rental properties

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:

Real estate investing in student rentals

Before Student Rental:

Real Estate Investing in Student RentalsReal Estate Investing in Student Rentals

Real Estate Investing in Student Rentals

 

 

 

 

 

 

 

After Student Rental:

Real Estate Investing in Student RentalsReal Estate Investing in Student RentalsReal Estate Investing in Student Rentals

 

 

 

 

 

 

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

Parent Guaranty

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.

Graduate Students

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? 

 

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20 thoughts on “Investing in Student Rentals: the Pros, the Cons and the Chaos

  1. Wow, your tenants really did a number! Smart to rent to grad students. They are much more mature and less likely to tear things up. Also with parents on the hook, they will think twice before doing anything stupid. Here’s a question – would you rent to college students that have pets? Good post!

    1. I have rented to college students with dogs and lived to tell the tale! TBH, the house in this picture is no longer a student rental. However, I have a great duplex near a university in NC that has been a solid student rental for many years and I love it! And I hope this post wasn’t too unfairly negative to the overall group of students…one very bad experience hasn’t been the norm for me, thankfully!

    1. I get it DocG, and it just depends what you are going for. As I mentioned in my other comment, I have a nice duplex in a good neighborhood in the NC that could be rented to anyone in the community, but I choose the grad students because it is working so well year after year.

  2. Wow, this is just shocking! Absolutely shocking! I can’t believe anyone in their right mind would think vandalism like this is alright, regardless of age. I have to say it was absolutely brilliant to have that clause in the contract, serves those boys right! Gosh, some people never cease to amaze me. However, not every student is the same so I am glad that experience didn’t put you off all students.

    1. I’m so glad you commented Corinne because you are 100% correct – not all students are the same! There are plenty of students like you who are spending most of their time working hard, learning, and setting the course for their future – shout out to my favorite Money magazine reader! 🙂 It can be tricky as a landlord to try to figure out who is a good risk, but as I admitted in my post, I had a feeling this group might be trouble. I got lazy and didn’t listen to my instincts. I’ve done that twice and be burned both times (the other didn’t involve students, but a family with some credit issues). So, it can happen with all types…but the beauty of real estate investing is it can always be repaired and you are usually still making good money at the end of the day!

      1. Thank you! I actually walked past a book store today and saw they had the new issue of Money in stock but I have yet to receive my copy in the mail hahaha #thestruggles
        I was meaning to ask also, have you ever invested in commercial property or just residential?

        1. Good question Corinne! I own only residential rentals – single family homes (SFH) and a couple of duplexes. Most investors start out in residential because it’s slightly less intimidating AND (the biggie) it usually takes a lot less money to begin investing. Coming up with a 25% down payment (standard in commercial) is tough (e.g., $250,000 in cash on a $1M dollar small-ish office building). With residential, especially if you purchase it to be your primary residence and then flip it to a rental a year or more later, you can put way less money down (while 20% is standard for the best fixed rate mortgage, you can often put as little as 3% down). So, you can usually begin investing in residential with as little as $10-$50k in cash. So I won’t go on and on here, but there is a great tax benefit for investors called a 1031 exchange that allows you to roll from one investment to another without paying capital gains. My exit strategy on all this residential hard work is to roll the properties into commercial properties that will require almost no oversight (they are called a triple-net lease properties or NNN). So someday I can take off my landlord hat and chillax on the beach 🙂

  3. That is so crazy. I can’t believe they did that to your rental!!!! WHO WOULD DRAW THAT KIND OF STUFF ON THE WALL!? Were they high on drugs or something? Were they loud?

    Good for you for getting their parents to pay. Hopefully the parents gave them a talking (and beating)

    Why would they write “Welcome to Hell” that doesn’t make sense. It looks so nice and clean, better than usual student housing.

    1. Right??!! Okay I admit that I came across these photos and posted them in a Bigger Pockets forum where landlords were posting abused property pictures…and people went crazy! So I decided I needed to share them with my loyal CashflowKat readers, hahaha. So, here’s what I think happened… The tenants hosted a two or three day long RAVE…lots of drugs and partying. Oddly, we didn’t hear any complaints about the noise or crowds during the party, we just heard from a neighbor afterwards who said the front door was just sitting wide open and mailbox and front door had paint of them. He offered to look inside and he took the first set of pictures. Later on, we heard that video clips of the rave (and home destruction) were actually uploaded to Vine or something. So my house party probably went viral, ha. Anyway, it’s hard to tell from the photos I included but others show the paintball destruction inside the house. And though I like to joke around, the nature of this graffiti was truly disturbing and made me worry for the future! And finally, I thought the parents would go ballistic when they found out, but the two wealthy Dads that I dealt with were basically like “boys will be boys” and they paid for the repairs and for their sons to move into new apartments.

  4. Wow pretty wild! I am looking at a few units near our town university, I will be very cautious:) Still seems like a good gig! Last year I had tenants from hell and they weren’t students!!!
    Great pics!

    1. Now that’s my girl! Don’t let psychedelic drug pictures deter you! Buy more rentals and you will always have more blogging material 🙂

  5. I remember going to a party one time when I was in college at a local rental outside the university grounds. There were so many people crammed in the living room that the hardwood floors were buckling a little. It honestly felt like the floor was going to give way. When you went to the basement, which was unfinished, you could see the wood beams bending up above.

    College….

  6. At least it was only surface damage, and easy to paint over!

    The house I lived in as a student was so badly maintained. The worst thing was the slugs. Loads of them, they would crawl across the kitchen floor at night and leave trails in the morning. Yuck!

  7. We thought our last tenants left our place in poor condition. They were amateurs compared to these college kids. If I ever get bad tenants again, this post will make me feel better.

  8. I can definitely see the upsides to student rentals, though these pics might make me reconsider!
    Haha – plus I know I wasn’t the best tenant in school, so I don’t want to get my just desserts either.

    Thanks for sharing!

    Ryan

  9. For the right price yes! If the cashflow is worth the PITA. I would not however do it for mediocre returns or any other form of rentals. To often people take on a property with a low cap rate and I wonder why? Why add more stress and work into your life. Passive investing has never been easier.

    In my opinion your expected return should be much higher then what you would expect from indexing otherwise it is not worth the extra effort.

  10. Whoa they really put the walls to, umm use : O Very good to know. I’ve never really thought about renting out a property as I’ve had no property to rent out but something to keep in mind down the road. Thanks!

  11. YIKES. The level of disrespect and disregard for other people’s property displayed to write all over the walls period (let alone what they put on the walls) is truly astounding. At least it was easily fixable with a coat of paint and didn’t put you off of renting to students forever! (Also I’m glad to hear the NC students are better 😉 )

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