College towns have become hot markets for real estate investors looking to capitalize on off-campus housing demands from a steady stream of renters year after year.
According to Zillow, the rising demand for college rentals keeps pushing rent rates up, while home purchase prices are still recovering from their decline during the financial crisis. This combination of high rents and affordable purchase prices makes buying a college town rental properties an attractive option for investors.
College towns have higher rates of renter-occupied housing, giving landlords a reliable stream of tenants. An article on Forbes gives this example, “in a state like Indiana, where the percent of renters in many counties is less than 25 percent, renters in counties with a university can be 32 percent (Notre Dame), 38 percent (Purdue), or 48 percent (Indiana) of the population.”
While some landlords or management firms may be leery of accepting students as tenants due to lack of rental or credit history, with precautionary measures in place student housing can be become a profitable revenue stream.
Benefits of Student Housing
Reliable Tenant Pool – With some student populations ranging from 20,000-50,000 and accounting for as much as 25 percent of a town’s total population, there is high demand for rentals for co-eds who want to live off-campus and are not in the market for purchasing their own home. Each year brings a steady flow of new potential tenants as freshmen move out of the dorms into their own off-campus rental.
Steady Rental Income – As the Great Recession demonstrated, the rental market remained strong and college enrollment increased despite economic setbacks and falling home values. Increased enrollment in college towns causes rental prices to climb to meet market demands. And with most college students getting assistance for rent from their parents or financial aid, investors are able to reliably collect rental income from additional sources other than a tenant’s employment.
Fewer Vacancies – Increased demand raises occupancy rates in college rental properties. Landlords and property managers can take advantage of high demand by starting the leasing process early to help student’s secure rental housing for the following year. Some college towns, like Davis, CA home to University of California at Davis, begin leasing season as early as February for lease terms that start in the fall, which resulted in a .2 percent vacancy rate in 2016 for rental apartments in Davis.
Marketing Made Easy – With demand so high, managers and landlords typically spend less time marketing properties and are able to spend the extra time on more important tasks. Proximity to the university, access to public transportation and walkability to local attractions are usually enough to draw applicants. Landlords and property managers in college towns should have a good web presence, as most students will do their apartment hunting online.
Easy Renewals – College students will typically need rental housing for 2-4 years. Landlords can capitalize on this knowledge by sending out lease renewal information early to current tenants who are still a couple years away from graduation.
Risks of Student Housings
No Employment, No Rental History, No Credit – Your typical tenant screening criteria might need to get reevaluated when you consider renting to college students. Even if a student works part-time, his income may be well below your minimum requirements. First time renters will not have landlord references to check and you could be dealing with a young student who hasn’t had the opportunity to build their credit. Without verifiable income, references or credit history is can be hard to determine if your student applicant will be a responsible tenant.
Increased Wear & Tear – Student rentals are notorious for accelerate wear and tear that goes beyond typical turnover cleaning and damage control. College students living on their own for the first time might not understand the value (or their legal responsibility) for maintaining and taking care of their home.
Roommate Mediation – A college student’s inexperience or immaturity may create roommate conflicts that develop into a hostile living situation. Your tenants might turn to you for help solving their problem or think they can simply move out before their lease ends without realizing their legal commitment to their lease term.
Naive Maintenance Responsibilities – For some student renters, this could be the first time living on their own without parents or dorm staff taking care of the maintenance. Simple things like regular cleaning, using appliances appropriately, changing a light bulb, or reporting maintenance issues could be a whole new experience for them. Make sure your tenants know what maintenance they are responsible for and who to contact the second an issue pops up.
College Parties – After a lifetime with the parents, or a year or two in the dorms, students that are moving out on their own for the first time may try to push the boundaries with parties or social gatherings that threaten to damage the property or disrupt your other residents.
How to Mitigate Risks when Renting to College Students
Require a co-signer or guarantor – Just because your student renter is a first time renter or doesn’t have a qualifying credit score, doesn’t mean they will be a bad tenant. For added protection though, if your student applicants did not meet your screening criteria, ask for a co-signer or guarantor who will be financially and legally obligated to pay rent and cover the cost of tenant caused property damage. Student co-signers are typically parents or family members with verifiable income and great credit.
Screen every tenant and co-signer – Every person that signs your rental lease needs to provide verifiable income and references, as well as consenting to a credit and background check. A co-signer will be useless protection unless you can prove that they are financially responsible and have the means to cover rent if your tenant cannot. Landlords should also consider checking university records as part of their screening process to verify that student applicants have not received disciplinary action that might not show up on a criminal background report. If an applicant was kicked out of on-campus housing or is on academic probation, that could be a red flag for disregard to rules and responsibilities.
Collect the maximum security deposit – Your state and local rental housing laws dictate how much you are legally allowed to charge tenants for a security deposit. By asking for the maximum amount you provide extra protection if your student tenant causes property damage beyond normal wear & tear or stops paying rent. Remember if you increase your security deposit amount make sure you do it for everyone, not just students or young renters, to avoid Fair Housing violations.
Have a rock solid lease – Make sure to review every lease term with your tenants so they understand their responsibilities when it comes to when and where rent is due, the consequences for late or missed payments, and their obligation to continue paying rent throughout the entirety of the lease term. Stick to your lease and community policies in regards to tenant maintenance, number of guests and acceptable guest behavior, quiet hours, drinking and drug use, and how common areas may be used. Remind your tenants of your expectations and their legal agreement to uphold policies that encourage safety, accountability, and community respect.
Provide tips for great tenancy – Leases are lengthy legal documents that can be overwhelming for young renters to reference when they have a question. Help your tenants be successful renters by offering tips for great tenancy. Consider providing a simplified fact sheet that points out important dates, rent amounts, rules, maintenance requests, and contact information. The fact sheet should reference the lease terms and communicate your availability to review the lease together if necessary or if any further questions arise.
Require year long lease agreements and have a subleasing plan – In order to avoid vacancies during summer months when students might travel, you can require 12-month lease agreements. With a 12-month lease agreement, your tenants may still be tempted to sublease their apartment to offset their costs if they plan on living elsewhere during the summer. To prevent illegal subleasing situations create a plan for communicating how a tenant can go about legal sublets if you decide to allow them.
Require Renter’s Insurance – Renters Insurance is an inexpensive way for your tenants to protect themselves, their personal property, and your rental property. Most plans cost renters less than $200 a year and will help cover the cost of replacing your tenants’ stolen or damaged personal possessions, it can also cover the cost of damage caused to the property by negligence. Ultimately, it is in a landlord’s best interest to encourage tenants to get renters insurance so the homeowner isn’t left with a bill due a tenant being unable to cover the cost of damaged property or court fees.
With proper planning, detailed screening, and extra protection landlords and property managers can mitigate the risks associated with renting to college students. The consistent stream of potential tenants, high demand for rentals, and competitive rent prices in college towns creates a strong rental market and profitable investment opportunities.