Investing in Student Housing: Pros, Cons, and Tips

College and university towns typically have a steady stream of incoming students and demand for off-campus housing. New college students arrive on campus every year, so the demand will always be present. In October 2021, 61.8% of high school graduates enrolled in universities or colleges. Despite a dip in 2020 because of the COVID-19 pandemic, the National Center for Education Statistics projects college enrollment will recover and remain steady over the next eight years. 

An increasing number of students will likely strain the housing available in many college towns. While colleges may offer on-campus accommodations for first-year students, many colleges do not have the capacity to offer continuing students the same opportunity. As a result, most students probably need to find housing elsewhere. 

The popularity of off-campus housing creates a reliably high rental demand. Unlike other kinds of real estate investment, student housing tends to experience a steady flow of demand as students enroll in the nearby university. Student housing investment returns tend to be reliable, especially near universities with high rental growth. 

With higher rental demand comes the possibility of charging higher rents. Especially if the property is in a highly desirable location, a property owner can often get more rent from a group of college students than a small family. Landlords generally charge rent by the room instead of a flat rate for the entire house per month. For example, a three-bedroom house that would rent for $1,500 a month could pull in $1,800 a month if you rent each room for $600 a month. Other landlords may choose to charge each student a flat semester rate for a property.

Investors also generally don’t need to invest in the highest-quality materials for student housing because tenant expectations differ from other types of rental housing. For example, students typically aren’t interested in marble countertops or walk-in bedroom closets. A clean, functional space is more important than one with the newest lighting fixtures. Students also likely don’t have the money that such upgrades would cost in terms of increased rental payments. While there are always exceptions, most college students prioritize affordability, privacy, and space over new fixtures and high-quality flooring. 

When investors purchase a turnkey property to rent out as student housing, they may get by with replacing carpeting or appliances or adding a fresh coat of paint every few tenants. Maintaining the property’s condition is essential for attracting new tenants, but students’ expectations may not be as high as those of a family or young professional. Investors can focus on smaller maintenance needs rather than budgeting for expensive refurbishing projects or home improvements. 

The stability of the student housing sector and the steady flow of tenants for this type of property leads to consistent lease renewals. A vacancy could represent significant uncertainty with apartments, single-family homes, or multifamily housing rentals. Open units are a financial liability that property owners need to resolve as quickly as possible. 

Fortunately, investing in student housing provides much more certainty that several tenants will renew their leases. Some students may enroll in a two-year associate’s or four-year bachelor’s degree program and live in the same rental location for that time. If a student enrolls in graduate school at the same university, they may renew their lease for even longer.

When the landlord rents to students by the semester or academic year, they could incentivize students by offering free storage over the summer or winter breaks if the students renew their lease for the next semester or academic year. This further stabilizes rent for the landlord while saving the college students time, effort, and money by moving all of their stuff every time their lease is over or purchasing a rental unit in the interim.

Since 60% of full-time undergraduate students in 2020 were unemployed, college students may not seem like the most reliable tenants. Many college students also don’t yet have a good enough credit history to begin renting. However, students often receive financial assistance from parents, which is a significant help to students and gives property owners greater peace of mind. Alternatively, parents co-sign their children’s student loans. In a lot of cases, student loan refunds or funds over the amount of tuition can also be used to pay for rents or lease contracts.

For the 2020-2021 school year, family income and savings contributed an average of 54% of total funding for a student’s education. Housing is an essential cost that many parents may help their students cover. Some parents may agree to co-sign the rental agreement for their student’s unit. When parents co-sign, it ensures students are just as consistent about paying rent as other tenants. You may find additional security in knowing that parents share the financial responsibility of their student’s housing. 

Some states have legislation preventing landlords from increasing tenants’ rent while under the same lease agreement. This requirement can keep property owners from raising the rent to the market value and can be especially frustrating for property owners with long-term tenants. 

However, investors in student housing have natural tenant turnover that enables them to raise rental rates as the market changes. Students may stay in a unit for as little as one semester or maintain that residence throughout their four-year degree program. Landlords must wait at least until a rental agreement ends before adjusting rental rates, which could be every year or as often as every month if students sign a month-to-month lease.

The built-in turnover associated with student housing gives investors much more control over the marketability of their units. As one graduating class leaves the university, you can replace them with the incoming class, raising your rates to maximize your earning potential. 

The student housing investment market is full of inexperienced renters. Your unit may be the first apartment a student has ever rented or lived in on their own. Student renters may be unaware of the importance of the terms outlined in the lease. Negligence or disregard could lead to breaches in the rental agreement. You may also have tenants who don’t understand your rights as a landlord or have poor money management skills. Having a co-signer on the lease is important for mitigating the risk inexperienced renters pose.

Students may also create more extensive damage to your units than other renters. College parties and horseplay could lead to carpet stains, holes in drywall, and other damages. While lower tenant expectations can be an advantage when it comes to property improvements and renovations, it could also mean that students have a lower standard for cleanliness and care, especially since they don’t own the unit. 

You can help discourage damage by requiring a security deposit on your lease that tenants won’t receive back unless they leave the units in a specific condition. In some extreme instances, renters could cause more damages than the security deposit will cover. If your insurance doesn’t cover the full cost of the damage, you’ll likely have to take on additional costs yourself or come to an agreement with the tenant through arbitration or litigation in severe situations.

It’s also important to note that not all students are irresponsible renters, and you’re likely to find plenty who take good care of your units.

Students at many universities across the country return home or travel for summer internships after the spring semester ends. It can be challenging to fill vacancies from May to August, as many other renters may want a longer-term lease. You may have to calculate seasonal vacancies in your rental rates or choose to deal with sub-leasers. These situations can cause complications that may be difficult to straighten out. 

As mentioned above, a potential solution would be to let students store their belongings in the unit for free if they renew the lease to alleviate the need to move every semester or academic year. 

While students may renew their leases during their time at the university, they’ll also typically leave after graduation. You can expect to rent a unit for no longer than four or five years, meaning you’ll consistently need to stay ahead of the following semester. 

As enrollment rates at the nearby college or university fluctuate, so do your vacancies. Times of low college enrollment are particularly risky for your profit margin. For example, the COVID-19 pandemic and college shutdowns in 2020 created the lowest enrollment rate since 2001. Student housing suffered as students stayed home or sought career paths that didn’t require a college education. Community colleges suffered larger enrollment declines than other sectors, while highly selective private universities witnessed an enrollment increase.