How to Know if Student Housing Investments Are for You

By Edward E. Fernandez | September 19, 2022

If you’re seeking a potential investment opportunity in a growing market, student housing is a logical option to consider. As enrollment rates continue to increase, universities are realizing a greater need for student housing. The U.S. student housing market is expected to expand by 700,000 beds by 2031. You can take advantage of this prospective increase in demand by investing in the expansion of student housing.

The investment potential is clear, but is it the right market for you? This guide will weigh the pros and cons of buying student accommodation to assist your decision-making.

Read on or skip to a specific question:

What Is Student Housing?

Student housing is off-campus accommodation for students who prefer to live outside the dorms. People turn to student housing for many reasons. They may want to move in with their friends or have a preferred location they want to live. Some students may be looking for more privacy than they have in a standard dormitory.

While dorms typically come furnished, student housing usually encompasses the physical space and nothing else. Landlords may offer furnished properties, but this is not an expectation. When students live in this type of housing, they’re also expected to handle many other household responsibilities.

Generally, student housing does not differ from other apartments or homes you may rent out to students. But if you designate your property as student housing, you may use lease terms to reflect a university’s semesters. You may also co-sign with parents in some rental scenarios since students may not have enough income on their own to cover rent.

What Types of Student Housing Are There?

Types of Student Housing

A student housing space can include many different types of accommodation, such as:

  • Apartments: These housing types are common around college towns and many other areas. They can include large complexes with hundreds of units, or they can be converted houses with first- and second-floor units. It’s common for these units to come unfurnished, although some units right by campus may include furniture if they’re advertised as solely student housing.
  • Cooperatives: Often known as co-ops, this type of housing involves a collaborative effort from the residents to run the complex. The tenants make decisions and rules about how to act in the building and often divide responsibilities like cooking and cleaning. Since this housing type operates based on the residents, it typically comes with lower rent costs.
  • Private dorms: A private dormitory complex will include many of the features of residence halls on campus. They may offer shared bedroom-style units in addition to amenities like fitness centers and dining locations. This housing type is often found on or just outside of a university campus.
  • Houses: This accommodation type may have multiple bedrooms but only have a single set of common areas, like a kitchen, living room, and dining room. Typically, houses come with one fixed rent price, and the residents split it amongst themselves. Alternatively, some student houses may split rent by bedroom.

If you’re considering investing in student housing, it’s essential to pay close attention to market trends in order to inform your investment strategy. Market trends in this housing type can help you uncover what types of accommodations students are looking for, so you can more easily fill rooms in your property investment.

1. Private Living Areas

In the past two decades, private student housing arrangements have grown popular. With the need for social distancing and quarantining amidst the COVID-19 pandemic, this need for privacy has increased even further.

These more private apartment-style living areas take the place of the communal, corridor-style accommodations that were common in universities prior to the turn of the century. The traditional, communal housing style in dormitories typically features shared bedrooms and bathrooms shared by entire floors or wings of a building. Apartment-style housing offers common areas like kitchens and living rooms but provides a private bedroom for every tenant.

2. Sustainability

Many universities, colleges, and students emphasize sustainability values that also apply to housing. Since campus housing initiatives and potential tenants prioritize environmentalism, student housing landlords may want to implement sustainability practices in their properties to compete in the market. 

Introducing sustainability in student housing can include small adjustments and large-scale changes. Minor adjustments may include replacing incandescent bulbs with more efficient ones or installing a bike rack to encourage students to cycle to class rather than drive their cars. More significant changes can consist of installing new windows or adding solar panels.

3. Technology

As more coursework shifts online, connection to the internet is crucial in student housing. In a study on student internet access, 1 in 4 students reported an unreliable internet connection made completing their coursework difficult. When students begin searching for housing in the new year, reliable WiFi capabilities may be high on the priority list.

Landlords may not be responsible for WiFi connectivity in homes where students typically set up their own internet plans, but WiFi is an essential consideration for apartment buildings. It’s important that every room in a complex has a strong and consistent internet connection, so students can count on their housing when completing schoolwork.

4. Commute Considerations

As with any real estate, location is a critical component for deciding if an investment is worth it. The recent drop in the use of public transportation should play a role in your location considerations. If students are less likely to use public transportation around the campus, they may opt for more eco-friendly modes of transport like walking and biking.

The drop in public transportation use may also point to a more community-centric mindset where students want to be close to campus. Housing farther away from community centers may be harder to fill.

5. Diverse Unit Types

The student housing market has shifted to account for different types of college students and how units must meet their needs. Even within dormitories, many schools offer quad style units, shared bedrooms, single units, and other styles to account for unique student needs. A student housing investment may want to account for this variety to fill rooms.

This call for diverse unit types may relate to the increase in nontraditional students in recent years. Students may be older than the standard college age and have more unique economic needs. These diverse unit types can acknowledge families for graduate students or make housing more affordable with shared bedrooms.

Is Student Housing a Wise Investment?

Student housing is attracting more investors each year for several reasons. College enrollment is rising, and new students have higher expectations for their housing accommodations than past generations. Cinderblock dorm rooms with communal bathrooms are being torn down and replaced with private suites with social lounges on every floor. Universities are renting these upgraded living spaces to students at premium rates, which can make them a potentially profitable joint venture for real estate investors.

Student residence halls and apartments fall into the multi-family real estate sector. As younger generations postpone purchasing a home until much later in life, apartments and other multi-family residences are in high demand. The multi-family housing market is one of the most stable, experiencing steady rental increases each year. In the fall semester of 2021, average rent prices increased an average of 2.3% — a stark increase from 1.2% in 2020. This consistent growth makes the multi-family housing market appealing to potential investors.

Approximately 46 million young adults will reach college age in the next decade, and some universities need help keeping up with this demand. The student housing industry is on the rise, creating investment opportunities.

The Benefits of Student Housing

Today, 33% of jobs require a bachelor’s degree or higher. As a result, college enrollment is projected to increase over the next decade to over 20 million people by 2029. A steady stream of students will need accommodations to rent in upcoming years. The market for student housing is changing and showing potential for investors. The following advantages make student housing investments appealing:

1. High Demand

In 2020, 62.7% of high school graduates enrolled in a college or university. As enrollment in higher education increases, the demand for student housing will grow even further. Some colleges are already struggling to find housing for all of their students.

There is potential to capture the rising demand by investing in student housing properties.

2. Stable Industry

The student housing industry is one of the most stable. Some people say it’s a recession-proof investment. Since all recessions are unique, there is no way to prove this claim, but history shows where the idea originated.

During the Great Recession, when many other industries suffered, college enrollment surprisingly increased. The higher the enrollment rates, the more housing is needed. College enrollment has remained relatively steady throughout history, making student housing real estate investments even more appealing.

3. Diversified Income

Student Housing Apartments

Another benefit of buying student accommodation to rent is that you have multiple sources of revenue. In a single-family home, you rely on one tenant for your entire income. Whether you invest in an apartment building, a collection of condos or one residence with several rooms, you’ll receive payments from several tenants.

The chances of losing all of your income with student housing are very slim.

4. Reliable Payments

While college students tend to have lower incomes than traditional tenants, they have a positive track record for making consistent payments. Their ability to make reliable payments is due to several factors:

  • Parents: In 2021, a national study of college students and parents found that, on average, parents fund 23% of their child’s higher education fees. If the student’s income is too low to cover rent, their parents often contribute to their housing expenses. For additional assurance, you can require a parental guarantee, where the student’s parents agree to pay the rent on behalf of their child. The security of their parent’s financial resources makes student tenants an ideal rental demographic.
  • Financial aid: Many students pay for their college expenses using financial aid. They can receive funding from scholarships, grants, loans and credit cards. Nearly 72% of students rely on scholarships and grants to pay for college, and 32% use borrowed funds. They can use this money towards any of their expenses, including their rent payments.
  • Roommates: Student housing typically includes shared living spaces that are paid for by more than one tenant. The cost of rent is shared amongst multiple students to make the payments more manageable.

5. Flexible Rates

In some states, rental control legislation bars landlords from raising the rent for their current tenants. Due to these laws, long-term rental properties can get stuck renting their units for lower than market value.

The benefit of student housing is that tenants are constantly cycling in and out as they graduate. You can replace them quickly with the next class of students who are eager to find housing. In September 2021, the average occupancy in student housing reached 94.1%.

The constant stream of new tenants allows you to raise your rates as the market fluctuates to maximize your profit potential.

6. Profitable Returns

In college towns with limited housing options, student rentals can charge higher rates. Students are willing to pay higher prices because their options are narrow. The cost of on-campus housing has doubled in the last 40 years, making off-campus properties more appealing to students.

Students’ priorities are generally price, privacy, and proximity to campus. You can meet these needs with a simple, low-maintenance property to get the highest return on your investment.

Student housing costs less and can be rented out for higher rates than traditional rental properties, potentially earning higher profits for investors.

Student Housing Investment Risks

It’s important to note that every investment comes with risk. Student housing investments are more reliable than most, but there are a few drawbacks to consider:

1. High Turnover

The student housing market has a high tenant turnover rate. While some might think this raises the risk of vacancies, this is rarely the case. The demand for student housing is high, and new students are interested in moving every semester.

Short-term leases can be beneficial. They allow you to adjust your pricing as the rental market fluctuates. And, if you have a troublesome tenant, you can replace them when their lease ends.

2. Property Maintenance

Student renters have a reputation for throwing loud parties, causing damages, and disregarding proper maintenance. While this might be true for some, you can also find students who will respect your rental property.

You can lower the risk of an unruly tenant by requiring a security deposit and renters insurance in your lease. If something happens, the tenant will be responsible for the cost of repairs. You can also encourage them to submit maintenance requests over text or an easy-to-use online platform. They’ll be more likely to reach out before a minor issue becomes a big problem.

While it might take some time, you can restore your property to its original condition.

3. Safety Liability

Some college students are notoriously reckless. However, many others are mature and responsible. In either case, there are strategies to help mitigate overall liability risks.

You can outline your lease with safety rules and policies and purchase comprehensive landlord insurance. Student housing might require more insurance and closer monitoring to protect, but the higher rental rates often exceed the additional costs.

4. Seasonal Vacancies

Most students return to their hometowns between semesters, leaving your property vacant over the holidays and summertime. While this might seem like a risk to your profits, there are several strategies to overcome this drawback.

If your tenant wants to keep their belongings at your property, you can continue to charge them rent. If they prefer to sign a nine-month lease, you can increase their monthly payments during the rest of the year to cover this loss. You can utilize their vacancy as an opportunity to make updates and perform regular maintenance to your property.

How to Get Started in Student Housing Real Estate Investment

As an investor, student housing may seem like a fascinating niche market. To get started with this type of real estate investment, you’ll have to work through various stages.

1. Look at Your Portfolio

If you already have a portfolio of investments, you’ll want to consider how a student housing investment will fit. If you’re striving to diversify your portfolio, examining student housing characteristics can help you determine if the investment will add something new to your portfolio.

Diversification often involves working with various levels of risk. Factors such as asset type, rental price point, and geography can all play a role in risk level. Your projected revenue and invested equity can also help you understand your projected returns.

2. Research the Market

Understanding market behaviors can help you determine whether a property is a worthy investment. Market behaviors can reveal which properties students are more likely to look for, helping you find tenants and fulfill the property’s revenue potential.

For example, market behaviors point to more community-centered living and eco-friendly transportation. If you try to invest in student housing that’s a 30-minute drive from the main campus, you may find it more challenging to attract tenants. When your property offers desirable features according to market behaviors, you may be able to apply higher rents that increase your revenue potential. 

3. Consider Location

Location in terms of the student housing market will involve the college campuses in the area

Location always plays a role in a real estate investment. It points to the demographic you’ll likely rent to and the overall desirability of your property. Location in terms of the student housing market will involve the college campuses in the area. These universities and colleges can help you identify potential tenants, rent prices, and more.

For example, a community college well-known for its high commuter population will likely not offer strong property investment opportunities. If there are very few students living on or near campus, your potential tenant pool will be small.

In contrast, a large state university with a big student population may offer plenty of renter potential. A small private university may have a smaller tenant pool, but higher tuition may correlate with higher-income families and higher rents. These considerations will all factor into your location decision.

4. Account for Expenditures

While your investment can lead to revenue, there may be several expenditures to consider before it’s ready to rent to college students. To understand all related expenditures, you’ll need a trusted contractor to guide you through the required modifications to a property. You may prefer to work with one contractor who can travel to various locations rather than find a local professional for every property.

Property remodels and updates can lead to hefty expenses, but how much you spend will depend on the quality of the property you invest in and general market expectations. An experienced contractor can help you understand which updates are nonnegotiable and which are optional based on market behaviors and regulatory needs.

Getting a contractor involved early in the investment process can help you manage capital and make informed investment decisions. 

5. Work With an Expert

In addition to working with a contractor, an investment advisor can guide your decision-making. These professionals specialize in portfolio development. If you work specifically with a real estate professional, you can gain more pointed insight into student housing developments and investment recommendations within the sector.

Working with an investment professional is not a requirement, and it will come with an additional expense. It’s up to you to decide if these insights could be valuable to you as a first-time investor in student housing. The additional expense may pay off if it helps make higher returns on your property.

6. Select and Purchase a Property

After you’ve learned about the market and your unique investment needs, you can identify and purchase a property. This stage will likely involve taking out a mortgage and determining how much of your own money you’ll put toward the purchase. You may also confront offers from other investments during the process. It may take time before you find a property where you can provide the best offer.

7. Manage the Property

Once the property is officially yours, you can move into the management phase of student housing ownership. How you go about this stage depends on your preferences. Some real estate investors will act as landlords and handle all management responsibilities, like getting leases signed, providing maintenance upon request, and collecting rents. Other investors will outsource the management responsibilities to a company or third-party provider.

Your choice will depend on the time you have to spare and how much of an additional expense you’re willing to accept.

How to Invest in Student Housing With a 1031 Exchange

The student housing market has significant potential. If you’re considering selling your current real estate in exchange for student housing, you can maximize your investment with a 1031 tax-deferred exchange. A 1031 exchange is a procedure that allows investors to defer all or some of the capital gains taxes when they sell their current properties in exchange for like-kind properties.

1. Work With a Qualified Intermediary

To complete a 1031 exchange, you must retain a qualified intermediary. This individual or company manages the funds involved in the exchange and has no stake in the transaction. When you sell one property, your intermediary will hold onto the funds from the sale. When you find a replacement property or properties, the intermediary will pass the funds to the sellers.

Since a qualified intermediary is responsible for holding a large amount of money, you’ll want to work with someone you can trust. Anyone who has acted as an agent in your investments in the past couple of years is disqualified for this role, such as an accountant, investment banker, or real estate agent. Otherwise, there are a few limitations for who can act as your intermediary.

2. Identify a Property for Exchange

There are several rules for what makes a property eligible for a 1031 exchange. The replacement and relinquished properties must be “like-kind,” which typically refers to the character or nature of the properties. This rule doesn’t lead to many limitations. For example, you can exchange a strip mall for student housing. The main limitations here require the property to be real, and you cannot exchange a domestic property for an international one.

Another vital rule is the equal or greater value requirement. Your mortgage for your relinquished property will count as part of the value. You can also deduct commissions and fees for brokers and attorneys, finder, filing, and escrow fees, and title insurance premiums. 

After you include these factors in the cost of your relinquished property, you can identify a replacement one. You have 45 days from the date you sell your property to identify a new one for a 1031 exchange.

3. Purchase Your Replacement Property

Once you identify the replacement property or properties, you have 180 days from the sale of your property to purchase the new one. This means your qualified intermediary must transfer funds to the seller within this 180-day window. To qualify for the capital gains tax deferral, your name must be on the title and tax return for both properties. 

4. Simplify the Process With 1031 Crowdfunding

The 1031 exchange process can seem challenging with the time limitations and associated rules, but it can help you maximize your investment in student housing. At 1031 Crowdfunding, we simplify the exchange process, so you can reap the benefits of the capital gains tax deferral.

When you register with us, you gain access to an extensive collection of properties available for exchange. Our inventory helps you reduce time spent searching for properties, so you can meet exchange requirements. Many of our clients close on purchases within a week.

How a DST Differs From a REIT Investment

The properties eligible for a 1031 exchange are limited. A Delaware Statutory Trust (DST) is an independent legal entity permitted by Delaware statutory law that offers shares of property you can purchase to defer capital gains tax in a 1031 exchange. A DST allows a flexible approach to how the entity operates. Investors own a pro rata interest in the DST are entitled to receive distributions from the trust in the form of rental income or profit from the sale of the property.

With a Delaware Statutory Trust 1031 exchange, investors can benefit from the profits of the DST without participating in property management. The trustee and the investors share an equitable legal title, but the trustee is solely responsible for managing the property.

A Real Estate Investment Trust (REIT) shares some similarities. Like a DST, a REIT owns real estate and sells shares to potential investors. Shareholders also receive a portion of all their net operating income in return.

The fundamental difference between a REIT and a DST is the regulations and requirements guiding their operations. The REIT technically owns the real estate, so investors are not considered to have a direct interest in the property. Therefore, the investment is not eligible to be part of a tax-deferred 1031 exchange.

How DSTs Differ From Direct Real Estate Investments

A DST allows investors to receive gains from student rental properties without taking on most of the associated risks and responsibilities. The benefits of purchasing student housing through a DST include:

  • Limited liability: DST investors have limited liability to their personal assets. If the trust goes bankrupt or faces legal challenges, the most you can lose is your investment in the trust.
  • Diversified assets: Some DSTs own multiple properties so that you can make gains from several sources with one investment. You can also invest in more than one DST to diversify your assets even further.
  • Minimal responsibilities: Student housing can require a significant amount of work to maintain. A trustee manages the DST, handling repairs, complaints, leasing, and any other property maintenance. As an investor, your only responsibility is contributing funds for your share.
  • Passive income: Once you purchase beneficial ownership in a DST, you’ll receive your pro rata share of all the income earned by the fund. You can potentially earn a significant income with minimal effort.

Invest in Student Housing With 1031 Crowdfunding

Though every real estate investment strategy has its fair share of risks, the market for student housing is increasing, making room for investors to potentially capitalize on stable cash flows. The demand for student accommodations is also climbing, which can help reduce economic fluctuations in the industry.

Purchasing student housing through a Delaware Statutory Trust provides all the benefits of owning real estate with less personal responsibility. A 1031 exchange can help you make a larger investment by deferring capital gains taxes on your relinquished property.

If you’re considering a student housing investment, our experienced team of securities and real estate professionals can help. At 1031 Crowdfunding, our online marketplace offers a vetted selection of real estate offerings. Register to learn more about 1031’s real estate investment options.

Invest in Student Housing with 1031 Crowdfunding

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise.  This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.


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