August 14, 2020

evaluating real estate opportunities in college towns

Evaluating Real Estate Opportunities in College Towns

Real estate investors all over the nation know that certain types of rental properties outperform others. Each type has its own set of risks, but a manageable long-term tenant can offset much standard risk in almost any situation and reinforce the positive aspects of owning real estate. Rental properties in college towns represent the middle ground between the best and worst real estate investing options.

Owning a rental property owner in 2020 has been an interesting ride. With the market fluctuations, economic decline, and the ongoing uncertainty of ordinary life — work, school, and society at large – it's hard to say whether the rental market will bottom out for the year or continue the slow climb we've seen at Rentometer over the past four months.

Public elementary schools, secondary schools, and high schools across the country have made plans for at least some level of in-person instruction, and colleges likewise. College students represent a reliable and recurring pool of rental tenants if you own property in a college town.

Advantages of owning real estate in college towns

Captive tenant pool

Depending on the college's size, you can count on a population of students who need off-campus housing. Although most colleges encourage freshmen to live on campus, not every new undergrad wants to live in a dorm. Then as students age into graduate and post-graduate studies, living off-campus is more desirable for their lifestyle and family needs. Every year, a new crop of potential tenants moves to town, and in the best case, they decide to stay year-round.

Steady rental income

If you lease your rental property at an average rental rate for the area, you are almost guaranteed to keep it occupied and earn steady rental income for the school year. To see if your rental rate is appropriate for the area, you can use a rental rate evaluation tool like Rentometer. Rentometer will show you how your property stacks up to similar rentals in your neighborhood. You may even find you can charge slightly more due to high demand among students for properties immediately sur-rounding a college campus. As an added benefit, many students need co-signers for their lease because they have no rental history. Their parents typically fill this role and offer a degree of security to ensure you'll be paid.

Continued property appreciation

Local governments in college towns work to keep the community a nice and attractive place to live – nice parks, good road, transit, snow removal. This helps keep private homeowners and rental property owners happy and making improvements to their home. As an investor, if you have an opportunity to buy at a good price, make a few improvements or renovate to add a bedroom or bathroom, and then rent the property out, it will boost the property's appreciation, giving you cash flow by raising rent for the improved property. And the home will appraise at a higher value when you consider selling.

Lower marketing costs

College students, teaching assistants, and other college staff all need housing. As swarms of people descend on the area each fall, you may be set with just a listing on Craigslist, Rentometer, or to get your property in front of a large number of searching eyes. This can cut your marketing costs quite a bit compared to marketing in a town without a college.

Many investors worry about college students as tenants, anticipating property damage, extra time, and energy to manage a rental property with this type of tenant. The risk that students are more prone to poor money management is thus likely to pay rent erratically. Let's look at some of the disadvantages of renting to college students and how to lessen those risks.


Disadvantages of renting to college students

Off-season vacancies

If your student tenants did not sign a 12-month lease, you could need to fill a vacancy when the lease expires during the summer, and students leave town. If that's the pattern, you have two options: Charge enough during the school year so you can cover holding the property vacant for 2 or 3 months OR extend the lease period. Either is an acceptable business practice for property owners in a college town.

Possible property damage

Most students have never owned a home. In general, it's safe to assume that renters are less likely to respect and care for a property they don't own. College students have earned a reputation for extra property wear and tear. There are those legendary large parties, pets, and a characteristic lack of concern about cleanliness. You may also find property damage due to neglect.

Student tenants are not always attentive to repair issues or damage, and may not take the time to communicate with the landlord or property manager. As a landlord, it's essential to detail each party's responsibilities – and liabilities – for property damage. Typical restrictions include prohibitions on pets, burning candles, storing weapons, or even odd rules like no climbing on the roof if there's a point of access.

Heavier hands-on management load

College rentals can be more management-intensive than other properties. Tenants don't always understand the binding nature of their lease and attempt to break the lease due to conflicts with roommates or noise complaints about neighbors. A manager may need to handle a high volume of complaint calls or serve as the intermediary between tenants in conflict to smooth out the situation. If this active management role is not for you, it would be smart to hire a property management company specializing in managing rentals in college towns.

Done correctly, renting to student tenants in a college town can be lucrative. Plus, many other college employees also need affordable housing. As an investor, property manager, or landlord, you'll want to take all the necessary steps to screen your new tenants or co-signers to keep rentals full and profitable.

With an uncertain economy and ongoing COVID-19 limitations, many college towns have been hit hard by students moving out of the area, perhaps for good. According to a study done by Smart Assets, college towns with an overall population of fewer than 125,000 people took the hardest hit from students leaving the area or college staff losing jobs during the pandemic. Do your proper due diligence on any rental area to look for a healthy mix of industry and diverse employment opportunities and a college campus to help balance the tenant pool and avoid complete reliance on students and teachers to rent your property.

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