Learn how to buy investment property in college towns

Written on March 13, 2018 by

communicationBuying college town real estate can lead to big payoffs.

As a real estate investor, college towns may scare you. You might think, “transient party centers for young adults.” But savvy property investors buy in areas around universities. Why? There are lots of great reasons. Here’s why you should consider buying a rental property near a university.

Reasons to buy college town real estate

1. College towns sell themselves

Usually, college towns are filled with restaurants, nightlife, art galleries, and shopping. Plus, college towns have high walkability scores. Those factors can make it easy for you to market your property.

2. There’s a large pool of renters

At many schools, a large percentage of the student body relocates from other places, and many of those students stay only until they graduate. Then there’s university staff, faculty, and graduate students. Even though they may be more connected to the town for a longer period of time, they still might prefer to rent instead of purchase a property.

3. Strong rental rates

Because there’s a consistent demand for rental properties, you can maintain market value rental rates.

4. Vacancy rates are low

That said, do your best to have tenants sign one-year leases, as vacancy rates go up in the summer because of the school break. If you require students to sign a yearlong lease, you’ll be covered during the summer months.

Risks associated with owning properties in college towns

Even though there are many great reasons to buy property in university towns, like with any investment, there are also some risks.

1. Property damage

Students tend to cause a lot of wear and tear to rental properties. Factor this into your deposit requirements and the amount of time needed to prepare the home or unit for the next set of renters.

2. High turnover

Because college kids tend to move often, you may need to invest more time in finding new renters than you would with other properties.

3. Seasonality

As previously mentioned, it can be tough to find renters for the summer months.

4. Demanding tenants

Because it’s typically their first time living away from home, college students can have a lot of questions. And unfortunately, they may not treat your property like they would their own. Property owners and managers should be fairly accessible and available, so it’s best to live close to the property or hire a high-quality, responsive management company.

Types of investment properties

1. Single-family home

If you live locally or have a child attending the college, consider buying a single-family home that your child can live in with a roommate or two while they’re in school. That may mean you’ll have easier access to the property, and hopefully you can better maintain it than if the renters were strangers. If your child is willing to do the job, you could have an onsite manager! But if they don’t want that responsibility, hire a professional manager.

Single-family homes also make great rentals for college professors, other university staff, and graduate students, who may take better care of rental properties and stay longer than an undergraduate student.

2. Multi-unit property

Consider a basic multi-unit property, like a duplex, triplex, or quad. These types of properties can yield a better return than a single-family home, because you’ll have more renters in less total square feet. In many cases, you can buy these properties with a single mortgage, which could make them just as affordable as a comparable single-family home.

3. Apartment building

Maybe you have a lot of capital to invest and plan to keep the property for more than a few years. In that case, consider purchasing a larger apartment building (more than four units). Appreciation on multi-unit buildings can be high, as long as you maintain the property and keep vacancies to a minimum.

4. Fixer-upper

If you’re up for a remodel project, shop for a single-family home that you can remodel into a duplex, which could pay off in the long run. Be sure to check the residential zoning laws first.

5. REIT

If you don’t live near a college town but want to take advantage of investing in one, talk to your financial advisor about investing in a Real Estate Investment Trust (REIT) that specializes in college towns.

Managing the property

If you’ve never managed a rental property before, consider managing it yourself. With tools like Cozy, which is free for landlords and property managers, you can save lots of money during the duration of your investment. Or hire a quality manager. Just be sure to do your due diligence before hiring someone.

In general, choose properties with basic appliances: a refrigerator, oven, and stove. Renters might consider appliances like dishwashers, garbage disposals, microwaves, and washer/dryers nonessential.

If you’re a college student

If you’re planning to attend college, and have enough money to put a down payment on a home, consider buying an investment property. Owning the property you live in while attending college may pay off big when you graduate.

Instead of paying the equivalent of a mortgage to the university or a landlord, why not purchase an affordable home, get a roommate or two, and pay your own mortgage while you attend college? You can either sell the property and keep your earnings or keep it and rent it out to other students who will continue to pay your mortgage.

What to research before purchasing property in a college town

1. Your long-term plan

How long do you plan to own the property, and what is the recent history of the real estate market in the town?

2. The town

You’ll find better property values in a small college town that’s not near a metropolitan city versus purchasing in cities like Seattle, Denver, or Boston, where property prices are already high. For a good overview of good college towns to invest in, check out Redfin’s picks.

3. The school

Is it growing and expanding? Are buildings being added, either on or off campus? What’s the ratio of students who live on campus to those who live off campus? How much student housing does the school own? Does the school plan to increase or decrease its enrollment? What are the rental rates? What are the cap rates?

4. Differences between private and public schools

Private schools may have lower enrollments and stricter policies on student housing, while public universities may have higher enrollments and more commuter students.

If you haven’t considered owning investment property in a college town, you might want to rethink your strategy. It’s difficult to argue against the earning potential of college town real estate.

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