Student Housing Investment: Benefits, Risks, and 6 Steps to Invest

The student housing sector is exploding, with a projected compound annual growth rate of 4.95% from 2021 to 2032, according to Business Market Research. This staggering growth highlights the hot demand for housing tailored to college students. If you're a real estate investor looking to capitalize on this booming market or a parent wanting to give your college-bound kid an affordable place to nest, understanding the ins and outs of student housing investments is a must.

This article covers student housing investments, exploring the benefits, challenges, and best practices. From higher rental yields and income stability to potential management headaches and legal considerations, we cover this niche market's key details.

Additionally, we offer insights for parents interested in leveraging real estate to reduce the costs of housing their college students. Discover various approaches to student housing opportunities and learn how to get a slice of the student housing boom.

Benefits of student housing investments

Investing in student housing has several advantages compared to other types of real estate investing niches:

Higher rental yields

Student housing can provide higher rental yields compared to traditional residential properties. Some of the reasons for this include:

• Location premium: Most students are willing to pay a premium for properties close to campus and with desirable amenities. These amenities can include high-speed internet, study rooms, fitness centers, laundry facilities, and common areas for socializing.
• Group rentals: Students often rent properties in groups, which can result in higher overall rent per property. For example, renting a four-bedroom house to four individual students can generate more income than renting the same house to a single family.
• Shorter lease terms: The typical lease term for student housing is nine to twelve months, matching the academic calendar. This allows landlords to adjust rental rates more frequently in response to market conditions.

Income stability

• Consistent demand: Colleges and universities have a regular flow of students each year, creating a consistent demand for housing. This stability can lead to reliable occupancy rates and steady rental income.
• Parental guarantees: Many students' leases are co-signed by their parents, providing an added layer of financial security and reducing the risk of late payments.
• Low vacancy rates: High demand for student housing typically leads to low vacancy rates during the school year. This gives investors a more stable and predictable income stream.

Appreciation

Properties in college towns often appreciate in value due to the constant demand for student housing. Universities constantly expand with new buildings and facilities, further increasing the demand for housing.

Challenges of student housing investments

While there are great benefits to investing in off-campus housing, there are some drawbacks to be aware of:

Management challenges

• High turnover rates: Student housing has a high turnover rate, with students moving in and out at the end of each academic year. This requires frequent tenant searches, property preparations for new residents, and a constant screening process.
• Maintenance and repairs: Properties rented by students experience more wear and tear, resulting in higher maintenance and repair costs.
• Time management: Managing student housing can be time-consuming, especially if you're handling maintenance, rent collection, and tenant issues yourself.

Financial risks

• Seasonal demand: The demand for student housing is seasonal, peaking when college students arrive at the start of the academic year. During periods of lower occupancy, landlords still need to cover mortgage payments and other expenses, which can strain finances.
• Dependence on university enrollment: The success of student housing assets ties closely to the enrollment rates of nearby colleges and universities. Declining enrollment can negatively impact your overall return on investment (ROI).
• Potential for missed payments: While parents co-sign many student leases, there is still a risk they won't pay rent or make payments behind schedule, which can affect your cash flow.

Legal and regulatory issues

• Compliance with housing laws: Like all rental properties, student housing investors must comply with various local, state, and federal regulations, including safety standards and tenant rights.
• Noise and behavior issues: Student tenants can sometimes be noisy and behave in a way that disturbs neighbors, leading to potential conflicts and complaints.

Steps to invest in student housing

If you decide to invest in this niche, here are key steps to guide you through the process:

Step 1: Research the market

Start by understanding the student housing market in the area where you want to invest. Look at the local colleges and universities, the number of students, and their housing needs. Review the demand for student housing and the existing competition.

Step 2: Choose a location

Like any investment property, the right location impacts occupancy and rental income. Properties close to campus, public transportation, and amenities like grocery stores are more attractive to students. For example, recent data from Statista shows that properties within 1 mile of campus experienced a 1.5% higher rent growth than those located further away.

Consider all the varieties of college students and their needs:

• Medical students: Medical students need quiet, study-friendly environments with longer lease terms and housing near medical facilities and hospitals.
• Graduate school students: Graduate students often seek private, quiet rentals with longer leases to accommodate their focused study needs and extended stay durations.
• New college students: New college students seek housing very close to campus for convenience and safety. They may also prefer furnished units with communal spaces for socializing.

Step 3: Create a financial plan

Calculate your potential student housing investment returns by evaluating the following:

• Investment amount: Begin by calculating the initial investment required, which includes the property's purchase cost. Include any renovations you've made so that the property meets safety standards and appeals to student renters.
• Operational costs: Consider regular maintenance and repairs. Since student housing can experience more wear and tear, budget for frequent upkeep. Add in other costs like property management fees, insurance, property taxes, utilities, and marketing expenses.

Next, determine your expected rental income. Start by researching the local rental market to understand what students are willing to pay for similar properties and determine your potential rental rates. Calculate your potential ROI by comparing the expected rental income against your total investment costs.

Step 4: Secure financing

Explore different financing options available. This could include traditional mortgages, commercial real estate loans, or private financing.

Step 5: Determine your property management strategy

Decide whether you will manage the property yourself or hire a property manager. Self-managing can increase your income and overall return on investment.

Using property management software like Azibo can help reduce your operational burden. This all-in-one platform offers a range of features that enhance your efficiency and effectiveness as a landlord. Key features include:

• Tenant screening: Use comprehensive tenant screening tools, such as background checks, credit reports, and rental history reports, to select high-quality tenants and reduce the risk of lease violations or other issues.
• Lease agreements: Create and manage state-specific lease agreements with customizable terms to confirm compliance with local regulations. This proactive approach verifies that your leases remain relevant and legally sound.
• Rent collection: Automate rent collection with Azibo's easy-to-use online payment system. The easier it is for your tenants to pay rent, the more likely you are to receive on-time payments and steady cash flow.
• Maintenance management: Efficiently handle maintenance requests with an online submission and tracking system. Tenants can report issues, and you can monitor each task's progress and completion to verify your real estate investment remains in top condition.
• Financial tracking: Use Azibo's powerful financial tracking tools to monitor your income and expenses. This includes tracking rent payments, maintenance costs, and other operational expenses, helping you maintain a clear overview of your property's financial health.

House hacking for college students

If you have a college student, why not use real estate investing to cut down on housing costs? Buy a property near the university, rent out the extra rooms, and your child's housing could be covered entirely, or at the very least, be a lot cheaper.

If you decide to go this route, Azibo's property management software can be your ally in making management easier. Azibo also offers a wide range of educational resources to help you get started.

Additional tips

• Involve your child: Encourage your college student to help manage the property. This can be a great learning experience in responsibility, money management, and basic landlord duties.
• Understand tax benefits: Owning rental property can provide many potential tax benefits, such as deductions for mortgage interest, property taxes, and depreciation.
• Set clear rules: Establish clear rules and guidelines for your child and other tenants to prevent potential conflicts and management hassles.
• Fair Housing Act: Research the Fair Housing Act to make sure you follow all practices and stay compliant with regulations.
• Consider future use: Think about how you might use the property after your child graduates. It could continue to be a rental property, or you might choose to sell it for a profit.

Financing options

• Kiddie condo loans: Kiddie condo loans are FHA loans that allow parents to purchase a property for their college-going children with a low down payment. These loans require the child to occupy the property as their primary residence, and parents can co-sign the loan to qualify for better terms.
• Home equity loans: If you already own a home, consider using a home equity loan or line of credit to finance the purchase.
• VA loans: If your child was in the military and is now going to college, they may be eligible for VA loans. These loans can provide favorable terms for purchasing a property, such as lower interest rates and low or no down payment.

Best practices when owning student housing

If you decide to invest in student rentals, a few strategies that can help you succeed in this specific asset class include:

Financial protections

• Require a cosigner: Since students often have limited credit history and income, requiring a parent or guardian to cosign the lease adds a layer of financial security and reduces the risk of unpaid rent.
• Security deposit: Collect a substantial security deposit to cover potential damages and make sure that students have a financial stake in maintaining the property. This can help mitigate the higher wear and tear typically associated with student housing.
• Automate rent collection: Set up an online payment system for rent collection. This increases the chances of timely payments and provides a clear record of transactions.
• Utilities: Charge for utilities based on usage separate from rent. Charging separately encourages college students to be mindful of their energy consumption.
• Late payment fees: Implement and enforce penalties for late rent payments to encourage college students to pay rent on time.

Legal protection

• Lease agreements: Create state-specific lease agreements that outline rules and responsibilities, including noise restrictions, guest policies, and maintenance obligations. This prevents disputes and sets clear expectations.
• Set occupancy limits: Define the maximum number of occupants per unit to prevent overcrowding and excessive wear and tear on the property.
• Insurance requirements: Tenants should be required to buy renter's insurance to cover their personal belongings and any potential damages they may cause.
• Limit subletting: Restrict or carefully regulate subletting to make sure that only approved college students reside in the property. This helps you maintain control over who lives in your units.
• Screen tenants: Conduct detailed background and credit checks on all potential tenants to verify they meet your criteria and reduce the risk of problem tenants.

Investing in student housing

Student housing investments offer attractive returns through higher rental yields and steady income but also come with distinct challenges. Managing student tenants requires careful attention, as does following applicable housing laws and regulations. Investors must understand the dynamics of this market to succeed with student housing investment opportunities.

Implementing best practices such as thorough tenant screening, clear lease agreements, and efficient property management systems allows investors and landlords to reduce risks and maximize returns.

Parents can explore innovative strategies like house hacking, leveraging the potential tax benefits, and long-term appreciation of real estate investments to make their child's college housing more affordable.

As the demand for student housing continues to soar, driven by factors such as increased college enrollments, those who approach this market with a well-informed strategy stand to reap great rewards. For an experienced investor or a parent seeking cost-effective solutions, the time is ripe to tap into the growing student housing market and secure a promising investment for the future.

Student housing investment FAQs

Who are the biggest investors in student housing?

According to Statista, American Campus Communities was 2022's largest student housing owner.

How can a college student invest in real estate?

A college student can invest in real estate by starting with small-scale investments like house hacking, partnering with family or friends, or using real estate investment trusts (REITs) to buy shares in real estate portfolios.

Is student accommodation worth it?

Yes, student accommodation can be worth it due to consistent demand, higher rental yields, and the potential for property value appreciation.