If you live near any post secondary (and in some cases high school) institutions you will have demand for student housing. I want to share with you a way to make money with student housing as a real estate investing option.
The most common method or what most people think of when they hear the term student housing investing is when you buy a whole house or small multifamily (generally 1 – 4 units) and rent it by the room. Renting by the room is a great way to increase the revenue of an apartment or house. You will have to whey the pros and cons. What I have come to realize in real estate investing is that when you do something to increase revenue, it will come at a cost. Student housing has many challenges. The most important thing you can do is set expectations when you sign the lease. Make sure to carefully list what is, or is not included? Make sure to set the expectations on cleanliness of the room / common areas, set expectations on personal space as well as noise levels, including quiet times. If the tenant is required to pay a portion of any bills for heat, electricity, internet, food etc. they need to know up front. I had a friend who rented to students and one night he had a call and the renting student asked for toilet paper. When he explained to her that toilet paper was not included, she said with a snarky voice “you said everything was included”. It is all about communication.
Pros to renting to students by the room:
- More revenue: You will have an opportunity to likely increase the revenue of the property.
- Rent will be paid: Students are less likely to not pay rent, you can also get parents to co-sign, and in some cases students like to pay several months in advance. I do want to note that sometimes if a student drops out of school and they never plan on returning to the area, they may skip out on rent.
- Coin operated laundry: If you have a property rented by the room a great way to make additional cash is to install a coin operated washer and dryer. If you do not want the hassle of repairs, maintenance, vandalism (happens when people try to steal the coins) their are companies that will work a deal with you, where they take care of the machines (maintenance and money collection) and share the proceeds with you.
- Annual Lease: When you do student rentals on an annual lease, you can either charge for the full 12 months and require the student to pay for the full year, or now what many are doing is 8 month leases, then doing Airbnb (or similar service) for the other 4.
- Low Vacancy: The vacancy rate for student housing is generally very low.
- Parent co-signers: You can ask parents to co-sign the lease for a student. I have a friend who runs several student properties. He requires a credit card to be left on file. He makes sure the parents know that they will be liable for any damage done by the student.
Cons to renting to students by the room:
- Higher property management expense: If you are not able to manage it yourself, you will find that if a property manager is willing to manage it, they will want to charge more than if you were to rent it as a single family home or separate apartments. The reason is that is takes more time and emotional energy to manage a student property. This can be due to personality conflicts between tenants, tenants failing school dropping out, and abandoning the property.
- Common area cleaning: You will need to hire a cleaner to make sure common areas and bathrooms are clean. Having your tenants arrange their own cleaning schedule will likely end in a dispute. You will also need someone to take care of the garbage removal, lawn care and snow clean up. The cleaner can also be your eyes on the ground.
- Higher maintenance costs: When you rent to multiple people it can be hard on a property. This may include higher appliance repair costs, as well as broken cupboard doors, window screens, and flooring. Even additional plumbing costs due to clogged pipes.
- Utilities paid by the landlord: You will need to pay the utilities or rely on your tenants to make sure they are paid. I would recommend paying them yourself to ensure they are all paid on time. This will include a WiFi bill.
- Higher insurance costs: Insurance companies consider houses set up like rooming houses to be a higher risk for bad things to happen. It is important to get a quote and factor in the cost of insurance before you buy a student property.
- Government regulation: Many areas put limits on student properties. In my area, no matter what size the house is, you can only rent to five unrelated people per unit. This was changed many years ago, because what some landlords were doing was buying a set of flats and then turning every closet, dining room, living room etc. into a rentable bedroom. In the end many of these two unit properties would have up to 18 rooms (9 per unit). This created lots of cash flow, however, they were not popular with the neighbors.
- Local Zoning and by-laws: If a house gets considered a rooming house, it may fall into a different category of zoning, which may make it illegal to operate. In many areas you can only have one lease per unit. This means in order to have more than one student in a unit, you may have to make a custom lease, or add to the lease. If the lease is not compliant, you may be in violation of local tenancy rules. All investors need to do their due diligence, I have seen some big old houses for sale next to universities, they might advertise 10 rooms for rent. The challenge is that if you buy the house based on the cash flow of 10 rooms and then the local government says you can only rent 5 of them, you could be in a lot of financial trouble if you already purchased the property. Zoning by-laws usually become a problem if you poorly manage your student property. It will usually be a neighbor who makes a complaint to the local by-law office. The other part of by-law compliance might have to do with the kind of appliances, if any you can have in a room. You may be allowed to have a fridge and a microwave, but in many areas as soon as you ad a range, it is considered an additional unit.
- Fire and building code requirements: If you set up a property that acts like a rooming house, you will have to check local building code and fire regulations. This might include certain fire separation requirements such as solid doors or metal covered doors on the bedrooms, it could include a certain amount of fire extinguishers, solid ceilings (not drop ceilings). Occupancy per square foot or bedroom requirements. Also egress requirements for windows in room that are going to be used as bedrooms. I am not sure where old school hot plates fit (either under insurance risk, by-law, or fire regulation), however, I would recommend you do not allow them in your rented rooms.
- Housing and condo association rules: These organizations can put limitations on student housing. They might not necessarily discriminate against students, but they can definitely ruin your experience as a landlord. Make sure if you buy a property in an area that is run by some sort of housing association, that you are able to rent to students. I have seen some housing and condo associations not permit the rental of the property at all.
- Risk of out of control parties: It was not long ago, I saw a story on the local news about a student property in an affluent university area getting out of control. The students were yelling at police and standing on the roof above the front step. I do not know the back grounds of these students, or their history, however, I can imagine if they still lived at home and went to a local university, they would not have been involved in an incident where several got arrested for throwing things at the police and being drunk and disorderly. The problem is that being away from home and mixing it with drugs and or alcohol can change a person. It can also be worse since many student properties are located in upscale areas around post secondary institutions. This often means that quiet families might not be tolerant of party houses.
Until next time,
Design your landlord experience,
Michael P Currie
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P.S.S. this post is part of my real estate investing series. You may also be interested in one of the following posts:
I’m glad that you mentioned that the vacancy rate for student housing would be low. I feel like there will always be more students that will need a place to stay. If I decide to invest in some real estate, then student housing might be something that I should think about.