Pros and Cons of Investing in Student Housing
Student housing is one of the soundest real estate investments you can make, especially for novice investors. However, investing in student housing isn't for everyone.
While college enrollment has declined slightly since the onset of the pandemic, there are still nearly 16 million college students in the U.S., and around 63% of high school graduates go on to enroll in college, including 56% of Colorado high school grads. That’s a lot of college students — and they all need somewhere to live.
Student housing is perennially one of the soundest real estate investments you can make, especially when it comes to accessibility for the novice investor. While you might be able to unearth value by hunting off-market, that takes luck and experience, and while using a low commission real estate agent can help you increase your profit margins, that won’t save you if the market turns. On the other hand, investing in student housing just means finding a college town, buying a property, and putting a “for rent” sign out.
That said, investing in student housing isn’t for everyone. While maintenance requirements are some of the lowest of any real estate type (for reasons we’ll touch on below), rents are often guaranteed by co-signers, and there’s a constant and growing supply of new tenants, it also comes with some unique challenges that can be intensely frustrating. Check out these pros and cons of investing in student housing.
Colleges generally provide housing for some of their first- and second-year students, but the majority of the student body needs to find off-campus housing. This means that there is a consistent, durable, high demand for student housing in college towns. It’s also relatively easy to find good value in a college town, which makes student housing an attractive option for an investor who’s just starting out.
While a conventional residential neighborhood may experience surges and declines in popularity (and rents), when it comes to student housing, the closer you get to campus, the more valuable the property is going to be, and not much is going to change that. That means your investment is going to be profitable even if you’re paying premium prices and full real estate commission.
Rents are generally pretty high in college towns. Part of this is due to expenses on your end; turnover and vacancies are high, and students tend to put a lot of wear and tear on their housing. The rest is due to the simple fact that you’re in a captive market. The students you’ll be renting to can’t commute from farther away, and they can’t live on campus. They have to rent student housing, and for all practical purposes, they’re confined to a pretty small physical area.
On top of that, students tend to live pretty densely. That single-family home you might rent to a family for $1,800 a month could now rent to five roommates who’ll pony up $500 apiece.
Relatively low maintenance
In general, college students aren’t going to demand high-end finishes like marble waterfall counters or a stainless steel chef’s range. (There are exceptions, of course — high-end student housing is still high-end.) College student tenants are satisfied with a clean, functional home, and won’t nitpick about the kind of small problems an adult professional or family might make into an issue. That translates to fewer demands on you and your professional property management — so much so that you may even be able to manage the property remotely.
Cosigners offer special security
Since most college students haven’t yet established a credit history, it’s fairly common to get parents to cosign the lease. So if your student tenant forgets to send in the rent, loses their job, or even drops out of school, you can still be assured that you’ll get your rent.
Wear and Tear
Although student housing is one of the soundest investments you can make, college students can put a lot of hard miles on a property. From weekend parties to setups where six people are sharing four bedrooms (and one and a half bathrooms), student housing tends to age in dog years. College students aren’t known for being meticulously clean, either, and problems like mold, leaks, or pest infestations can quickly lead to more serious damage.
Among landlords, long-term, dependable tenants are highly prized. That’s because cleaning up and repairing a property between tenants is costly and time-consuming (and that vacant time represents lost money), and each time you get a new tenant in a property, there’s a chance they’ll be difficult or negligent.
With student housing, you’re essentially guaranteed to have turnover every year or two. That’s going to put a lot of pressure on you to get the property fixed up and rented quickly once a tenant moves out, and to properly screen new tenants. That can be tough if you’re an inexperienced investor.
The rental cycle for student housing is going to revolve around the school year, so if your property becomes vacant in the off-season, you’re probably going to be stuck with a vacancy until the students come back to town. You might also have to deal with summer subleasers in your property, and short-term subleasers can be flaky. The complications from this kind of uneven demand can be very disconcerting to an investor who’s just starting out.
Experienced student housing landlords have also noted that, due to the strong seasonal demand cycle for student housing, you more or less have to rent your property before the start of the school year or face a year-long vacancy. Once the school year starts, students aren’t going to be trickling in a month or two into the semester looking for housing. Another issue is that non-students don’t typically want to live in or near student housing.
Dependent on the university
You’ve probably seen a common theme through all these pros and cons: the success of your student housing investment is intimately tied to the college or university. While the college thrives, so will your property. On the other hand, if the university fails or contracts, your investment will likely suffer too, regardless of the property type. Make sure the educational institution you’ll be tying your prospects to is thriving, stable, and secure!
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is also a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.