Investing in a rental property in Collegetown can pay off big, but there’s a problem

In college and university towns across the country, each academic year brings a new wave of students, faculty and staff, many of whom are looking for housing. This demand creates a unique and flexible real estate market for anyone looking to purchase an investment property. While there are benefits, owning and renting a home in a college town may also come with some challenges.

Purchasing a property in a college town may pay off

Constant demand for rent

Many colleges and universities operate year-round, including offering classes during the summer. Some students take courses between semesters, while others may stay in the city for work, internships, or sports. Also, graduate students, faculty, and university staff can work year-round.

Even during economic downturns, college enrollment rates typically remain steady and can rise, as some students pursue graduate degrees during a difficult job market. For example, from 2010 to 2011, after the Great Recession, college enrollment was about a third higher than it was in 2006.

As a result, college towns have consistent demand for housing throughout the year, resulting in high occupancy rates and low vacancy rates.

Reliable rental income and attractive returns

Student accommodation often commands higher than average rents, as the university’s presence provides a competitive pool of applicants for each property. Furnished units, or those close to campus, can fetch higher rents. A 2023 Nasdaq analysis of 11 popular college towns in the southern part of the United States found that more than half of them had median rents above the national average for a two-bedroom unit.

Long-term appreciation and stability

Colleges and universities are generally large employers in their areas, and their presence often supports local economies and creates demand for other industries and services. This creates economic stability in college towns, which can lead to a steady increase in property values.

These increasing property values, combined with continued demand for housing, mean that properties in college towns generally have good resale values. Also, if you sell your property, you should have many willing buyers.

Large pool of tenants

College towns are home to more than just students. Schools create a large pool of tenants for rental properties by bringing in faculty, administrators, visiting professors, researchers, and other staff. Some students stay in their college towns once they graduate, or young professionals move on to take up jobs in companies that spring up around the university.

Family savings and benefits

Owning a home in a college town can benefit your family if your child decides to go to school there, especially if living in off-campus housing is common. While some college towns have affordable rents, others can reach nearly $1,700 or more per bedroom each month. This amounts to $17,000 in housing costs for the 10 months of the academic year (August to May).

Having a property where your child can live, perhaps with a few friends, can make these costs more manageable. Also, owning may offer tax advantages if you can claim a mortgage interest deduction or you use previous rental income from the property to pay off the mortgage. You will also avoid the hassle and costs associated with moving every year.

Fishing with buying real estate in a college town

Tenant turnover

If you rent to students, you’ll likely need to find new tenants every year, or every few years. This frequent turnover can take significant time and resources, both from you personally and in the form of payments to the property management company.

Erosion of property

If you are renting to graduate students or young professionals in the city, your property may be exposed to a moderate level of wear and tear. However, some college students may not be careful and respectful tenants. You may incur more accidental damage with younger tenants and will need to budget for annual maintenance, in addition to taking a security deposit.

Management challenges and seasonality

If you don’t live in the city, you’ll need a property manager or management company to handle tenants, maintenance, and any issues that may arise. If the property is not rented during the summer months, someone will need to check on it regularly.

The cost of property managers can vary depending on the size of the property and the number of tenants. For example, a single-family property may have lower management fees than a building with multiple residential units. Although some property managers charge a flat monthly fee, many charge a percentage of the monthly rent, typically ranging from 4% to 12%.

Depending on the services provided, the property management company may also charge fees for:

• Initial setup
• Tenant status
• Vacancies
• maintenance
• Evictions
• Early termination

Initial costs and complexity of financing

Unless you can pay cash for the property or plan to live there, the purchase will be considered an investment property. Mortgages for investment properties have different requirements than mortgages for a primary residence.

Most insurance companies don’t offer mortgage insurance for your investment property, so you’ll need a down payment of at least 15% to 25%, as well as very strong credit to qualify. Investment properties also won’t qualify for many programs that help homebuyers secure low-cost financing, such as FHA or VA loans. Lenders may also require you to have enough savings to cover mortgage costs for several months.

Local regulations and zoning

Before purchasing an investment property in a college town, check local regulations, as zoning laws may restrict the number of tenants you can have in one property. If you purchase a property in an area with a homeowners association (HOA), the HOA may also restrict the number of renters or whether you can rent the property at all.

Tips for success

• Choose the appropriate location: To attract renters, purchase a property in a desirable part of town. Consider walkability, neighborhood appeal, and proximity to campus, restaurants, and popular local spots.
• Screen renters: Careful screening of tenants reduces the risk of property damage or unpaid rent. If you’re not sure how to screen tenants, work with an experienced property manager.
• Invest in durability: When maintaining a home, choose materials that can withstand heavy wear and tear, such as vinyl flooring, washable paint, and appliances with minimal bells and whistles.
• Off-season plan: If you don’t have summer tenants, use this time for maintenance or renovations. Or consider flexible leases to attract new faculty, graduate students, or recent graduates who may need a short-term home.
• Do your due diligence: Educate yourself about owning and managing an investment property by learning about mortgage financing, tax implications, local regulations, market trends, rent schedules, landlord responsibilities, and tenant rights.

Bottom line

College and university towns offer a unique combination of rental demand and economic stability, making them an attractive investment opportunity.

However, owning an investment property comes with many challenges, including mortgage financing requirements, tenant turnover, and depreciation. Before purchasing, consider the pros and cons of owning a rental property and being a landlord to ensure you are prepared and that your investment provides long-term value.