If you have a college bound student, buying a rental property near campus may have crossed your mind as a good investment decision. I have invested in this market for more than 3 decades and have compiled the following assessment to help you decide.
Should you buy a rental property for a college student? For parents who want a solid long-term vehicle for passive income, buying a rental property when a child goes to college is an excellent investment. You can save on student housing, collect rent revenue, and build equity.
There are some downsides to consider. Owning rental property is not for everyone and what may seem like an opportunity could become a setback. But with the right knowledge and proper planning, you can be on the path to making a worthwhile investment.
Is buying a rental property for a college student a good investment?
Buying rental property as an investment strategy is a great idea for almost anyone. Owning a rental in a college town when your student is going to school there could have some significant added benefits. Learning how to weigh the potential return on your investment before diving in will help you maximize your earnings potential and avoid common mistakes.
One of the first things you will want to research is what is the income potential for rental in this area.
Let’s say you are considering a 3-bedroom single family home two blocks from campus. You check the off-campus housing site, Craigslist.org and other sources and find the rent rates in this area are $1,200 per month.
Assuming the rental will be occupied by 3 tenants, you can expect $1,200 per month ongoing, but only $800 per month during the first four years while your student is living there.
Rents can and do increase over time. The closer your property is to campus and better the condition, will often equate to higher rent.
Long term appreciation
Over time, your rental property investment will increase in value. It is important to understand that on average, four years is not long enough to build significant appreciation in a rental to make it a profitable investment.
While in some locations and markets the value of your property may skyrocket, this is not typical. While you certainly can, and should, weigh the possibility of selling your college rental after your student graduates, expect to hold onto your investment for much longer to realize the real profit potential.
Keep in mind that you will spend a lot of money up front in attorney fees, inspections, repairs, etc… that will reduce any appreciation when you sell.
Another very important consideration when owning investment property is depreciation. Depending on how you report depreciation for tax purposes, you may have to pay that money back when you sell. In this case you may want to do a 1031 exchange for another rental property.
Saving on college housing costs
Living on campus is usually considerably more expensive than renting off campus. There are many benefits to living on campus such as:
- Furnishings included
- Proximity to classes and campus amenities
- Social life / activities
But, for students looking to save some money or gain more independence, off campus living has its advantages.
I did some research on 10 colleges throughout the US and found the following costs for dorm rooms:
|College||Avg Rent Per Month|
|Oregon State University||$970|
|University of Florida||$578|
|University of Illinois||$734|
|University of California – Davis||$1126|
|Colorado State University||$682|
You will want to take a look at the exact cost of housing at the college your student will attend to get an accurate understanding how much you might save each year while your child is living off campus.
Costs of buying a rental property:
When you buy an investment property, there are a lot of upfront costs you might expect.
- Attorney fees
- Real Estate broker fees
- Closing costs (title, taxes, admin)
- Repairs & maintenance
- Legal forms
- Advertising (for other tenants)
If you obtain a standard mortgage to purchase the property there will be mortgage interest which will likely be significant in the initial years.
Look for a positive net income
It might not always be possible, but before buying a rental property as an investment I like to see the potential for a positive net income. That means the income from the rental is greater than the costs. Here is a simple formula you can use:
+ Cost savings from campus housing (1 or 2+ students)
– Mortgage payments
|House price: $250,000|
|Mortgage Principal, Taxes, Insurance||($1,700)|
|Cost savings (of not paying for on campus housing):||$800|
|Net Monthly Cash Flow||$200|
There are many other variables such as students sharing a room, or your down payment amount that will impact actual results. But this gives you an idea how to determine if buying a rental property for a college student is a good investment.
Pros and cons of buying a rental property when your student goes to college
Great incentive to get started with investing in real estate
Rental real estate is an excellent investment and if you have a college age student, this may be the time to purchase your first property. Don’t expect to make a huge profit or even get to positive cash flow in the first four years. It can happen, but not always likely. The important thing is you are getting started.
Have someone on site to keep an eye on property, collect rent
While your student is living at the property, you will have someone who can make sure things don’t get out of hand and maybe even collect rent from other tenants.
Easier to find tenants
Your son or daughter will likely make some friends at school who may be interested in living together. It may be easier for your student to get the word out and show the property to prospective tenants.
Generally higher rent
In many college towns, off campus housing is in high demand. So, you can usually charge a bit more for rent compared to other areas.
Your student is there to study
If you are considering having your student handle all of the rental property duties, it may be too much of a burden for them. Remember, they are there to study and learn. Not be a landlord.
When student graduates no longer have same oversight
After 4 years (or possibly less), your student will no longer be around to keep an eye on things. Since many colleges require first year students to live on campus, this time may be shorter.
Here is an entire article I wrote on how to reduce the risk of renting to college students that you can use as a handy guide.
Sharing a house is not easy
Often young adults can grow tired of each other. What seemed like a good living arrangement does not always work out. This is especially true when multiple people share the same home.
Miss out on part of college experience
Many college dorms and managed apartment communities will have amenities and social activities for students that your son or daughter will miss out on.
Consider getting help managing a college town rental
Getting someone to help manage your rental property will help make everyone’s life easier. Your student can still look after the wellbeing of the home but won’t have the responsibility of dealing with the many issues that can arise.
When your student graduates, you will still have someone there to keep up with leasing, repairs and maintenance.
Of course, the cost of having someone manage your rental will reduce your profits. Although the prospects of obtaining a positive ROI over the long term will be much better.
Here are a few responsibilities a rental property manager can assist with:
- Keeping the rental up to code with town/city
- Repairs and maintenance needed before occupancy
- Ongoing maintenance and repairs
- Emergency repairs – what do you do if a water main breaks? Roof leaks? Refrigerator stops working – who will shop for a new one?
- Collecting rent
- Leasing / interviewing tenants – in the best world, your student is living with his friends for four years but you can expect this.
- Evictions -yikes. It could happen
- Managing rental after graduation
Should I buy a condo for my student to live in college?
A condo may be a better option than a single-family home for your student’s well-being. There will likely be fewer maintenance concerns and communities often have amenities that the younger crowd will love.
Typically, a condo will not be a great investment as a rental property. A condo will not have the same appreciation potential, and there are often limits on how much rent you can charge.
Be sure to evaluate the profitability of your investment before deciding it is the right choice.
Important issues a parent must assess before buying a rental for a college student
You have seen how buying a rental property when your kid goes off to college can be a good investment. And, I have shared some tips on how to successfully manage this type of rental. But there are a few more things to consider before you invest in a college town rental.
1. Some colleges don’t allow freshmen to live off campus. This may reduce the amount of time your student lives in an off campus rental.
2. Insurance – You will certainly want to purchase appropriate insurance that covers your property as well as the tenants and guests.
3. Background checks – even though fellow renters may be friends with your student, it is a good idea to complete a background check before letting them move in.
4. Maintenance (this may still be a long-distance rental) – will your son or daughter be able to complete some of the basic maintenance such as shovel snow, cut grass, prep a furnace for winter or investigate a water leak.
Furthermore, will your student be prepared to deal with tenant issues, even if they are friends?
5. Timing of buying a rental – When will you start looking for a property? High school kids often get accepted to college in March of senior year for regular admission. That may not leave you much time to research and complete a purchase before school starts in September.
6. Where to buy – Do you know the area well enough to invest in the right location. Is it walkable, safe, noisy, a party atmosphere?
7. Who will rent with your student on day one? You may need to advertise to find roommates.
8. Will your child stay at school? Sometimes, a college is just not the right choice for a student.
9. What is the off campus atmosphere like? Are lots of students living off campus? Do most students live in managed communities? Does the school have a graduate program?
10. If you don’t hold a property long enough, you could sell it at a loss.
Making your college rental a good investment
If you are considering buying a rental property for a college student, it is critical that you do proper planning. This includes having in-depth discussions with your student to make sure they will be committed to the responsibility of overseeing the property while living there. These efforts will help cultivate a sound financial investment for years to come.