Investing in Student Rental Properties
Are there colleges and universities in your area? If so, there are almost certainly students looking for rental properties and savvy real estate investors meeting that need. Let’s consider how and why you might wish to join this growing investment sector.
The Benefits of Student Rental Investments
Economic resilience. Most rental markets are subject to the ebbs and flows of local economies; rents often rise and fall with employment levels and other economic conditions. That’s not the case with most student rentals, which benefit from ties to institutions of higher learning that are generally unfazed by economic downturns.
High demand. According to the U.S. Census, the overall U.S. rental vacancy rate in the fourth quarter of 2024 was 6.9%. Supply is higher than demand, and some rentals go empty. On and around many U.S. college campuses, however, there’s a considerable shortfall of student housing. With demand greater than supply in many cases, the student rental market is enticing for investors.
Fewer restrictions. People who invest in the short-term rental market face increasing restrictions on renting through online platforms such as Airbnb and Vrbo. There’s an ever-growing list of cities, including Los Angeles, Santa Monica, and San Francisco, that have strict Airbnb laws. These laws can considerably reduce a real estate investor’s earning potential. Student rentals don’t require special licensing and are governed by the same laws that cover all residential rentals.
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How is the student rental market trending?
Growth. Last year, U.S. investment in the student housing market totaled $5.7 billion. The market research company Mordor Intelligence estimates that the revenue from this market was $3.1 billion in 2023, with a compounded annual growth rate of 6.5%.
Location. Properties within a half mile of campuses have the highest rents and occupancy rates in the student rental market. The highest rent increases, however, are among properties located between a half mile and one mile from campus. As of March 2024, the average year-over-year rent for these farther-out properties rose 7.3%. The average increase for all student rental properties was 5.8%.
California and Arizona have some of America’s highest-rising student populations.
Berkadia’s 2024 U.S. Student Housing Report ranks California State University, Fullerton and California State University, Long Beach among the Top 10 fastest-growing flagship universities in the U.S.
America’s fastest-growing colleges include California State University, Northridge; San Diego State University; the University of California, Irvine; Arizona State University; and Grand Canyon University in Phoenix.
Housing type. Nearly two-thirds of U.S. student renters prefer to rent a private room. Close to one-third of students in that group wish to rent an entire property.
Amenities. Among desired rental amenities, the Top 3 for U.S. students are an in-unit washer/dryer, their own bathroom, and extended Wi-Fi.
What’s the best financing option?
Mortgage programs that go well with student rental properties include:
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- DSCR Rental Loan. With this unique mortgage program, loan approval is primarily based on the income that a property will generate, not the borrower’s personal financial situation. There’s often no income verification, nor the need to submit tax returns when applying. A DSCR Rental Loan is tailor-made for short-term rental properties.
- Conventional Loan. Adhering to the guidelines of Fannie Mae and Freddie Mac, conventional loans are popular with investors because the mortgages often have lower interest rates and fewer fees. You could finance a single-family home, a condo, or a one- to four-unit property with a traditional 15- or 30-year fixed-rate mortgage. An adjustable-rate conventional mortgage, however, may better suit your investment needs.
- Bank Statement Loan. Designed for the self-employed, Bank Statement Loans don’t rely on traditional approval criteria such as pay stubs and tax returns. Instead, mortgage professionals mainly consider the cash flow patterns of bank accounts to determine eligibility. If you work for yourself and are looking to invest in real estate, a Bank Statement Loan may be an ideal option.
- CPA Profit & Loss Loan. Real estate investors often own their own businesses and take tax deductions that lower their net incomes on paper. This can be an issue when applying for a mortgage loan. Thus, the need for a CPA Profit & Loss Loan. With a profit-and-loss statement prepared by a certified public accountant, your mortgage professional can get a true picture of your financial situation.
The Pros and Cons of Student Rental Investments
The Pros
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- Higher earnings. A quick Google search can tell you around how much an investment property will rent for, based on an average of individual rental agreements in the area. Property owners who charge multiple renters individually, however, could yield significantly higher monthly earnings. For example, six students might each pay rent on a three-bedroom house, with the total exceeding what one rental agreement might generate.
- Lower costs. Smart-home tech? Hardwood flooring? Green spaces? These are some of the most sought-after amenities among most renters. Students rarely seek such higher-end features; they want the basics, and that can lower the investment cost considerably, especially if you’re buying a fixer-upper.
- Co-signer security. As students rarely have lengthy credit histories, it’s common for landlords to require co-signers, often the parents of students. This gives the property owner an extra layer of protection to ensure the rent gets paid.
The Cons
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- Maintenance and repairs. The relaxed attitude students may have about a property’s condition and amenities has a downside: the likelihood of property damage could be higher. From raucous parties to sloppy students, higher-than-average wear and tear is possible.
- Unreliable tenants. Students may be more likely to breach a contract if they leave school early or have roommate disputes. Sneaking in an extra roommate to lower the rent – that could happen. While most students are legally adults, they don’t always behave in the most adult-like ways.