How do you find a great student housing investment opportunity?
Ever since I started investing in real estate in 2016, I’ve been buying a new property each year. And 5 years later, I was able to grow my portfolio to multiple six figures, so I know first-hand what to look for – and what to avoid.
Want to learn how you can do the same? Read on!
Why is student housing a great investment in 2023?
Maybe you’re wondering, “What makes student housing a good niche to focus on? Why not just rent to professionals or families instead?”
Valid question.
There are several key reasons why a student housing investment makes more financial sense than renting out entire apartments or houses.
Let’s take a look at a few of these.
Renting individual rooms means higher returns
Students will only typically rent an individual room for the duration of their studies.
And here’s why that’s good news for real estate investors:
By renting out individual rooms, you can earn significantly more than if you rented out your whole property to just one tenant.
For example, for my student housing rentals, I charge approximately $600-$700/month per bedroom (with access to a shared kitchen, bathroom, and living space). This works because I target students who are looking for this type of living arrangement near their colleges.
For many students, renting a quiet room in a house instead of living in a loud, crowded dormitory is extremely attractive. With this, they also have the ability to live at your home with their friends instead of random strangers.
Plus, they end up paying a lot less for housing because I make sure to charge only about half or 2/3rds of what the local college charges. A dorm room costs, on average, $8,000-$15,000 (or more) per year.
On the other hand, if I wanted to rent to high-income earners with families, I wouldn’t be able to charge per bedroom because these renters would have different needs.
So, instead of earning somewhere between $2,600-$3,600 for a 4-5 bedroom home rented out to students, I’d have to charge a whole house tenant much less to stay competitive – even though I’d be renting out the exact same property.
That’s what makes renting to students so valuable:
They’re not looking for fancy housing, so by making light renovations and dividing up your properties into several bedrooms, you end up with higher returns.
The student housing model is recession-proof
Statistically, more people enroll in higher education when the economy is struggling, especially community colleges and vocational schools.
In fact, the rate of higher education enrollment increases in correlation with economic policy uncertainty.
What does that mean for you?
Renting out individual rooms to students has a financially bright future.
For example, in 2020, a lot of students decided to go back to live with their parents while their colleges were closed and classes moved online. But that didn’t stop me from finding tenants and maintaining 100% occupancy at all of my student rentals.
How?
I offered discounts to students who wanted to stay near their friends, and I also started targeting recent grads and young professionals who needed a place to live and wanted to save money on housing.
Ultimately, there will always be people who need basic housing, so the student housing model makes a lot of sense.
Okay, now that we’ve covered why student housing is a good niche to invest in, let’s talk about finding that first investment opportunity – without making a lot of expensive mistakes.
How to find an ideal student housing investment opportunity
The first step to making a good investment is doing your due diligence before agreeing to buy a property.
When I first got started in real estate investing, I didn’t do this. Instead, I bought an old house, and it turned out to be in much worse shape than I had thought.
Unfortunately, that one mistake ended up costing me a lot of money because I discovered expensive problems with the plumbing and HVAC systems after it was too late to back out of the deal.
So, don’t do what I did: Always vet your property thoroughly.
One quick tip: I recommend focusing on the property’s sewage line before making a purchasing decision because a sewage line replacement can end up costing several thousands of dollars.
But if you do uncover issues, this doesn’t necessarily mean you shouldn’t buy the property. It just means you’ll be in a better position to negotiate the price and have the seller give you cash for the repairs.
What to look for when buying your first investment property
When I’m in the market for a new investment, I focus on large houses so that I can put in as many bedrooms as feasible to maximize my ROI.
For example, a duplex in my area recently went on the market, so I decided to go take a look at it. The listing price was $599k for a 3-bedroom, 2-bath house just over 1,500 sq. ft. I knew that with some remodeling, I could add a few extra bedrooms to turn it into a 5-bedroom, 2-bath house.
But given the almost $600k price tag, the investment wouldn’t have made sense without negotiating down to about $550k. Plus, there was already a tenant living in the house who didn’t want to move out, which complicated the situation.
Ultimately, I decided to pass on that particular property, but it was a good size and could potentially have been a worthwhile option.
You can learn more about it here:
Target emerging markets
Another great way to help ensure you’ll get long-term returns on your investment properties is to focus on areas that have emerging markets.
These are regions that are attracting higher standards of living because of higher job growth and economic prosperity, so they’re good areas to zero in on.
One great measure of growth to look for? The presence of tech companies.
Tech is everywhere these days, and in America, several cities, in particular, are emerging as the centers for all things tech. These areas are attracting top talent, which rapidly increases the local housing prices, so you can’t go wrong by investing in these regions if you buy when people are migrating to that city.
Basically, if the job market is expanding, that’s where you want to position yourself as an investor.
Understand appreciation vs. cash flow
With real estate, your cash flow from rental payments isn’t the only way to make money. You can also earn income from appreciation, which means how much a property’s value increases over time.
Typically, it takes a few years for properties to significantly increase in value through appreciation alone. For example, according to the National Association of Realtors, the median house price increased by 6.4% per year between the late 1960s and the early 2000s.
But then, rapid inflation occured after Covid hit, which drastically changed the housing market. In fact, between 2020 and 2021, median house prices increased by over 17%.
So, that means a house that was worth $300k in 2020 increased in value by $51k – in just one year. That’s the power of appreciation.
Do your research
How much rent could you reasonably expect to collect in a particular location? To figure this out, you first check out Rentometer.com, which will allow you to quickly compare rent prices based on a property’s size, the neighborhood, etc.
Other great places to look are Craigslist, local apartments, and Facebook groups where people list their rentals. This initial research will give you a clearer idea of the rental market in a particular location.
Visit properties in person
Once you’ve figured out what kinds of properties you’re interested in, make sure to visit them in person or virtually before making a final purchasing decision.
Though a lot of people buy properties sight unseen, it is risky. And for your first rental, you may want to minimize risk as much as possible.
One of the benefits of doing in-person visits is that you can get a much better feel for the neighborhood vs just looking it up on Google Maps.
For example, is there a lot of trash on the streets? Does it feel safe? Is it a walkable area, with sidewalks and businesses that cater to pedestrians (coffee shops, restaurants, etc.)? Are there people out and about?
These are all important questions to ask yourself.
Why?
Because quality tenants will be asking themselves the exact same questions when evaluating your property before deciding if they want to live there or not.
Avoid evictions
Here’s the three-step process I recommend to avoid the hassle of having to evict tenants.
- Vet them first. In other words, are they mature, responsible adults? Are they the kinds of people you want as tenants? Always call up references to make sure.
- Ensure proof of income. For students, check financial aid documents (and their parents’ financial records, if they’re the co-signers). This can help reduce the likelihood that you’ll stop getting rent payments if somebody loses their job.
- Establish a good professional relationship. Avoiding evictions isn’t just about choosing the right tenants. It’s also about building a good rapport with your renters and showing them that you value them. So, even simple manners such as saying “please” and “thank you” can go a long way.
Alright, now let’s take a look at how you can buy your first property.
How to buy a student rental property
I recommend using a method I call START to get started investing in real estate. Here’s what that looks like.
S stands for having a strategy. In other words, how are you going to make money investing in real estate? Do you want to flip houses before renting them out?
If so, you’ll need money upfront to cover the cost of renovations – and, depending on what condition the property is in, it might take months to get it in good enough shape that you can list it as a rental.
Do you want to buy properties that are move-in ready? If so, that will cost more initially, but you’ll be able to list them faster. Ultimately, there’s no right or wrong path to take, but having a strategy and knowing what you’re getting yourself into before you start is important.
T stands for talking to a real estate agent. Go online, search for real estate agents in your city, and let them know that you’re interested in visiting some properties. This is a great way to learn more about real estate, especially if you come prepared with questions you want to ask the agent.
A stands for asking for pre-approval. Before getting a mortgage to pay for a rental property, ask to be pre-approved for a loan. To do that, contact a bank or lender in your area and explain what your budget is, what neighborhood you’re targeting, etc. Getting pre-approved is important because it can help your offer stand out when you’re ready to buy a property.
Why is that?
Because it shows that the bank or lender that’s giving you a mortgage has already determined that you’re in a good enough financial position to buy the house.
On the other hand, someone who wants to buy a house but who isn’t pre-approved doesn’t have that vote of confidence in their favor, which helps you stand out.
R stands for reviewing properties. As I talked about above, make sure to review properties you’re interested in yourself. This will help you get a better feel for whether they’re worth your time or not.
T stands for getting a teacher. Like with anything, real estate is much easier to learn about if you have someone who can help you get started and avoid common mistakes. That’s why I recommend investing in an experienced coach or mentor.
Financing options
Depending on your circumstances, there are many different financing options that can help you get started as an investor.
For example, if you’re still in college, you can do what’s called “house hacking” where you live in one room in a house and rent out the others to fellow students to pay down your mortgage.
Using what’s called an FHA loan, you can go this route with an initial down payment of just 3.5% if your credit score is at least 580. (Check out the other requirements here.)
If you’ve already graduated from college and don’t have debt, though, I recommend getting a 20% down payment, since you’ll avoid extra costs that way.
And, if you already own a house, you can use your current home’s equity to purchase a rental property using a HELOC (Home Equity Line of Credit).
Ultimately, there are advantages and disadvantages to each financing option, so choose the one that makes the most sense based on your situation.
Next steps
So, there you have it. Now you know how to identify a student housing investment opportunity and get started in real estate.
As I’ve seen firsthand, this type of investment can offer long-term returns that you can then reinvest to keep expanding your portfolio.
Want personalized coaching to avoid expensive mistakes and scale faster? I’ve got you covered.
