Are college student rentals a good real estate investing strategy?[Ask Coach]

[00:00]

Are College student rentals a good strategy as a real estate investor, or is it a bad idea, something that’s going to end up as a nightmare, like a scene from Animal House? I happen to have a lot of experience in this as someone who lives and also invests in a College town in Clemson, South Carolina. So I’m going to tackle this question in this edition of Ask Coach, and we’re getting started right now.

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Welcome to the Asked Coach edition of the podcast. If we haven’t met yet, I’m your host, Chad Carson.

[00:30]

You can also call me Coach. My mission here is to help you get out of the financial grind so you can do more of what matters. And the Asked Coach edition of the podcast is where I do my best to answer your burning questions about real estate, investing and personal finance. Today’s question comes in by email from David Whistunewski. And the question is, this is the time of year that a lot of rentals targeted to students come on the market. Can you discuss special considerations when renting to students? I’m particularly interested in how management companies handle tenant turnovers. Does one rely on them to inspect for damage and then manage repairs and cleaning and potential upgrades prior to vacancy? I think he meant occupancy by a new tenant. The idea of renting to students is attractive to me, but is contrary to the advice given by John Shabb in his book Building Wealth One House at a Time. He goes on to talk about some advantages and disadvantages of student rentals, which I’ll get into in a moment. I appreciate this question, David. This is definitely something in my wheelhouse. As I said earlier, I invest in College student rentals.

[01:25]

It’s not the only type of rental I have, but I live in Clemson, South Carolina, which is a small College town in the upstate of South Carolina, and my very first experience with student rentals was a house hack that I did. I don’t know if some of you have heard of my house hack or read my article or seen my video on it, but I moved into a fourplex in Clemson and it was in an area that was primarily student rentals and I lived in unit number two. We fixed up the rest of the property. It used to have Merry Christmas spray painted across the front of it, so it was in bad shape and vacant, but we turned it around. I lived there when I got married. My wife moved there with me and it was a nice, efficient way to live. But I also rented to students. I happened to rent to international students. I had a lot of fun. I had a Chinese couple on one side who were getting their PhD, had a guy from Africa living in unit number three, and got to know him a lot. So it was a lot of fun and I really appreciated student rentals and that was such a good experience that I started expanding and doing more to the point now where we have about 110 units, and I would say at least half, maybe 60% of our units are student rentals here in Clemson.

[02:24]

I’m going to respond to David’s question in two parts. The first, I’m going to go over the advantages and disadvantages of student rentals in case some of you are considering it, or maybe you’re already getting into it a little bit and you’re considering doing even more student rentals. And then the second part, I’m going to talk about his question about tenant turnover. How do you handle that? How do you work with your management company and just a couple of other best practices that you might want to consider. So let’s start with the advantages that David listed in his email. The first thing mentioned was that you have higher rent. And I would say this is a maybe advantage. One of the reasons I say maybe, and I think most people think that you have higher rent because you imagine a four bedroom house, and if you rent it to a family, they can only pay a certain amount of rent. Whereas if you’re into students, four students might think, oh, I could pay $600 a piece and so $2,400 in rent when maybe the market rents $800. So if you could rent to high occupancy to put a lot of people in one house, that’s probably true.

[03:17]

But the thing you have to be careful of I’m just speaking from my experience in my town, is that they’re often regulations against having a lot of students in a house, and sometimes it’s because local residents can’t afford to compete with the student rentals or they just want to reserve a certain amount of housing for local residents or more low density. So in my town, there is a regulation that says you can only have two people who are unrelated living in a house. I don’t know how common that is in other College towns and maybe in bigger cities, it’s probably less common. But something you want to be careful of is that regulation might restrict your ability to get higher rep. But in any case, it is true in a sense, because they pay what they pay just based on a per student bed. And if you can get a three bedroom apartment or something in a more dense occupancy type situation, apartments or something like that, you can get a higher per square foot rent from student rentals. So in general, true, but be careful with single family houses. The other advantages, though, is stable demand.

[04:11]

And I would say this is one of the biggest advantages for me is that consistently you have people who come back and rent. Now there is some turnover, which I’ll talk about as a disadvantage, and it happens more often maybe than a long term renter. But having people who are always needing to go to school in your town. Even in a recession like during 2008, nine and ten, a lot of people went back to school who might not go otherwise or couldn’t get a job. So they extended their school a year or two. Not necessarily the best situation if you’re piling up a lot of debt personally, but that was the case. There seems to be a counter cyclical movement of people going to College. So definitely stable demand and then defaults on rent are very rare. So typically somebody has a scholarship or they’re working part time. You have to be pretty responsible to go to College and get in and make good grades. So that’s consistent with being responsible with your rent as well. And sometimes there’s parental guarantees for the rent. So it’s not just the 18 year old or the 20 year old who is promising to pay the rent.

[05:07]

They also have parents or somebody helping them pay their rent. So all of those lead to pretty consistent income by always having demand and always being pretty good on paying their rent. The fourth advantage that David listed as being less picky on condition, I would say that’s not true. Most of the time my tenants sometimes even more picky. They might have a parent who comes in and follows through with them. I would say I treat my tenants and the property is just the same as I would any other rental. We clean them as well as we can, we fix them up as well as we can. And so it hasn’t necessarily been that you can get by or something with doing less work, although I know there are landlords out there who do that, so I wouldn’t count that as an advantage. On the disadvantaged side of College student rentals, there is frequent turnover. So this is probably the biggest thing to consider is that on average, probably every year and a half, I have some students who stay a year, some students who go two to three years. If they’re getting a PhD or staying longer or just can’t graduate in four years and they got to keep going, then there is more turnover.

[06:03]

And what’s the negative of that? The negative is there’s more work in doing the leasing. So your property manager has to do more work or you have to do more work if you’re self managing it. And every time somebody moves out, there’s some kind of base level of maintenance work you have to do. Just think about when somebody pushes a couch against a wall, that’s not necessarily damage that you can charge for, but it has a little bit of you need to paint that wall, you need to clean up more. You can charge cleaning fees to the people living there, and they have to clean it up themselves. But there’s always going to be things that turnover, I would say I would be surprised if I ever spend less than $500, $750 on a turnover just as a base level. So that’s a cost, something you have to do more often. There’s going to be more wear and tear on the property. That’s naturally over time and related to that more constant turnover, it’s possible you have more likelihood of damage. You might think back to my Animal House analogy that you have people partying and throwing beer through beer cans, through windows, things like that.

[06:58]

Occasionally that kind of thing happens. There are a couple of properties we have that are more prone to having they have parties. You have to more often visit them and ask them to clean up after themselves. But by and large, most especially the ones that we rent to are usually grad students or kind of upper level seniors, juniors. In College, we have not as many problems as you would think. It’s pretty consistent, pretty typical. Even with other rentals, they’re very responsible people in general. So I don’t think that’s always the case about increased damage, but because of the frequency you might have more damage, you might replace carpet more often, things like that. The final disadvantage you mentioned was that all the lease terminations are on the same date. So we have everything and in the end of July. So there’s one time period when everything turns over. But I actually think this is an advantage because the College always has new students coming in that you can pre lease. And this is what most people do. They start looking for rentals either starting in October, November of the year before for August, October through May, June.

[07:56]

You basically had that entire time to lease it while people are living in your units. That is a big advantage because your vacancy period is going to be much lower. You can know whether you have enough demand to rent that property, that current rent. If you’re not getting enough demand, you can lower the rent. So very rarely do we ever have vacancies very short period of time. And that leads me to the kind of the turnover period. We do have about a ten day, seven to 14 day kind of somewhere in there, depending on the property time period. Where August 1 to August 10 or July 25 to the first week of August, you have a vacancy period and the property manager and this is why you have to have a good property manager to help you out. They do a walkthrough with the prior tenant to find any kind of damage. Hopefully they’re taking videos and pictures and doing a checklist and then they are handling getting a lot of maintenance. People in on hundreds and hundreds of thousands of units in town all in the same week. It’s pretty chaotic. The Lows and the Home Depot in our area are like sold out for a week or two because there’s so many people doing maintenance in a short period of time and people cruise come in from all over the upstate of South Carolina just for that one little week and a half period.

[09:01]

So that is a positive and negative. It’s a management tough thing to tackle. So if you’re doing that yourself, you got to get your contractors ready. You got to be very organized. We used to make a very detailed list of property by property here’s the day you go here, here’s the time you go here. And so property managers in a College town are usually used to that. They’re specializing in that they earn their money based on that time period. So I don’t see that as a disadvantage. Again, advantage. You can pre lease it and do a lot of things ahead of time to make sure you don’t have any vacancies. Some final takeaways ideas on making College student rentals work for yourselves. The thing I found this is consistent with any rental property is you want to buy demand real estate. You want to buy property that all the College students want to live in. Now what is that? Typically, proximity to campus is the big deal. Can they walk? Can they bike if it’s further away? I have properties that are mile and a half away. Is it on a bus line? Is it easy to bike or walk?

[09:54]

That’s something that a lot of students want to do. They’re on a budget. They want to get to campus more affordably. Sometimes they want to get to the downtown area where the bars and the restaurants and just entertainment type stuff are close to parks. So that’s not unusual for any rental. Right. You just need to find out what does your tenant want? Our tenants go to campus. They want to get to parks. They want to get to the downtown area. The closer you are to that, the easier your property will be to rent. The other recommendation I have is buy low maintenance buildings or remodel them to be low maintenance. Because of that turnover issue, which is one of the biggest disadvantages. You want to have buildings that don’t wear down as easily. So having hardwood floors, having luxury vinyl plank instead of carpet on the inside, using the types of paint you use, use the same paint over and over again. Maybe it’s a little bit more durable or just something that you can touch up really easily. Paint one wall and it still blends in with everything else. You’re going to have a lot of turnover.

[10:46]

So build your maintenance of the building accordingly. Or if you have a property that is very high maintenance, you might want to sell that one and buy another one so that you can reduce those maintenance costs that can eat you up with a College student rental. The third and final consideration is just pay attention to University trends. I’ve been very lucky in that my University, Clemson, has been growing over the last ten to 15 years. The population has been growing for students that’s not always the case. And you do have to think, long run, all your eggs are in the basket of one University. This is a small University. If it’s one that is going to have challenges in the future. If you have the idea that maybe universities in the long run aren’t going to look the same as they are today, who knows? But that technology is interrupting everything else, that’s a consideration. So for me, diversifying to different markets has been part of my own strategy. But we are all in clubs and for now. But we do want to spread out and not just have all our eggs in that basket, even though we don’t think Clemson is going anywhere.

[11:39]

It’s a big state University. We want to consider that and kind of hedge our risk a little bit. So David, I hope you found that answer helpful to your question. And all of you who are listening to this who are also interested in College, hope you found it helpful. If you enjoyed this edition of Ask Coach and you like to have your question considered in the future, you can send an email to [email protected]. We get more questions than we have the ability to publish, but to increase your chances, be sure to keep your question as clear and as short as possible. And number two, keep it relevant to the topics of real estate, personal finance, early retirement, and also personal development. If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson.com/REIToolKit In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my Real Estate Investing toolkit, which includes a property closing checklist that I actually use when I buy properties, a real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets, and goodies that will help you on your journey to financial independence.

[12:37]

Using real estate, you can get it all for free at coachcarson.com/REIToolKit. I also want to take this time to thank some people behind the scenes who make this podcast possible each and every week. This includes my podcast editor extraordinaire, Michael Nguyen, my amazing virtual assistant, Megan Thomson, my wife Kari, who helps me behind the scenes and is my partner here at Coach Carson. And of course, thank you to all of you, the listeners of the show, who make everything possible. This show exists for you. It exists because of you, and I really appreciate you being here for another episode. Everything I’ve shared with you in this episode has been for general education purposes. I’ve not considered your specific situation or risk. Before buying your own investments, be sure to consult a financial real estate and or a legal professional. Until next time. I’m Chad Carson. You can also call me Coach. And this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time.