Benefits and Drawbacks
There are no opportunities that are 100% perfect and guaranteed to yield nothing but positive results (just ask the tens of thousands who flocked to the Klondike Gold Rush). Reaping rewards always requires a bit of risk, and a willingness to put in work where necessary. Investing in student housing has its ups and downs, yes, but as you’ll see, it’s a much safer bet than the Klondike Gold Rush.
Divide and Prosper
A distinct benefit to student housing is that the home owner is often able to break the home or condo down into individual units. Rather than renting out an entire house or apartment to a single family, for example, you can rent it out per room. Many students will be looking to rent a single room, as opposed to an entire apartment.
This generates a higher cash yield, as the cumulative rental fees for each unit together will be more than the rent for the entire unit (think about buying something in bulk versus buying individual – three individual chocolate bars will cost more than a pre-packed three-pack).
The specifics of how you divide a student rental property are ultimately up to you, though – as are factors like price per unit, and utilities. Having fewer units means fewer students from whom to collect rent, but it also means a lower overall price.
Multiple rental units within a home or apartment take more time to manage than one large unit, but can ultimately be more financially rewarding. On the other hand, renting out the apartment or home all-in-one can take less time (in terms of finding the student(s) to rent it, collecting rent, etc.), but may mean less profit overall.
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This is another one of the ways in which student housing differs most from other homeowner/renter dynamics. Many universities and colleges run on reliable semester systems, so as an investor, you can predict when student tenants will be leaving, and when more will be coming in. University of Waterloo’s semester system is a bit different, so students there may have a greater likelihood of staying year-round.
In any case, student renters are more frequently on a measured, short-term basis than other types of renters. Even students who choose to remain in the unit between semesters (if the terms of your lease permit that) will only be attending the university or college for a matter of years.
The more rapid rental cycle has some benefit: tenants who aren’t working out for you won’t last long, and because new leases will be signed every time new students come in, you are much more flexible with changing the price of rent. Owners are limited with how much they can increase rent each year with long-term tenants, but with potentially new students each year, you can adjust the price of rent to both remain competitive and maintain an ideal cashflow.
Another consequence of high student turnover is the need for maintenance. This may mean the need for preparing the property for showings (and new rentals) each year, including painting or repainting, fixing any problems, and so on. Indeed, by and large, student rentals do entail more maintenance requirements. Students themselves are typically higher maintenance and ultimately higher risk.
Effect on Mortgage
Because students are higher risk, and because they typically require more maintenance, investing in student housing can affect your ability to get a mortgage. It also might impact your ability to easily get mortgage insurance. Mortgage lenders often see student housing as higher risk, and this can affect the offered rates.
So what can you do to offset this? One way is to try to find a mortgage professional who has experience in the student rental market. As we’ll explain shortly, this is a rapidly growing market, and it shows no signs of slowing down. Another way to offset mortgage-related worries is to save for a larger down payment. Lenders may end up asking for a down payment 10-15% higher than the typical 20%.
Finally, a variable that can affect mortgage lenders willingness to offer a mortgage, and one with a competitive rate, is whether or not the owner will have a child living in the property. This casts a different light on the property than one that is purely a student rental, though of course this is not an option for everyone.
It’s worth noting, however, that parents with a student heading off to college or university do have a great opportunity to purchase a home and rent it out to their child and fellow students or their child.
Manage That Property
Many successful student rentals make use of a property management company. As we’ve noted, there can be much more upkeep involved in housing students: for many of them, it’s their first time living away from home, and students do have a (not unwarranted) reputation for less tidy living and a propensity for parties (large or small).
Of course, it’s ideal to carefully choose which students become tenants, but the fact remains that student housing will, on average, be more demanding of time than families, young professionals, couples, etc. A property management company can handle all the day-to-day tasks for you, ensuring a minimal headache for you while retaining your ability to tap into this growing market.
The Price of Student Housing
The student market has the potential for great financial rewards to those willing to take a few more risks than the standard rental course. This does mean, however, that there will potentially be more competition for prime student housing (particularly areas near the campuses). Because many investors will be looking to purchase these properties, the average overall price of student housing can be higher.
However, it’s important to look at this as somewhat of a good sign: if a home is generating that much interest, then clearly both the area and the overall market are desirable.
Student housing is a real estate market truly on the rise. In part due to the fact that many students only live on-campus for first-year, and then look elsewhere for housing, each year ensures a very large influx of potential renters.
Both universities in Waterloo (University of Waterloo and Wilfrid Laurier University), and Conestoga College in Kitchener, are seeing steady growth in their student populations. Post-secondary education is becoming more attainable, and each year will see a new batch of students looking for student housing. It’s a fine time to get into this market.
Student housing may take more work, but it truly has the potential for financial gain: both short-term and long-term. If you’d like to buy student housing in Waterloo, Kitchener, or Guelph, we’d love to help. Please feel free to contact us if you’d like to know more!
Written by Will Kummer