Key Takeaways
- Between students, faculty, and staff, college towns have a steady demand for rental properties, which can create reliable rental income.
- Owning property in the town where your student attends college can also lower the costs associated with college housing.
- But be aware: Owning property in a college town includes restrictions on tenant occupancy, property wear and tear, and the complexity of financing an investment property.
In college and university towns around the country, each academic year brings a new wave of students, faculty, and staff, many of whom are looking for housing. This demand creates a unique and resilient real estate market for anyone looking to buy an investment property. While there are benefits, owning and renting out a house in a college town could also come with some challenges.
Buying Property in a College Town Could Pay Off
Consistent Rental Demand
Many colleges and universities operate year-round, including offering classes during the summer. Some students take courses between semesters, while others might remain in town for work, internships, or sports. Also, graduate students, faculty, and university staff may work year-round.
Even during economic downturns, university enrollments usually stay consistent and can even rise, as some students pursue graduate degrees during a tough job market. For example, from 2010 to 2011, after the Great Recession, college enrollment was about a third higher than it had been in 2006.
As a result, college towns have consistent demand for housing throughout the year, leading to higher occupancy and lower vacancy rates.
Reliable Rental Income and Attractive Yields
Student housing can often command higher-than-average rents, since the presence of the university provides a competitive pool of applicants for every property. Furnished units, or those near campus, can bring in even higher rents. A 2023 Nasdaq analysis of 11 popular college towns in the southern part of the United States found that more than half of them had average rents higher than the national median for a two-bedroom unit.
Appreciation and Long-Term Stability
Colleges and universities are generally large employers in their areas, and their presence often supports local economies and creates demand for other industries and services. This creates economic stability in college towns, which can lead to a steady increase in property values.
These growing property values, combined with the consistent demand for housing, mean that properties in college towns generally have good resale values. Also, if you sell your property, you should have many willing buyers available.
Broad Tenant Pool
College towns are home to more than just students. Schools create a large tenant pool for rental properties by bringing in faculty, administrators, visiting professors, researchers, and other staff. Some students remain in their college towns once they graduate, or young professionals move to take on jobs at the businesses that grow up around the university.
Tip
Universities with associated medical schools and hospitals create an especially large tenant pool. In 2023, the average hospital in the United States employed 131,000 people.
Family Savings and Perks
Owning a home in a college town can benefit your family down the line if your child decides to go to school there, especially if living in off-campus housing is common. While some college towns have affordable rents, others can reach nearly $1,700 or more per bedroom each month. That’s up to $17,000 in housing costs for the ten months of the school year (August to May).
Owning property that your child can live in, possibly with a few friends, can make those costs more manageable. Also, owning may provide tax benefits if you can claim the mortgage interest deduction or have been using previous rental income from the property to pay off the mortgage. You will also avoid the hassle and costs associated with moving every year.
The Catch With Buying Property in a College Town
Tenant Turnover
If you’re renting to students, you’ll likely need to find new tenants each year, or every few years. This frequent turnover can take up significant time and resources, either from you personally or in the form of payments to a property management company.
Property Wear and Tear
If you are renting to graduate students or young professionals in town, your property might experience only an average level of wear and tear. However, some college students may not be careful and respectful tenants. You may incur more incidental damage with younger renters and will need to budget for yearly maintenance, as well as take a security deposit.
Management Challenges and Seasonality
If you don’t live in town, you will need a property manager or management company to handle tenants, maintenance, and any problems that arise. If the property is unrented during the summer months, someone will need to check on it regularly.
The cost of property managers can vary depending on the size of the property and the number of tenants. A single-family property, for example, may have a lower management fee than a building with multiple apartment units in it. Although some property managers charge a flat monthly fee, many charge a percentage of the monthly rent, typically ranging from 4% to 12%.
Depending on the services offered, the property management company may also charge fees for:
- Initial set-up
- Tenant placement
- Vacancies
- Maintenance
- Evictions
- Early terminations
Initial Costs and Financing Complexity
Unless you can pay cash for the property or plan to live there, your purchase will be considered an investment property. Mortgage loans for an investment property have different requirements than mortgages for a primary residence.
Most insurers don’t provide mortgage insurance for an investment property, so you will need at least a 15%-25% down payment, as well as very strong credit to qualify. An investment property also won’t qualify for many programs that help homebuyers secure low-cost financing, such as FHA loans or VA loans. Lenders also may require you to have enough savings to cover several months of mortgage costs.
Local Regulations and Zoning
Before buying an investment property in a college town, review the local regulations, as zoning laws might restrict the number of tenants you can have in a single property. If you buy property in an area with a homeowners association (HOA), the HOA may also restrict the number of tenants or whether you can rent out the property at all.
Tips for Success
- Choose the right location: To appeal to renters, buy property in a desirable part of town. Consider walkability, neighborhood appeal, and proximity to campus, restaurants, and popular local spots.
- Screen tenants: Thoroughly vetting your tenants minimizes the risk of property damage or unpaid rent. If you’re unsure how to screen tenants, work with an experienced property manager.
- Invest in durability: When maintaining the home, choose materials that can withstand heavy wear, such as vinyl flooring, washable paint, and appliances with minimal bells and whistles.
- Plan for the off-season: If you don’t have tenants in the summer, use that time for maintenance or renovations. Or, consider flexible leases to appeal to new faculty, graduate students, or recent grads who may need a short-term home.
- Conduct due diligence: Educate yourself on owning and managing an investment property by learning about mortgage financing, tax implications, local regulations, market trends, rental schedules, landlord responsibilities, and tenant rights.
The Bottom Line
College and university towns offer a unique blend of rental demand and economic stability, making them an attractive investment opportunity.
However, owning an investment property comes with several challenges, including mortgage financing requirements, tenant turnover, and wear and tear. Before buying, consider the pros and cons of owning a rental property and being a landlord to ensure you’re prepared and your investment provides long-term value.
