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Depending on the college, students nationwide looking to live at school have recently found themselves staying in luxury hotels, trailers, on friends’ couches, or Zooming in to class from their parents’ homes. That’s because available student housing is becoming as rare as a full-ride acceptance letter from an Ivy League university.
A Massive Investment Opportunity
The shortage has created a massive opportunity for private developers and landlords, who know that housing doesn’t have to be paid for out of pocket but can be borrowed, along with student loans that cover tuition and food.
The Wall Street Journal reported that in pricey cities like Austin, Texas, a simple off-campus room with no natural light in a four-bedroom home is renting for as much as $1,300 a month. Given that the median listing sold price in Austin in February 2024 was $499,000, even with high interest rates, student housing is one of the most profitable sectors for landlords.
Away from high-cost private universities, student housing is still at a premium, with median rents at 70 large public universities costing $801 per month, according to Moody’s Analytics, as quoted in the Wall Street Journal. To put things in perspective, large public universities had fewer than 613,000 beds in 2023 to house an undergrad population of 1.8 million.
Off-Campus Rents Are Soaring
Data from Zillow is equally alarming. It showed that off-campus rents averaged $2,062 a month in 2023, up 28% from $1,614 at the start of 2021. While the numbers are averaged for apartments and single-family homes, the upward rent trajectory and the shortage of student housing have made it impossible for some students to attend. Complicating matters has been the rising cost of building materials, slowing down the building process universities have undertaken to accommodate students.
“If you look across the country, many schools are dealing with this challenge of building fast enough, building reasonable enough,” Bill Mattera, Texas State’s housing and residential life director, told NPR.
Colleges are Getting Desperate
The situation became so dire that some universities have actually paid students to take a semester off. At Middlebury College, an elite liberal arts school in Vermont, administrators took the unprecedented step of offering upper-level students $10,000 to take a voluntary leave of absence for the 2023-24 fall and winter terms due to the post-pandemic on-campus housing squeeze, where all students are expected to stay.
Students at the University of Tennessee in Knoxville were housed at a nearby Holiday Inn, while 23 students attending College of the Redwoods, a public community college in Humboldt County in northern California, stayed at the Bear River Casino and Resort, 6.5 miles south of their college.
A Viable Alternative to Short-Term Rentals
In the current climate of high interest rates, student housing could be a viable alternative for investors who are worried about the long-term viability of short-term rentals as cities tighten laws for guests staying under 30 days. For parents, it could be a win-win: They can secure housing for their kids while charging other students in the property rent. In the process, they are providing their child an invaluable lesson in landlording and responsibility while possibly whetting their appetite for their own investment journey.
Student housing also attracts deep-pocketed investors, making it ripe for syndicators looking for maximum ROIs and a way to future-proof their investments.
“Where is capital going in the commercial real estate space?” CoStar analyst Chad Littell said to the Wall Street Journal. “It’s following rent growth, and student housing is showing some of the strongest rent growth.”
Things to Be Aware of When Investing in Student Housing
You’re not alone if you’re excited about high cap rates but fearful of raucous college parties and trashed apartments in your student housing. However, landlords have some built-in safeguards in the current college accommodation crunch.
Pros of owning student housing
Here are five reasons why investing in student housing can be a positive.
1. Guaranteed tenants: The shortage of student housing means most landlords have a built-in tenant pool, guaranteeing rents for the academic year—and possibly the entire year as students look to safeguard their home for the following year, even if they aren’t physically there in the summer. Additionally, a student’s eviction carries much more weight than it might for a regular tenant. Students would not want to jeopardize their education by not paying rent or throwing wild parties. Additionally, if they are studying full-time, finding somewhere else in the middle of the term, even with their parents’ financial help, will be challenging.
2. Rents are way higher than normal rentals: Students often rent by the room, which means inflated rents compared to normal rental prices.
3. Parental guarantees: Including a parental guarantee on the lease not only ensures your rent but also the cost of damages should a college party get out of hand.
4. Solid long-term investment: Investing in a college town means hitching your wagon to the ongoing success of the town’s university. Choose well with an established, coveted university, and you could be baking in generational wealth to your investment.
5. Ability to charge for extras: A student rental allows landlords to charge for extras such as parking, high-speed internet, in-unit laundry, parking, and storage.
Cons of owning student housing
At the same time, investors in student housing should be mindful of these four potential drawbacks.
1. High turnover: Just as with short- and mid-term rentals, student housing needs to adopt a systemized approach for tenant screenings, lease renewals, repairs, and cleanings to minimize vacancies or complaints.
2. Immaturity can lead to bad decisions: Renting to 18-to-22-year-olds, many of whom have never lived away from home before, can lead to immature behavior, damaging your property or resulting in missed rent. Thus, meticulous screening, a conversation with a parent, and a parental guarantee on the lease are essential. Weeding out the party animals from the academics is vital to ensure your home is in good hands. This can include checking social media accounts and having individual leases for each student, so if one fails to pay, it is easy to evict them without jeopardizing the status of the responsible students and losing your entire rent.
3. Upkeep: Workforce housing or mid-term rentals often have a weekly or monthly crew come in to conduct repairs and clean public areas within the residence. It’s an extra expense for the landlord, but it’s a good way to monitor the property while ensuring garbage doesn’t build up.
4. Misuse of home and appliances: As a landlord, you want to make your rental as difficult to damage as possible. That means using vinyl flooring instead of carpet, installing refrigerators without exterior ice dispensers (which stops ice from accumulating on the floor), only using induction cooktops (to avoid fires), and using low-maintenance hardscape and artificial turf to minimize unkempt exteriors.
Final Thoughts
Real estate investing is all about maximizing cash flow while mitigating risks. In that respect, student housing is hard to beat.
The built-in market is not dependent on a city’s economy. It has parents guaranteeing rent and the ability to borrow to cover the cost if the parents cannot. In addition, the shortage of student accommodation has acted as extra insulation against lousy behavior, missed rents, and damaged property.
However, with low inventory, finding student housing is challenging and expensive. It’s not a get-rich-quick scheme but a long-term hold that will pay for decades to come.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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