Every year, millions of students flood into college cities and towns. These students, along with the faculty and staff at their schools, have one common need—housing. Consistent demand for housing makes college and university communities attractive to people who are interested in real estate investing. But this kind of venture isn't for everyone—even someone who has investment properties. In fact, it takes a very specific type of person who can take on the commitment of renting to students. Read on to find out if it is an investment option that you should consider.

Key Takeaways

  • There are a number of ways you can invest in real estate in college towns including REITs, commercial properties, condos, townhomes, and multifamily homes.
  • Determine how close you want to be to your investment property and around colleges where you're interested in investing.
  • Do your research and speak to professionals before you commit to buying a property.
  • Consider all the implications of being a landlord.

The Opportunity

While housing demand may fluctuate in other areas, college towns boast a steady flow of students, professors, and staff—a great number of whom will always require off-campus housing. Most colleges and universities do not have enough on-campus housing to satisfy demand, and when school budgets are tight, maintaining and upgrading housing can take a back seat to other financial priorities. Well-maintained, well-marketed, and competitively priced properties that are close to amenities can attract both buyers and renters alike.

Baby boomers are realizing the benefits of investing in real estate in these communities. Many parents find that off-campus housing can provide their children with a place to stay during college. But that's not all. A college town property may also serve as an investment that may appreciate in value after graduation. It may also provide the owners with a place to retire in the future. In fact, baby boomers are increasingly citing a preference for college and university communities for post-retirement housing, according to the National Association of Realtors (NAR).

Investment Options

There are a number of ways to invest in real estate in college communities, either directly or indirectly. Here are a few of options:

  • Real estate investment trusts (REITs) that focus on financing properties located in college towns or cities
  • Commercial buildings that lease space to local businesses
  • Single-family homes for flipping—fixing and quickly reselling, holding and selling later after an appreciation in value, or renting
  • Condominiums, townhomes, or duplexes for resale or renting
  • Companies that own multifamily complexes in college towns
  • Raw land for future development

Make sure you make an honest evaluation of the following when you determine the type of real estate investment that interests you:

  • How much risk you're willing to take
  • How much time you have to commit to managing an investment
  • How much cash or credit you can access to finance your investment
  • Your other financial commitments
  • The tax implications of any potential investment
  • Your time horizon

Where to Look 

Once you narrow down your investment options, there may be several areas available from which to choose. Decide how physically close you want to be to a potential investment property, then draw a radius around one or more colleges where you are interested in investing. Do some research and consider the following:

  • Is the school opening a new campus in a nearby community?
  • Will it build additional academic buildings and/or add programs of study to expand enrollment?
  • Is the campus diminishing in size? If a school is shrinking, either the student enrollment is dropping off, or the school is considering dropping programs due to lack of funding. If you are prepared to become a long-term investor, you may be able to find a reasonably priced property with the potential for long-term value in a declining market.

It's important to take the time to research communities where you are considering investing to see what the local real estate market is like. Call the school's admissions office to find out information that could potentially affect a real estate investment, such as:

  • The school's current and projected future enrollment
  • The school's current and projected ratio of students to on-campus housing units
  • How much off-campus property is university-owned
  • School spending on housing for students

As you evaluate your options, keep in mind that private schools tend to have strict housing policies, lower enrollments, and lower student-to-on-campus housing unit ratios. There may not be as much demand for off-campus housing in these cases as in a community with a public college or university. There are also significant differences in the needs of students attending school in a city versus in a suburban or rural area. For example, urban and suburban schools tend to attract a higher percentage of commuting or part-time students who may not need housing.

Before You Buy

As you begin evaluating available investment properties make sure you consider the following tips:

  • Know the tax implications of buying an investment property. Consult a tax attorney or personal financial advisor.
  • Research your financing options. The type of property you consider along with your credit history will determine the type of financing available to you. Talk to your banker or personal financial advisor to learn what options may be offered and which one(s) are right for your financial situation.
  • Find a realtor with experience selling to owner-investors. A real estate agent with this experience can answer a lot of your questions and provide you with tips on the local rental market.
  • Check on homeowners' association rules or restrictive covenants that regulate or prohibit rentals.

Are You Ready to Be a Landlord?

If you are seriously considering purchasing a rental investment property, it's important to know the risks and work involved with being a landlord. First, consider your budget and where you want to buy. Remember, buying a property in and around New York City will cost you a lot more than purchasing one in Charleston, Illinois, which is home to Eastern Illinois University. The following are a few other considerations that will give you a place to start.

Who Is Your Competition?

Identify the competition by determining your rental pool's other housing options. For example, how much on-campus housing is available? How much does it cost? What is the going rate at other rental properties? Evaluate potential properties based on where your renters prefer to live, what amenities and features they expect, and what they're willing to pay.

Affordability

Make sure you understand the cash flow of your potential investment. What are your net operating income (NOI) projections? Do you have a plan for managing gaps when you are in between renters? For example, could you rent the driveway out for parking to commuting students or rent the property to families coming for parents' weekends, graduation, football games, and other events?

How to Advertise

Create a plan to market the property. If you want to find renters on your own, you'll need to know the best way to connect with potential tenants. Check with student unions and groups, department heads and administrative staff, as well as housing liaisons. And don't rule out social media. You may be able to advertise your property on a school's Facebook page or reach out to its followers on Twitter using specific hashtags.

The civil penalty for violating the Fair Housing Act for the first time is $16,000.

Keep one thing in mind. Make sure your advertisement doesn't expressly rule out any particular group. It's always a good idea to check the legal housing guidelines in your area to make sure you are not slapped with a housing discrimination complaint because an applicant feels you intentionally ruled them out as a prospective tenant. Although students aren't considered a protected class under the U.S. Department of Housing and Urban Development's (HUD) Fair Housing Act, they are still protected by fair housing laws.

Maintenance

Make provisions for maintaining the property. If you do not have the time, ability, or inclination to interview renters, place ads, mow the lawn, repair broken appliances, steam clean carpets between renters, consider contracting with service providers, such as a property management company, yard service, or housekeeping company to ensure the property is maintaining its value and that you know what your renters are doing.

The Bottom Line

College and university towns offer attractive options for real estate investors. If you are the parent of a soon-to-be college student, if you are close to retirement and considering a future move, or if you would like to expand your investment portfolio, consider exploring your options in these areas.