Real Estate Speculation in College Towns

Author: Katie Adams posted: 07/10/2010

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Every year, millions of college students flood into college cities and towns. Those 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 interested in real estate investing. Read on to find out if it is an investment option that you should consider.

The Opportunity

Whereas housing demand may fluctuate in other areas, college towns boast a steady flow of students, professors and staff, and a percentage of those 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. Properties that are well-maintained, well-marketed, competitively priced and close to amenities can attract buyers and renters alike.

Baby boomers are beginning to realize the multiple benefits of investing in real estate in these communities. Many parents are viewing off-campus housing options as something that could not only provide a home for their child, but also be an investment that could appreciate in value for resale after graduation or provide a place for their own future retirement. According to the National Association of Realtors, baby boomers are increasingly citing a preference for college and university communities for post-retirement housing.

Investment Options

There are numerous ways to invest in real estate in college communities, either directly or indirectly:

• 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 (apartment) complexes in college towns
• Raw land for future development

To determine what type of real estate investment you might be interested in, honestly evaluate:

• How much risk you’re willing to take
• How much time you have to commit to managing an investment (i.e. investing in a REIT consumes far less time than managing a rental property)
• How much cash or access to credit you have to finance your investment
• Your other financial commitments
• The tax implications of any potential investment
• Your time horizon

Where to Look

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

• Is the school opening a new campus in a nearby community?
• Is the school planning to build additional academic buildings and/or add programs of study to expand enrollment?
• Is the campus diminishing in size? If a school is shrinking in size, 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; therefore, there may not be as much demand for off-campus housing as in a community with a public college or university. In addition, there are significant differences in the housing needs of students attending school in a city versus 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 that 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 are considering for investment, along with your credit history, will determine the type of financing available. Talk with 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 experience selling to similar buyers can answer a lot of your questions up front 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 for the Responsibility of Renting Out?

If you are seriously considering purchasing a rental investment property, it’s important to know the risks and the work involved with being a landlord. The following will give you a place to start:

• Identify your target renter. Are you most interested in renting to undergraduate and/or graduate students? Faculty? Staff?
• Identify the competition. Once you know your targeted renter, determine their alternative/competitive housing options. For example, if you are interested in renting to graduate students, how much on-campus grad-student housing is available? How much does it cost? What is the going rate at other rental properties? Evaluate potential properties based on where your target renters would prefer to live, what amenities and features they expect and what they’re willing to pay.
• Make sure you understand the cash flow of your potential investment. What are your net operating income 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, etc.?
• Create a plan for marketing the property. If you plan to find renters on your own (without using a realtor or a property-management service), you’ll need to know the best way to connect with your targeted renter. For example, if you’re interested in renting to faculty or staff, are there ways to post flyers in staff lounges? Is there an internal newsletter you could advertise in?
• 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, etc. you may want to contract with service providers, such as a property-management company, yard service or housekeeping company to ensure that 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 nearing retirement and considering a future move, or if you would like to expand your investment portfolio, consider exploring your options in these areas.

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