Positive cash flow can be hard to come by these days. In most cases, the best chance of obtaining it is by buying a house with a rental suite. But the duplex market can be quite competitive, as there is usually a large net of potential buyers, including investors and first-timers looking to offset the costs of their mortgage. You’ll often pay a premium for these properties, too.
What if there were a way to maximize cash flow on practically any detached home by using some basic criteria? If you’re up for playing the role of quasi-hotel manager, which involves investing extra time, you can reap the rewards student rentals offer and see a healthy surplus in your bank account each month.
Student rentals were the answer for me when I started investing in real estate, and it’s still a widely leveraged strategy for achieving solid, consistent returns. I’ve definitely encountered some learning opportunities along the way. I’d like to save you from some of the headaches I experienced and give you the best chance of success if you decide to go this route. Here are five simple lessons that should help you pass Student Rentals 101 with flying colours.
Lesson 1: Area is key
If you’re getting into student housing, this is one lesson that can’t be ignored. Find an area that is near public transit and within a reasonable distance to a college or university. Better yet, check the neighbourhood’s walk score and find an area that is close to everything needed to survive.
Many students won’t have vehicles and therefore need immediate access to basic amenities. A good rule of thumb is to search in areas with no more than a 10-minute drive to the campus in case your tenants do have a vehicle. This is an essential ingredient to owning student housing.
Lesson 2: Rent by the room
I recently pulled up rental rates from our property management company. They average $1,200 to $1,400 a month for a one-bedroom condo, which is way out of most students’ budget. But these same students will be able to afford to rent a room at rates of $800 to $900 a month, making by-the-room rentals an attractive offering.
As an investor, this is where the cash flow starts to get interesting. Let’s use the example of a basic four-bedroom single-family home. Here in Kelowna, this would likely fetch you about $2,300 a month if you were renting it out whole. Compare that to the per-room rents you’d see on a student housing property, and you’re sitting at $3,200 to $3,600 every month for the exact same property – quite a healthy increase!
To see the best returns, look for dated homes that are in good shape, which you can often find at a discount. You’ll want to find a home with decent-sized bedrooms, as this is where students will spend most of their time. Also look for a reasonable number of bathrooms (one bathroom for every two bedrooms is a good rule to follow). Most importantly, as seen in the example above, maximizing beds is where you’ll net the best returns.
Lesson 3: Include utilities (to a point)
To make things more streamlined, include all the basic utilities – heating, cooling, water, etc. It probably goes without saying that you’ll also want to include good high-speed internet service as well.
It’s also a good idea to have a cap on the amount you’ll pay, and anything above and beyond that is the responsibility of the tenants – for example, anything above and beyond $300 a month would have to be shared.
Unfortunately, I learned this lesson the hard way when I opened my mail years back and saw an electric bill for more than $1,000. I visited the home later that week and noticed that, in the dead of winter, the downstairs tenant had his window open – and the baseboard heat cranked. When I confronted him about it, he said he wanted to get some fresh air, but it was freezing outside, so he needed to blast the heat to keep it a “good temperature.” I changed my utility policy soon after.
A smart utility policy also keeps your returns predictable and consistent. Capping them allows you to know what your monthly cash flow will be.
Lesson 4: Furnish it
Even though it means upfront costs, you’ll want to at least include basic furnishings throughout the house to attract tenants. Basic bedroom furniture – a bed, dresser and small desk – are the staples, as most of the time your tenants spend in the house will likely be in their room. Furnish the living area with a couple of couches and a coffee table (no TV is necessary; most kids will be fused to their laptops). I recommend also providing all the kitchen supplies, such as dishware, utensils and cookware. You don’t need anything fancy here, so thrift stores and online classifieds will be your friends. You can set all of this up on a budget if you keep an eye out for deals.
Lesson 5: Perform regular check-ups/cleaning
Unfortunately, managing a student housing rental is not one of those ‘set it and forget it’ investments. The biggest challenge comes from having a house full of tenants who are often strangers to one another. In order to keep the peace and make sure everything’s running smoothly, you’ll want to plan regular check-ins.
One strategy I found effective was bringing regular cleaning supplies to the house. That allowed me to enter without the typical 24-hour notice required and make sure the maintenance is kept up. I’ve also talked to investors who provide a monthly house cleaner to do a once-over in the kitchen, bathrooms and common areas. The tenants appreciate it. For $150 or less a month, this can go a long way toward keeping everyone satisfied.
These five simple lessons can help you score an A+ in student rental cash flow. Though it takes more time and effort than your average long-term rental, you’ll be able to buy on the low end of the market and see high-end returns. It’s the best kind of homework there is.
Evan Goode is a long-term partner at Vantage West Realty and an experienced real estate investor specializing in small multi-family properties. Contact him directly at [email protected]
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