(Five-minute read time)
If you are looking for ways to invest and you have an interest in real estate, then student rentals are worth considering. Upsides usually include good cash flow, low chance of vacancy, and an investment that grows in value while your tenants pay the bills. I purchased my first investment property in 2016 and my second investment property in 2018. Both are used exclusively for students, and I have a total of ten tenants at any given time.
You should do lots of reading before making any significant investment decision, in real estate or otherwise. Hopefully, this article will get you some insight from someone who has lived through the buying, renovating, renting and tenant transitions that you will encounter as a student landlord.
Why Rent to Students?
This is a common question. Maybe you have visions of keg parties every weekend and holes in every wall. Perhaps you think they will trash the place or leave you in the lurch on rent. Maybe you believe that a friendly family that stays for years and years is the ultimate tenant, and students are a nightmare to work with.
Completely untrue, and here's why:
If you do your homework as a landlord, check references, keep the place in great shape, and screen your tenants (basically don't be an absentee landlord), then you are likely to have good/great tenants most of the time. This means they don't disrespect the house or the neighbours, and they pay on time. The other great part about students is that they leave when their lease is up. This may sound backwards (who wants a tenant that leaves?), but you need to think about it this way: A family that rents for years but runs into financial trouble may choose to pay for food before rent. They may destroy the house over the years, and you may have a very tough time getting a young family with kids to leave when they have no place to go.
Students can usually always go home to mom and dad, and they typically move on after their lease is up, unless things are great and you want them to stay.
Remember that in Ontario, you cannot force someone to leave at the end of their lease. Having a regular turnaround of student tenants is a good thing because if you don’t get along great they will be gone in less than a year.
The second part of the 'why students' question comes down to rental rates. Charging rent by the bedroom is preferred. Families or individuals can't afford to pay more just because there are 4 bedrooms vs 3. You will be able to charge a rent that pays for more of your expenses if you rent to students by the room. Check your local market rents to confirm, but the bottom line is that a family of 3 or 4 does not have 3 or 4 incomes (usually). Note that there are limits to how many rooms you will want to have, and there are possible impacts of having multiple lease agreements. More on that below.
The Best Location for Rental Property
Each university city has areas that are more popular for students. My advice is to choose your location carefully. Be aware that rents in these areas are low, and houses tend to be poorly maintained and hard to sell for any purpose except student rental. This is critical because you should be thinking of your long-term exit strategy. If you buy a house and have a plan to be the best landlord in town who takes care of their property and makes sure it looks nice, that is one thing.
If you are surrounded by rundown places with cars on the lawn, overgrown grass, and flags for window coverings, then don't be surprised when you can't sell that house to a family later on. Think: would you want your own child to live there during his/her university years?
Instead, choose a beautiful neighbourhood near the university or on a quick transit or bike ride. You will attract a different crowd of renters, and you will probably be able to sell the house to a broader range of buyers when the time comes. A 5-10 minute walk is usual, and you can use Google Maps to check walking times to the university campus. Bonus points for houses within walking distance to grocery, pharmacy, or other food places. Nobody wants to take their groceries on the bus if they can avoid it.
Getting a Mortgage for Rental Property
The first thing you should know is that lenders will treat family rentals and student rentals very differently. They estimate their expected risk when they decide to offer you a mortgage. Most big banks are not interested in financing student rentals. When you have less choice of lenders, it can be problematic. You might even encounter a problem when you are trying to buy a rental for families while there are currently students living on the property. Beware of this, and make sure you have open conversations with your mortgage broker so that you can prevent any surprises. I've had funding pulled on a mortgage only days before closing when the bank decided they didn't want to do the deal anymore. It's costly to have to extend closing, and the sellers will probably demand additional deposit money or some other concession. It's stressful, and you should try to avoid financing surprises.
Having said that, some lenders are totally okay with student rentals. You might find that the rate is slightly higher, or the terms are a little more restrictive, so do your homework early. In early 2021, most lenders started saying no to student rentals because of the risks of covid and students not having in-person classes. There are still lenders who will do it, but now, be prepared to pay more. It's hard to say when it will become easier and cheaper to finance student rentals. Note that non-student rentals are treated differently, and there are no problems with them.
Mortgage Rates on Rental Property
In general, you should expect a slightly higher mortgage rate on a rental property. This is reasonable since the lender is taking on more risk when they loan to investors. With student rental properties there can be a significant range of mortgage rates that depend on a variety of factors.
Expect to pay a higher rate on a rental that has a large number of bedrooms (i.e. a rooming house). Also, watch out for properties that are purpose-built for students. High-rise towers that are 100% student-occupied will often seem inexpensive, and you may find out too late that financing was a challenge.
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To get personalized advice on how to get started on your real estate investments, book a call with a Professional Ontario Broker today at no cost or commitment: https://www.wealthtrack.ca/discovery
To learn more about the basic math behind rental property investing, what to look for in a student rental property, and tips for renting to students, click the link to read the full article:
https://www.wealthtrack.ca/blog/buying-an-investment-property-for-student-rentals
