For some new investors, real estate can feel like a dragon. It’s big, scary, and they’re afraid of getting burned.
Maybe you’ve known for a while now that real estate is a proven wealth-building vehicle, but it’s intimidating to take that first step. Maybe you have a few rentals under your belt but aren’t making as much profit as you had hoped. If you’re either of these people, this article is for you, as I will be covering one of the most lucrative markets in all of real estate investing. By investing in this niche, my mentees and I have been able to consistently double our rental income on a property.
Being a landlord can be fun—if you do it right
No matter how great you are at finding good rental property deals, you could lose everything if you don’t manage your properties correctly. Being a landlord doesn’t have to mean middle-of-the-night phone calls, costly evictions, or daily frustrations with ungrateful tenants.
Why college town investing is the best start for newbie real estate investors
Let me introduce you to college town investing.
Now you might be thinking, “College students? Don’t they throw crazy parties and trash your house?”
My reply to that is, actually, “no.”
Over the last five years of investing in this market, I haven’t had to keep anybody’s security deposit due to home damage from a wild party or any other event. And I have 17 to 18 tenants per year.
Let’s get into some numbers.
Most real estate investors leave half of their cash on the table when they rent out their house as a single unit rather than renting by the room.
One of my houses would have made only $1,419 if I rented it out as one unit. But after adding two more bedrooms, I can rent it for $3,110. Because I own four of these houses, I’m now making $10,755 per month in rental income.
It wasn’t always like this. I started out as a typical pharmacist. I graduated in 2015 with my Doctorate of Pharmacy and worked two jobs as a retail and hospital pharmacist. I quickly realized that I didn’t want to work as a pharmacist until I was 65 after talking to one of the older pharmacists who told me, “Honestly I just come here for a paycheck now. I wish I could have retired a lot sooner.” I realized that although typically pharmacists make over six figures, this alone isn’t enough to achieve financial independence.
My inspiration to get into real estate came from my grandpa who had purchased several rentals in the Bay Area back in the ’50s before Silicon Valley even existed yet. As we all know, Bay Area prices went up like crazy, so Grandpa Chaw was able to retire early and live mostly off the income from his rentals.
Following my grandpa’s example, I knew I wanted to get into real estate as soon as possible because real estate is truly a time game. Buy as soon as possible, and then wait for it to appreciate over time. As your rent goes up, your cash flow goes up, and you write off tons of money in taxes.
Soon after I graduated, I decided to work a lot of overtime to save up for my first down payment, which I used to buy my first rental in 2016.
Making mistakes is part of the game
I got a call from one of my tenants one night who said, “You’ve got to fix this. Sewage is pouring out of the kitchen sink and it’s all over the floor now.” I hired a clean-up crew and then a plumber to assess the situation. It turned out that I would need to replace the whole sewage line. This cost me $9,000 out of pocket.
Not only that, I hadn’t realized when I purchased the property that it had virtually no AC system. This led to loud complaints during the 100+ degree summers. I ended up having to install a mini-split HVAC system which solved the problem, but it cost me $15,000. Finally, I had a vacancy for eight months because I had no idea how to advertise my bedrooms. This cost me $5,200 ($650 per month for eight months).
At the end of it all, I was feeling very depressed and discouraged. I was tired of having to take calls during my lunch breaks and late nights on weekends. I thought I had made a huge mistake investing in real estate. But I kept at it because I knew if my grandpa could do it, I could do it too.
Over the next four years and after so much trial and error, I finally created a system for student housing that I now teach to others. The system allowed me to cut the amount of time spent on my rentals to less than an hour a week.
Do your research
Check your local city laws first to make sure everything you’re thinking of doing is legal and up to code. Some cities may require you to get a business license to rent by the room. During the current COVID-19 pandemic, check the college website to make sure the college is scheduling on-campus learning (most colleges have some on-campus activities, whether it be with labs or experiential programs).
Realize that despite some classes’ being online, students are still looking for housing in the area because they want to study together with their friends rather than staying with their parents. My market is a case in point. I’m 100% occupied with 17 tenants until August 2021. When asked, my current tenants told me that their home was too cramped and chaotic so they couldn’t focus on their studies. Also, most graduate school students still need access to on-campus buildings to do their research.
Choose the right college
You need to make sure to choose a college with a good market size to rent your bedrooms out to. Consider targeting more academically prestigious and professional (medical, pharmacy, law) colleges because most students that go to those types of colleges are more serious about completing their studies.
These types of colleges also offer opportunities for higher degrees such as medical school, pharmacy school, and nursing school. These types of students would rather not waste their time in college partying.
Finally, because these colleges are so popular, most of the students will be from out of the city, state, or even country, so they are definitely searching for a place to stay close to the college.
Determine market demand and rent
If you are cheaper than on-campus housing, then you automatically have market demand. Because you provide more room and more privacy than on-campus dormitories and charge cheaper rent, it makes sense for a lot of students to just stay in one of your bedrooms.
Figure out what people are paying for bedrooms using sites such as Craigslist.
Make your place attractive to college students
I try to find properties that are in close proximity to campus so that I can charge premium pricing. I also look for houses with plenty of parking. This allows the college students to bring a car so they can drive to their experiential functions such as health fairs for pharmacy, nursing, and medical students. Check out the neighborhood to make sure parents will feel safe letting their children stay there.
Add extra bedrooms
Whenever you can create an extra bedroom, that’s another $500-$700 in additional rental income per month. This is huge! Even just adding one extra bedroom to a house will pay for the majority of repairs and expenses that come up on your house throughout the year.
This also typically allows you to at least double the amount of rental income and cash flow you make on the property. So don’t skip it!
One of my biggest mistakes was not realizing that one of my living rooms was large enough to convert part of it into a bedroom. It took me two years before I finally decided to do the conversion. After renovation, it rented out for $550 per month. Therefore over the course of two years, this mistake cost me $13,000 in lost potential rent.
Market your rooms well
Create demand and urgency by highlighting the benefits of staying in your bedrooms vs on-campus housing. Advertise in the areas where your target market (i.e. college students) hangs out.
Make sure you have plenty of college students interested in your bedrooms because this allows you to choose the best tenant out of the large selection of students you have available. It’s important to get your marketing right so that you can be picky when choosing your tenants.
Create systems and build teams
I’m a full-time pharmacist, and I personally spend less than an hour a week managing my rentals because I have the systems in place for self-management.
I empower my tenants to take on certain responsibilities. Since students are tech-savvy, they make rent payments through a phone app called Zelle which gives real-time deposits so I know when rent is paid late.
Whenever something breaks in the house, I have my team of contractors with whom I’ve built an extensive relationship that I can count on. And the best part is that I don’t have to waste 8-12% of my revenue on hiring a property manager.
Avoid problem tenants
There are a few strategies you can use here.
- Target marketing efforts toward the type of students you want to attract. I’m looking specifically for the types of tenants who are much more worried about passing their midterms and finals than throwing wild house parties. I focus on advertising where those high-quality tenants are likely to hang out.
- Screen social media accounts. I make sure not to bring in people who look like they party nonstop.
- Strategically pair up the college students. This creates a balance so that even if there are a couple immature college students, they’re kept in check by the more mature, professional students. If one tenant has a major final coming up, they likely won’t put up with plans to throw a crazy party. I also have at least a few people in every house who take on responsibilities to maintain the house. If you’re still worried about getting party tenants, you can always take out house damage from their security deposit. But guess what? I’ve literally never had to do this in my full five years of investing in this niche.
- Try to minimize common space and turn those spaces into additional bedrooms instead. Not only does this increase your cash flow, but there literally will be no space to throw a crazy large party.
Real estate doesn’t have to be frightening. Investing in college rentals may seem like a good way to find trouble, but careful analysis and screening solve most potential issues.