Student vs. Multi-family Rentals

By Erwin Szeto

Years ago, I had some capital available after my joint venture partners and I decided to split up so I was excited to be a buyer for myself again but found myself stumped about what to buy next. We had just exited some wonderful single family and small multi-family properties that cash flowed okay and appreciated significantly but as I do from time to time, and as all sophisticated investors often do, I reset, re-evaluated, and then took action.

I first considered the single family home or a small multi that I was used to. Based on my cash flow requirements, single family was out and in the markets where I focus, quality, LEGAL small multi?s are difficult to come by and I would not recommend to anyone to invest in a non-legal, non-conforming multi-family property without the intention of taking out permits and making it legit. The risk is a tenant or neighbour complains and then the investor gets receives a work order and hefty fine from the city until he or she evicts the tenants and the property is back to its allowed use. Imagine what losing those rents does to your cash flow and the costs to modernize a multi-family to current building and/or fire code. If you don?t know the costs, you should really consider finding them out.

Next up for consideration was student accommodation. I know several REIN members who have had a lot of success with this strategy by charging a per room rent near post-secondary schools.

Advantages of Student Housing

• Provides a high cash flow which is most times higher than multi-family properties
• The parents serve as guarantors for international students, meaning more rent up front.
• Students are often better tenants than adults. Just ask any property manager.
• No professional tenants. Students are migrants so when school is over they leave.
• Some neighbours will dislike you and complain
• Sometime students party and make a mess. If they don?t clean up, we send the bill to mom and dad.
• Garbage: food packaging, pizza boxes, Chinese take-out containers. Most cities allow unlimited recycling collection; provide lots of blue bins and the planet will thank you.
• More wear and tear. Renovate with durable materials such as ceramic and vinyl floors.
• Spoiled kids and over bearing parents
• High utility bills. We include a clause that caps monthly utility costs and bill back overages to tenants.

Disadvantages of Student Housing

After completing my due diligence, I purchased a property with a JV partner next to a shopping mall, near Brock University. My current tenants are in the concurrent education program for future teachers, meaning that they must maintain a minimum average in the low 80?s to remain in the competitive program. They?ve been the best tenants I?ve ever had in my career as a landlord. I bring them treats from Starbucks when I inspect the property to show my appreciation and they lose their minds! Their parents guarantee rent and damages and pay me $2,700 inclusive for the house which is worth less than $300,000.

The ideal student rental is near a post-secondary school or near a bus stop that goes to campus. Generally, those closest to campus sell for a premium, have been student rentals for the longest and typically are in the roughest condition. They also rent the fastest and for a premium. Unfortunately, the rent premium does not always match the price premium but we?ve had a lot of success in renting nicely renovated homes a bit further away on bus lines for similar rents. Ideal tenants include post-graduate students, mature students, certain varsity athletes (rowers and swimmers are on or in the water at 6am = no time for partying), nursing students, and those from competitive programs (e.g. Engineering, Business, etc.)

Lessons Learned

• More rooms = more cash flow right? In student housing, we rent per room so on paper, renovating for a 6th, or 7th or even 8th bedroom makes your cash flow numbers look great, however more money = more problems. Students prefer less density over more and may pass over your property. Groups of students who come together are ideal so the smaller the property, the easier it is to find a group who get along and will stay for several years.
• Be the house the parents choose. Even though the students are adults, the parents are often the decision makers and what do parents look for? Reliable property management, home safety, regulation sized windows in basements, fire extinguishers, CO and smoke detectors, and fire rated drywall sealed with fire rated sausages and other adhesives and finally insulation.
• Do not include internet. Rent inclusive of utilities is a common practice among student landlords and even though many young people believe internet to be a necessity, don?t fall for it. Offer the students a credit or reduced rent of $60 for internet. Many internet providers offer student discounts and more importantly, if there are technical issues or service interruptions, and there will be, the students can work directly with the provider rather than use you as the intermediary. Also there is the common issue of piracy. Just last week my friend received a notice from HBO Canada to not up/download Game of Throne on their student property in Brantford. I’m not sure if my friend knows that she could just use a TPB proxy to get around this and keep watching the shows she loves; I’ll have to inform her!
• Every bedroom needs a windows (and a smoke alarm) so you must account for existing windows and placement for new windows when renovating for student housing, basements especially. As for your smoke alarm, make sure that you contact a professional electrician, like those you can find at Aardvark Electric, (click here for more information) to come and install or repair it for you. This is because the process may be more complicated than you first thought, and when you don’t understand how the wiring works or what is wrong, it’s best to leave it up to the professionals. Either way, smoke alarms and windows, particularly those in the basement are vital. Think of your basement windows as a second egress in case of fire and larger windows equals more natural light, and are an important selling feature to increase rents and obtain parent approval.
• Advertise a phone number that allows texting on your lawn sign and online advertisement. You can provide your mobile phone number or download one of the many smart phone apps out there. I personally use TextNow which provides me a free phone number and I can forward my texts to my email for a paper trail and/or forward to my team to book showings.

The tenant profile of college and university students is different. University students often come from families with higher household incomes and the parents are more likely to be involved whereas college students are more independent often paying their own way. College programs are generally shorter in duration, six month to three years; therefore they have more turnover when compared to university programs which are typically three-four years for undergraduate plus another two for masters. University parents are also more likely to purchase homes for their kid and rent to their friends as it just makes financial sense to buy a house for $400,000 than pay $3,000 a month in rent. This increased buyer demand does reduce affordability and creates competition for tenants so college rentals for improved cash flow can be the way to go.

Erwin Szeto has been member of the Real Estate Investment Network since 2009 and has won several REIN Awards: Michael Millenaar Memorial Award for Leadership, REIN Silver Award and REIN Ambassador Top Player Award. Erwin is the leader of the Mr. Hamilton Team, a team of savvy, investor specialist Realtors. He is an active investor, philanthropist, lives an active lifestyle which includes Crossfit, and the occasional extreme activity to test his limits.

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