College Town Real Estate

It is easy for many people to idealize their college years. Yet college towns are not only ideal for 18-year-olds, they are ideal for real estate investors. College …

It is easy for many people to idealize their college years. Yet college towns are not only ideal for 18-year-olds, they are ideal for real estate investors.

College towns are attractive to a wide swath of the population for a variety of reasons. Residents, including retirees, often choose college towns because of the job and cultural offerings and other events; business owners favor the well educated population; and real estate investors tend to be drawn to them because of the steady stream of renters and reliable price appreciation.

Research universities in particular can benefit the towns in which they are set because their large, diverse and often well paid staffs can boost local economies. Further boosting local economies are the many new companies, particularly in the medical and technology fields, that choose to set up shop in towns with research universities because of the well educated work force available.

Employment and culture

“College towns are the best bargain in U.S. real estate—the ideal mix of low prices, culture, fun and high-tech growth,” Rich Karlgaard wrote in Digital Rules, his Forbes.com blog.

College towns are good picks for real estate investments because they present “a steady stream of revenue…and growth potential for years to come,” according to The New York Times. Growth potential comes from the growing number of students attending college, which will require larger staffs to teach and support them, and from the burgeoning employment markets present in college towns.

“Many college towns…have significant private research and technology industries nearby to take advantage of university facilities and to attract well-educated employees,” according to the RealEstate Journal. “Such industry further strengthens housing demand.”

College towns offer potential for more than just technology and startup companies; “older companies will find college towns great places to expand and reinvigorate,” Karlgaard wrote.

But college towns are attractive even for those unconcerned about a location’s job market. Many retirees are choosing to move to college towns because of the variety of cultural and lifestyle benefits college towns offer their residents.

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“These days, college towns are getting a lot of play as retirement places,” according to the RealEstate Journal. “Many are younger and wealthier retirees seeking the intellectual stimulation, the ‘buzz’ and clean small-town lifestyle of such communities.”

“A campus means more cultural activities, a decent selection of restaurants and often less crime—all attractive in a neighborhood,” according to Forbes.com

As a result, “the U.S. population is expected to grow about 1 percent a year between now and 2050, but towns and cities with large universities will grow at three times that rate,” Karlgaard wrote.

Reliability

In part because of the positive growth outlooks of college towns, it seems that housing demand—particularly for student housing—is likely to steadily increase, according to The New York Times. “With demand for private student housing expected to remain strong for the next several years, industry experts say, investors can almost bank on steady rent increases regardless of economic conditions or the interest rate climate.”

As universities grow because of increasing student populations, university housing often fails to meet demand. Out of both necessity and personal preference, many students choose to live off campus. Off campus students make up a steady stream of available renters. Numerous visiting professors and other professionals further boost the supply of would-be tenants.

“Real estate prices, like anything else, are a function of supply and demand,” according to the RealEstate Journal. “In college towns, demand is at least steadier, if not more destined to grow, than the average real estate market. Second, supply…is usually constrained by strict zoning and growth controls, common in most college towns.”

Because of the high demand often present in college towns, and all of the benefits that they offer, “college-area real estate can be less vulnerable to price declines than other areas,” according to Forbes.com.

Housing

Many parents of college-age students purchase a house or apartment and rent it to their child and potentially some roommates. For many parents who can cover the up-front costs, this makes sense, because the property can appreciate for four or more years while their child is in school. During this time, they are receiving rental payments from the child and possibly some roommates, while saving money by not paying room and board costs to the child’s school. Upon their child’s graduation, parents can decide whether to continue to rent the property to students or to sell it.

“If you do rent to students, be sure to get a substantial deposit to cover damage and cleaning costs, or in case your tenants decide to stop paying rent and go backpacking in Europe for the summer. And remember the bright side—you don’t have to put as much upkeep into a student rental as you would if you were targeting professionals,” according to Forbes.com.

“Student housing has already proved profitable for many investors. The capitalization rates—meaning the initial yields—can often exceed those on conventional multifamily homes,” according to The New York Times.

Those who wish to invest in college towns purely for the opportunities, and not for the added benefit of providing housing for a child, can buy property with more flexibility. Student housing is not the only investment option in college towns.

“If you’re going to get anxious about a scratch on the wall, you shouldn’t buy a property that would most likely rent to college [students]….Instead, try something that would appeal to professors or researchers,” according to Forbes.com.

“Professors need housing too. And while many faculty members are permanent, many are so-called ‘visiting’ professors, often from overseas,” according to the RealEstate Journal. “These folks need housing too.”

Student housing REITs

For investors who want to invest in college towns, but who don’t want to make the commitment of actually purchasing a property, there are three real estate investment trusts (REITs) that specialize in student housing.

One has netted returns of 10.07 percent and another 28.76 percent, according to the National Association of Real Estate Investment Trusts; the total return for all equity REITs during the same period was 16.12 percent.

Thus, while student housing is one of the main opportunities for investors in college town real estate, it is far from the only option.

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