Turning Houses Into Degrees: Student Rentals

Student rental property street view
An investment in knowledge pays the best interest. – Benjamin Franklin

We were so proud when our son got accepted to university. He worked hard to get good grades, and he was passionate about taking a kinesiology program. He is fascinated with how the human body moves and is thinking about a career in physiotherapy. Our daughter will graduate from high school in just over a year, and is just starting to explore undergraduate psychology and neurology programs. But higher education doesn’t come cheaply. We saved up for post-secondary studies in an RESP (Registered Education Savings Plan), but this alone will not be enough to cover all the costs of the 4-year programs for both children.

Where we live, funding for university and college education has been in the news recently. Ontario’s provincial government announced there will be a 10% reduction in tuition fees in 2019/2020 for all students. Also, the parental income cut-off for OSAP funding (Ontario Student Assistance Program) will be lowered. Even without the recent changes, there is no denying that higher education is always a major expense. Tuition, fees and supplies for a university undergraduate program in Ontario are over $8,000 per year, and living costs can be $10,000 per year or more for a student not living at home.

While our son was living in residence first year, we started thinking about the housing costs for the remaining years of his studies. With typical rents around $500 or more for a room in a shared house near his university, he would be paying at least $6,000 per year for housing alone. Instead of having our son pay for off-campus housing, we decided to purchase a house and get him to help rent out rooms to his friends from the university. That way we could save on rent, cover the mortgage payments, and, based on our projections, make a profit when selling the house later on. Also, having an income-generating asset is a great way to work towards financial independence (see Books That Changes The Way I Think). It will be even better if our daughter goes to the same university, but we’ll wait and see what happens!

If you have children in high school, here are some pros and cons of investing in student rental properties based on our experience:

  • Location, Location, Location – Most students rely on walking, cycling or public transportation to get between home and school. It’s therefore important to be close to the university. For us, the off-campus housing office at the university was a great help. Each Canadian University should have one. They let us know the areas where students like to live and what were typical rents. We didn’t buy right next to the university since the prices were too high to be economical, but we got a place on a transit route with a short ride to campus. This seems to have struck the right balance.
  • Rental Demand – You should consider whether you would buy the house to rent to the general public, not just your to child. The market can fluctuate, and it may not be the best time to sell when your child graduates. Consider buying a place in a mixed neighborhood, rather than in the student ghetto for most flexibility in the future. CMHC (Canada Mortgage and Housing Corporation) provides housing market analysis for local markets to help make informed decisions.
  • Property Management – You need to be prepared to deal with the risks as well as the rewards of owning a rental property. Things will wear out over time and student renters may accelerate this process. So far we have had to repair a door with a hole, replace a cracked vanity, and build a new deck after the old one began to tilt! Having your child look after the house will likely help to minimize the damage, but there will be wear and tear. A rental home can be a great opportunity to enlist your child to learn about maintaining a house, but don’t be fooled into thinking this is a passive investment. You need to be on call to deal with issues such as frozen pipes on a -20oC day or a continuously running toilet. An alternative is hiring a property manager to help you look after the rental, but this comes at a cost. Evaluate your lifestyle to see what you can manage yourself.
  • Turnover – If you are lucky, you’ll keep the same group of tenants for 2-3 years. It’s best if your child finds trusted friends to live with. You can help by charging reasonable rent with the guarantee to look after the place. Even if your child’s roommates are close friends moving in, you may find that living together causes some drama and resulting turnover. A new boyfriend or girlfriend may upset the dynamic, resulting in you looking for another tenant after a year. Make sure you sign 12-month leases not month-to-month or 9-month school year leases since it’s hard to find renters in the summer months. These 12-months leases are standard for students in many areas.
  • Legalities – Keep informed about the rules for student housing in the area. Each city has different rules about the number of students per house, fire safety, parking, noise, and insurance. Our student rental has the maximum 4 bedrooms allowed in the city without licensing. We also have interconnected fire and carbon monoxide alarms on each floor. Make sure the students know the garbage and recycling collection days. Provide bins and make sure they use them.

These are just a few thoughts on how to help fund your child’s post-secondary education while building equity in a cash-flowing asset. Are you interested in buying a house when your child goes to university or college? I’d encourage you to consider it!

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