Student Rentals: They Can Be Great Investments But…

Student rentals can be great investments. You buy a 2 bedroom house, split it up into 8 bedrooms, put locks on the doors and voila, you’re charging $600 x 8 = $4800/mth. You bought the place for $500K and put the minimum 20% down ($100K). You’re carrying a $400K mortgage at $2000/mth and property taxes are $5K/year.

You’re pocketing $28,600/year which is not a bad return on your investment of $100K.

Beware! Student Rentals Are Hard To Finance!

If you’re buying a home that is anywhere near a college or university, the first question the bank is going to ask is: you guessed it! Is it a student rental? Pretty hard to say no especially if you already have a home and the place has 8 rooms in it! Banks generally do not like student rentals. Why? The short answer is: because they tend to get trashed and this is the bank’s security! There are some banks that offer mortgages on student rentals but the terms are not the best (because their risk is higher). Usually they will ask you to put a larger down payment on the home (35%) and/or they will charge fees and/or higher interest rates. Work with a broker who will find you the right lender and help you present and structure it properly.

If you turn a place into a student rental after purchasing it as a regular rental or an owner occupied home, the bank may not be aware of it but you are supposed to disclose it. Also, if you try to change any of the financing on the home in the future and an appraiser walks in there, the purpose of the home will likely become clear.

Student Rentals Are Generally Riskier

Putting 8 students in a home together with shared common areas can lead to issues. The banks are weary about lending on these properties for a reason. They have a bad reputation so you may want to babysit your investment a little more closely.

Rentals (student or otherwise) can pay off, but they can also be a hassle. So make sure you know what you’re getting into and vet your tenants carefully!

Sean Howard is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Sean, he can be reached at 905-574-9200 #216. Alternatively, you can contact Sean here.

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**Note: to keep it simple we did not factor in legal costs buying and selling the rental property or the realtor’s commission to sell the property.