Getting a Mortgage and Buying an Investment Property for Student Rentals

(Fifteen minute read time)

If you are looking for ways to invest and you have an interest in real estate, then student rentals are worth considering. Upsides usually include good cash flow, low chance of vacancy, and an investment that grows in value while your tenants pay the bills. I purchased my first investment property in 2016 and my second investment property in 2018. Both are used exclusively for students, and I have a total of ten tenants at any given time.

You should do lots of reading before making any significant investment decision, in real estate or otherwise. Hopefully, this article will get you some insight from someone who has lived through the buying, renovating, renting and tenant transitions that you will encounter as a student landlord.

Why Rent to Students?

This is a common question. Maybe you have visions of keg parties every weekend and holes in every wall. Perhaps you think they will trash the place or leave you in the lurch on rent. Maybe you believe that a friendly family that stays for years and years is the ultimate tenant, and students are a nightmare to work with.

Completely untrue, and here's why:

If you do your homework as a landlord, check references, keep the place in great shape, and screen your tenants (basically don't be an absentee landlord), then you are likely to have good/great tenants most of the time. This means they don't disrespect the house or the neighbours, and they pay on time. The other great part about students is that they leave when their lease is up. This may sound backwards (who wants a tenant that leaves?), but you need to think about it this way: A family that rents for years but runs into financial trouble may choose to pay for food before rent. They may destroy the house over the years, and you may have a very tough time getting a young family with kids to leave when they have no place to go.

Students can usually always go home to mom and dad, and they typically move on after their lease is up, unless things are great and you want them to stay.

Remember that in Ontario, you cannot force someone to leave at the end of their lease. Having a regular turnaround of student tenants is a good thing because if you don’t get along great they will be gone in less than a year.

The second part of the 'why students' question comes down to rental rates. Charging rent by the bedroom is preferred. Families or individuals can't afford to pay more just because there are 4 bedrooms vs 3. You will be able to charge a rent that pays for more of your expenses if you rent to students by the room. Check your local market rents to confirm, but the bottom line is that a family of 3 or 4 does not have 3 or 4 incomes (usually). Note that there are limits to how many rooms you will want to have, and there are possible impacts of having multiple lease agreements. More on that below.

The Basic Math Behind Rental Property Investing

With any investment you are considering, it is a good idea to first do some rough math to help you set a sense of the numbers. You'll want to think about the cost of buying the house itself, the down payment, renovation costs, and tax implications. Remember, no investment is made in a bubble - the decision to purchase an investment property should be compared against other possible investments. You need to decide if it fits your finances, abilities, lifestyle, and future plans. Do you want to have a house for your kids to live in while in university many years from now? Do you want to be able to gift the property to a child in your will? Do you want a hobby house that you can work on yourself to add value?

In essence, student rental math boils down to some simple math. That is, (RENT PER ROOM) * (# OF ROOMS)=REVENUE. This revenue number needs to be more than all your costs to manage the house, or else you are going to be contributing from your personal funds each month to top it up.

Each situation varies, but on the cost side, you could simplify it by looking at the price of student property in your area, and then doing a mortgage calculator on the website of your choice. Include about 1-1.5% of the house cost for annual property taxes (your city website will tell you the actual rate). Then add about $200-$300 per month for essential utilities that you would probably include in your rent charge to tenants. Student tenants like it simple, so a one-price-for-all is the way to go. Consider including high-speed internet service also if you think it will help. Make sure that gets factored into your math.

In our area, student houses have a broad range of prices based on location (we'll talk more about that later), so for example sake let's pick a home that costs $500,000 and has 4 bedrooms. Using the payment calculator at https://www.mortgagegroup.com/, I estimated a payment of $1791/month based on a 2.5% interest rate and a 25-year amortization, including property taxes at 1%. I realize that this rate is way out of touch with reality for now. Add $300 more for heat, hydro, and water, and we are at $2091/month. So, given this math, you could estimate your breakeven rent at $522.75 per tenant, monthly ($2091/4).

Be aware that this is rough math, and when you do your full budget, you will need to account for income taxes. Many of your expenses are tax-deductible, but the principal portion of your mortgage payment is not. That is, if your tenants pay your mortgage, the interest is an expense you write off, but the principal they pay is not. So in our example, the principal portion of those payments starts around $962/month, and that will be taxed as income for the landlord even though you don't keep it. Make sure you increase the rent to cover that expected tax burden. In this case, I estimated a 25% marginal tax rate, so that means I need to add $962 * 0.25 = $240.50 to my rent prices to cover that. So we revise rent up to $2331.50 or $582.88 per tenant, monthly.

Knowing this desired minimum rent, you should now check out your local student rental listings to see if your rent is competitive or not. If you are too high, then you will have difficulty renting your house out to students. Each market is different. Also, note that this rent cost does not cover your down payment. You should budget to cover the cost of the down payment also. Either use the interest cost for comparison or the opportunity cost if you had some other investment that you cashed out to get the funds.

The Best Location for Rental Property

Each university city has areas that are more popular for students. Sometimes lovingly referred to as the 'student ghetto'. My advice is to choose your location carefully. Be aware that rents in these areas are low, and houses tend to be poorly maintained and hard to sell for any purpose except student rental. This is critical because you should be thinking of your long-term exit strategy. If you buy a house and have a plan to be the best landlord in town who takes care of their property and makes sure it looks nice, that is one thing.

If you are surrounded by rundown places with cars on the lawn, overgrown grass, and flags for window coverings, then don't be surprised when you can't sell that house to a family later on. Think: would you want your own child to live there during his/her university years?

Instead, choose a beautiful neighbourhood near the university or on a quick transit or bike ride. You will attract a different crowd of renters, and you will probably be able to sell the house to a broader range of buyers when the time comes. A 5-10 minute walk is usual, and you can use Google Maps to check walking times to the university campus. Bonus points for houses within walking distance to grocery, pharmacy, or other food places. Nobody wants to take their groceries on the bus if they can avoid it.

What to Look for In Student Rental Property

Selection may be limited by your choice of location and by your budget. Don't forget, however, that students are people with taste, they do appreciate some of the nicer finishings. They will pay a few bucks more for a bathroom that was recently updated, and a kitchen that has more beautiful appliances and counters. If you walk into the house and the kitchen is oddly shaped with flooring that changes from one tile to another colour of tile midway through, take note. I know that it's a student rental, but if you are weirded out by this place, then how do you expect to show it to prospective tenants with pride? The bedrooms need to be big enough for a double bed and desk at the least. Tiny bedrooms are not functional when students spend so much time in their rooms. Large windows are a bonus.

Make yourself a checklist when reviewing properties. It should note the estimated condition of the essential items like the furnace, roof, windows, appliances, etc. Note if there is central air. Everyone loves central air, but it has a cost, and you should be prepared to charge more if you include that. Don't try to tell the renters it's optional for an extra cost, they will just think you're cheap. Instead, include it, and when you show the property, you need to position it as a premium rental (if it is).

Bringing back the topic of bedrooms - note how many and do some rapid math on your rent needs vs the house price. In our 4 bedroom example, we know our rent needs, but what if you see a great house in the same area with only three bedrooms? Either you need more rent per person, or you need to renovate to add bedrooms. In our example, moving from four to three rooms means that every tenant pays $194 more per month. Could you see them doing that? Never forget about the numbers, even if the house is fantastic and you are in love. Never forget that you are not the person living there, so practice being as logical as you can about this.

Now, we could do an entire article on renovations, but to give you the basics, here is how I would look at it. What improvements will be revenue-producing, and which ones will not? Need help to think about which are revenue producing? Extra Bedroom [YES], Extra Bathroom [YES], Drastic Improvement of a Kitchen or Bathroom [YES]. Be careful about the rest. Nobody cares if your windows are new or your roof is new except you, so don't expect them to pay more for it. You will get the benefit of a new roof when you sell or when you avoid a nasty leak.

Basement apartments can be lovely for a couple of reasons. They can split larger houses into smaller rental units, which can make them easier to rent. A 4 bedroom unit and a 1 bedroom unit may rent easier than one large 5 bedroom unit. In some areas, there is a demand for 1 bedroom apartments and pricing is high, which could make a one-bedroom unit easy to rent. Be very aware, however, of the bylaws in your city. There may be limits on the number of tenants in your house or the number of bedrooms. Become familiar with the laws for a legal basement apartment vs a non-legal one. Make sure you check with your municipality on the status of any basement apartment and all building permits for the house you are considering. Some cities have a website where you can search for open and closed permits. This is valuable because the seller may not properly disclose this to you or may not realize that their basement apartment is illegal.

Getting a Mortgage for Rental Property

The first thing you should know is that lenders will treat family rentals and student rentals very differently. They estimate their expected risk when they decide to offer you a mortgage. Most big banks are not interested in financing student rentals. When you have less choice of lenders, it can be problematic. You might even encounter a problem when you are trying to buy a rental for families while there are currently students living on the property. Beware of this, and make sure you have open conversations with your mortgage broker so that you can prevent any surprises. I've had funding pulled on a mortgage only days before closing when the bank decided they didn't want to do the deal anymore. It's costly to have to extend closing, and the sellers will probably demand additional deposit money or some other concession. It's stressful, and you should try to avoid financing surprises.

Having said that, some lenders are totally okay with student rentals. You might find that the rate is slightly higher, or the terms are a little more restrictive, so do your homework early. In early 2021, most lenders started saying no to student rentals because of the risks of covid and students not having in-person classes. There are still lenders who will do it, but now, be prepared to pay more. It's hard to say when it will become easier and cheaper to finance student rentals. Note that non-student rentals are treated differently, and there are no problems with them.

Mortgage Rates on Rental Property

In general, you should expect a slightly higher mortgage rate on a rental property. This is reasonable since the lender is taking on more risk when they loan to investors. With student rental properties there can be a significant range of mortgage rates that depend on a variety of factors.

Expect to pay a higher rate on a rental that has a large number of bedrooms (i.e. a rooming house). Also, watch out for properties that are purpose-built for students. High-rise towers that are 100% student-occupied will often seem inexpensive, and you may find out too late that financing was a challenge.

When Should You Buy Student Rental Property

The school year and the most common lease timelines will have an impact on when you should buy. First, consider what month you want to have students move in, assuming the house is empty or that the current tenants are leaving. Your town's university residence terms likely end at the end of April to go along with the school year. Many students are looking for leases that start either May 1 (so they have a place to move their belongings) or September 1 if they plan to move home for the summer to work. Your situation might be different. In this example, if we want students to move in on May 1, then we need to make sure we have enough time to purchase, take possession, and perform any repairs or renovations, as well as show the property to prospective tenants. This is where it becomes a challenge, so if you can handle a short period of vacancy, this is best. It will often be a challenge to take possession and have tenants move in right away. Usually, the students want to secure a new place many months before their lease ends. In our example, many students who wish to move on May 1 are looking for houses as early as January. Use an 8-month lease if you need to get your house on the right schedule, perhaps purchase and show the property in spring and have tenants move in on September 1.

Lease Document

In Ontario, the province has adopted a standard lease document. Gone are the days of landlords making up their own leases that are either too vague or too strict.

As a landlord, you should be using the same lease document as all landlords, and it is available online. You are allowed to add conditions to your lease if need be. Still, none of those conditions can violate any tenants’ rights that are specified by law. Take some time to become familiar with the key components of the Landlord Tenant Act. Make sure you take care to know the rights and responsibilities that you are taking on as a landlord.

You may be surprised to learn that it is illegal, for example, to prohibit pets in the house in most cases. The good news is that the standard lease is comprehensive and makes it very easy to prepare a lease for new tenants. Before you show the property to prospective tenants, think about how you want to structure the leases. Do you want one lease for the entire property? It can be beneficial for both the tenants and the landlord to have one single lease. The tenants get more control over who occupies in the case that someone needs to move out. The landlord gets a more simple arrangement and the rent payment for all becomes a shared responsibility.

Use the special conditions section to specify things that are unique to your situation. Be aware that if you put an illegal condition in your lease and even if the tenant signs it, that condition is not enforceable. So, if you have a personal rule against houseguests, for example, don't expect to be able to legally restrict them in the rental house.

Finding Student Tenants

It is best to find out where the students in your area are searching for housing. It may be a rental website, realtor .ca, or Kijiji. The local university off-campus society or student union classified is generally an excellent place to start. It is often free to post, and it is a popular place for students to search for housing. Try a few places and see what works for you. You should not have to pay much if anything for this service.

Make sure you have nice photos of the kitchen, bedrooms, and yard. If you can only upload a couple of pictures, then use photo software to combine two or three pictures into one image. Spend some time to craft a clear and attractive listing that outlines the features of the house and clearly states the rent cost, lease term, and other vital details. Decide in advance if you want to include your cell phone number or just an email address. Adding your cell phone will make it easier for prospective tenants to reach out, but it will take more organizing on your part to keep up with the flow of messages. Use a spreadsheet to make a schedule that you will use to plan your showings.

Try to select a day when you can devote a few hours or more in one large block of time. Schedule showings during that day only, or during two days if need be. Avoid one-off showings on a random evening unless absolutely necessary. Book many groups in one day with a spacing of 20-30 minutes between appointments to maximize your time. Most students don't need more than 10-15 minutes to decide if they like the place, so shorter appointment times help you and them by allowing for more showings in one day.

Don't ask students to sign a lease on the spot. It will come across as slimy and pushy, and it is not in anyone's best interest to rush into a contract. Instead, take applications to time-stamp who was there first, and then use reference checks to narrow it down to the group of choice. Check references quickly, since students will keep looking while you are doing this and you don't want to lose a great group. When you do meet to sign leases, make sure you explain the contract clearly and allow time for questions. Follow the law concerning rent deposits.

Working with Tenants

Throughout the term of the lease, be communicative and respectful. Respond to inquiries and be timely with repairs. It doesn't hurt to schedule an inspection quarterly to give the tenant a chance to tell you about something that broke or something that might break soon. Being proactive with repairs and maintenance means that you have no surprises when the lease is over, and you have no delays in making the house ready for future tenants. It protects your investment and allows you to gradually increase rents over time along with the market. A house that deteriorates because the landlord thinks their job is done when the cheque is cashed will soon be worth a lot less in rent than it was before. Tenants will treat the house poorly if they think you don't care, and the opposite is true if they can see that you care. Without being a pushover, try to be easy to work with so that the tenants feel comfortable. Again the advice here is to be familiar with your rights and obligations under the law and be familiar with the tenants' rights and responsibilities as well. Many students have never signed a contract before, so if you take a moment to educate them on their rights, it will help build trust. Treat the property and tenants with respect, and always keep an eye on the numbers.

Final Tips for Renting to Students

Be organized, save receipts, and take your time to do it right (your accountant will thank you). Become comfortable with basic spreadsheets if you aren't already - they will help you model and plan for future purchases, renovations, or exit strategy.

If you need help with a rental property mortgage, reach out by email or book a call. Most big banks are reluctant to finance this kind of property. You don't want to find the ultimate investment and then lose it because financing was unavailable. Only a mortgage broker can compare dozens of lenders for you at the same time and get the best mortgage for you.

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