How To Earn An 'A' When Investing In Rentals In A College Town

College towns are one of the best places to own rental property. Not at the low end - where you'll get undergrads who have no idea how to keep your place in shape (that's a specialty best left to local landlords) - but at the middle and high ends, where you'll get graduate students, faculty, and the large numbers of administrative staff who keep a university functioning. Not only do these people have steady jobs, they have a strong incentive to keep a clean reputation.

And they also don't want to buy a home. Grad students, junior faculty, and many administrators don't plan to remain in one place - their careers involve moving (up) from one university to another. This is an important consideration for you as a landlord, because, despite the inconvenience of frequent turnover, it means there's always a large market for your product.

For example, in a state like Indiana, where the percent of renters in many counties is less than 25 percent, renters in counties with a university can be 32 percent (Notre Dame), 38 percent (Purdue), or 48 percent (Indiana) of the population.

Your rental strategy depends partly on how much it costs to buy a single-family home. Do you buy one and rent it out as is? Or do you go through the expense of converting it into multiple rentals units? Look at the difference in average prices between Boulder, Colorado (University of Colorado) - $453,000, and South Bend, Indiana (Notre Dame) - $148,000.

In Boulder you'll find very few people that can afford to rent a $453,000 home. Although average income is higher in Boulder than in South Bend, it's not three times higher. So, do you buy a much cheaper home in Boulder to rent out? No. There are good reasons why you want to confine your investment range from 75 percent to 110 percent of the average home price. That means you don't want to buy below $340,000 - still twice the price of a home in South Bend.

That means that in Boulder you'll have to subdivide - which can take a year and cost a bundle but can produce a very lucrative long-term investment. Average rents run about 20 percent of local income, so in Boulder each unit in your property can produce about $15,000 in annual rent. With three or four units, you're in business.

In South Bend you can also subdivide, but the easier course will be to rent out a property as is. The average annual rent in South Bend is $10,000. This by itself can give you an adequate return, but with a house that has three or four bedrooms, you could probably charge a lot more and still make three or four tenants very happy. What you DON'T want to do is charge rents lower than the average because you'll then run into the undergraduate problem.

There are good reasons to prefer one college town over another. What's the financial situation of the college? Is it private or publicly-funded? Are there other economic engines that will drive demand for housing (maybe a technology industry or an affiliated hospital)? You'll have to do some home work. But here are important facts for 33 college towns that can get you started.

The current rule of thumb is that a home price/rent ratio over 18 means you should subdivide

Data provided by Local Market Monitor, Inc.