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Owning a Student Property Investment in Your IRA

Dad moving daughter to college

  |  By Chris Shanahan, CISP®

For retirement investors seeking real estate investment opportunities for their self-directed IRAs, the options can seem almost limitless. On the PENSCO blog, we’ve discussed investing in everything from single-family homes and real estate crowdfunding to REITs and manufactured homes. Another area self-directed IRA owners have explored: investing in student housing.

To learn more about the potential opportunities and pitfalls of student housing investments, I spoke with Jason Hartman. Jason is a real estate investor who also hosts the podcast The Creating Wealth Show, in which he shares his expertise on real estate investing and income properties.

Here is an excerpt from our conversation about student housing investments:

Michael Howe: Can you tell me a little bit about investing in student housing and why an investor might want to do so with self-directed IRA dollars?

Jason Hartman: One reason that many investors are drawn to investing in student housing is that you can rent to multiple roommates and potentially earn higher yields on the property.

For instance, Columbia, South Carolina is a big university town with a lot of student housing. Some of our investors purchased homes for around $170,000 to $240,000, and have the potential to charge $2,000 to $2,500 in rent for a 4- or 5-bedroom house for students.

Investing in real estate with your self-directed IRA allows you to maintain control of the investment with the added benefit of purchasing the property with tax-advantaged dollars.

MH: What does an investor need to know about vetting a market before making a student property investment?

JH: Generally, investors should look for landlord-friendly markets. That way, if there is ever a problem and a tenant needs to be evicted, it won’t be extremely problematic to complete the process.

Second, investors need to understand what the rules are when it comes to the university allowing students to live off campus. Some schools require students to live on campus for a year or two, decreasing demand for off-campus housing.

And third, investors should also understand how much housing the university provides for students. Given that student housing can be a lucrative investment, many universities have increased the quality and amount of student housing that they offer, creating more competition for off-campus landlords.

MH: What considerations need to be in place when putting together a lease for students?

JH: Make sure the lease specifies whether it’s for nine months — to cover the school year — or students signing the lease are responsible for a full 12-month lease.

Also, be sure the lease has been customized to cover issues that might be specific to a student housing investment, such as how many tenants may rent and live in the home, what the policy is regarding visitors and noise violations, or what to do about damages incurred to the property. Make sure all of the renters are listed on the lease and clear policies are set about who else can or cannot stay at the property.

It might help to talk to other student housing investors to see what special clauses they’ve added to their leases.

MH: Do the students’ parents also need to sign the lease?

JH: Given their age, students may not have much credit in their own names and their ability to pay rent may be tied to scholarships or work-study programs. This means a standard credit check might be incomplete to determine if a student is able to pay the rent. Ideally, have parents cosign the lease.

MH: What other differences might exist when it comes to renting to students?

JH: I often suggest that property managers check in on a student property investment fairly frequently. Students may not report repairs in a timely manner, and you might not find out about them until they’ve caused extensive damage.

Student housing investors also need to be prepared to deal with a higher turnover in houses that are rented near universities, which can increase maintenance costs.

MH: What is your longer-term outlook on rental properties?

JH: The demographics coming into rental housing for the next decade are phenomenal, but that doesn't just mean students.

Generation Y is likely to rent for a long time because they’re saddled with unreasonable student loan debt and they want to be mobile. One of the best things you can have on a resume, if you’re looking for a job, is mobility — the ability to move to where employment opportunities are best. Generation Y is eager to move to where the jobs are and they are growing up with the sharing economy, with startups such as Uber, Lyft and Airbnb in focus. The ownership concept isn't the same for them, and the dream of owning a house with a white picket fence doesn't apply for many of them. This bodes well for investment properties.

Stay tuned to the PENSCO blog as we explore other unique real estate assets that investors hold in their self-directed IRAs. Want to learn more about investing in real estate with your IRA? Download our guide.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.