How to Buy Student Rentals in Ann Arbor
With record enrollment at the University of Michigan, student rentals are in high demand and short supply.
Disclaimer- No part of this was written by a third party or a robot.
How Bad Is the Shortage of Student Rentals in Ann Arbor or How Big is the Opportunity for Investors?
Put simply – and this is even understating the reality – the shortage of student rentals is acute and the opportunity is great.
According to a recent Michigan Daily article, on-campus housing for University of Michigan students is not guaranteed after freshman year and undergraduate students have until March to basically have their housing situation figured out for the next school year.
U of M is struggling to meet this rising demand for housing with record-breaking enrollment in Ann Arbor. Undergraduate applications increased a staggering 35% from 64,972 in 2019 to 87,632 in 2023, which lead to enrollment increases in 2023 of 8% of 33,730 from 31,266 undergraduates in 2019. That’s not even counting graduate, post-doc, medical, and law students, which pushes the total enrollment at U of M to 52,000 students or higher!
Even though U of M and private developers have been feverishly adding new student housing units to the market, they are simply not keeping pace with demand which puts pressure on increasing rents as a result.
In fact, rents at newer student housing developments can be as high as $1,800 or more per room, which is also pushing rents of older student rentals higher – between $1,000-$1,400 per bedroom depending on location and condition.
Clearly, there are several problems to help solve as investors with student housing in Ann Arbor. One, providing safe and affordable housing to students. Two, helping with a shortage of available student housing units. Three, if you have a student attending the University of Michigan, why not purchase a house and rent the other rooms out to other students helping pay for the housing costs for your own child while enjoying the tax benefits from the investment real estate?
Where Should You Look For Student Rentals in Ann Arbor?
Most students, even if their classes are on North Campus, want to live as close as possible to Central Campus and “The Diag” and “South U” nightlife. Obviously, this puts a premium on properties close to those areas.
This map from the University of Michigan, shows the neighborhoods near central campus.
The website for the Dean of Student Services at U of M offers a resource about the different neighborhoods around central campus.
In your search, you want the property to be walkable to central campus as much as possible and close to bus routes for the Ann Arbor Area Transportation Authority and U of M. Google has a Transit Trip Planner search tool that tells you how close a given location is to a bus stop and how long a trip takes and which buses to take to different locations of interest like central campus.
So, knowing the different neighborhoods around central campus and how close a property is to a bus route to campus will be important search criteria.
Certainly, working with an investor-friendly local Realtor will help you identify properties that would make a good student rental, refer you to a quality property manager and property inspector, as well as have relationships with investor-friendly contractors to help you save time and money. They will also have relationships with local landlords who may be considering selling before they hit the market.
“The shortage of student rentals is acute and the opportunity is great.”
What Kind of Property Should you Look For as a Student Rental in Ann Arbor?
You want this to be an investment and you want it to cashflow.
Ideally, you will find a property that is an existing student rental that cashflows with a property manager the day you buy it.
However, because real estate is so competitive in Ann Arbor because of the limited supply, it will be challenging to find an existing student rental that cashflows when you buy it because the owner will want to maximize their property’s market value.
Not saying it won’t or can’t happen – just saying it will be tough.
Another way to get a student rental to cashflow is to buy a property with plans to develop it perhaps as new construction or, more commonly, adding rooms and baths to get the property to cashflow.
Can you buy a four bedroom that has space to add one or two more rooms and a bath to get enough rental income to maintain the property, pay a property manager, and have positive cashflow?
Other features you will want to look for in a property is whether or not it has a common space like a living room for students to socialize together. Does it have a space for students to sit and eat together, enough full baths for the number of students in the house, and a decent size kitchen for basic meal preparation?
Make sure, in the due diligence process, you have the property inspected thoroughly to avoid costly structural, environmental or mechanical issues.
Additional conditions of the property you will want to check is if the property is in a flood zone or a historic district.
The City of Ann Arbor offers resources and maps online to see which areas my be affected by a floodplain. Properties in a floodplain may be required to have flood insurance and have building restrictions.
The City also has maps and resources online about the designated historic districts and what requirements and limitations there are for a property in those areas.
Further, when doing your due diligence on a potential student rental property, you will want to check the permit history of the property. You want to know if there is a record of maintenance being done on the property with permits because recent work completed without a permit may require you to have work retroactively permitted and brought up to acceptable standards of building codes through city inspections.
The permits history for the City of Ann Arbor are found in two places online:
Older permits are found in the Etrakit system by entering the property address. Newer permits can be found in the STREAM system.
If the property you are considering is already a student rental, then see when the Certified Rental License or Certificate of Occupancy expires and how many people it allows to stay in the rental house in the permit records.
Finally, you will want to involve your property manager in the due diligence process so they can give you advice on how to improve the property, how to obtain market rents, validate current rents and rent rolls, what areas may be best for student rentals, and they can help you get a property certified with the city as a new rental.
What is Involved Getting a New Student Rental House Certified with the City of Ann Arbor?
You have to apply with the City of Ann Arbor for a Certified Rental license through the STREAM permit system mentioned earlier.
There is a cost to apply and the cost is greater for new rentals vs. renewing rentals. There are additional costs for inspections by the City and costs associated with repairs and additional inspections that require permits. Finally, there is a cost for re-inspections by the City.
In summation, you want to budget at least $5,000 for getting a new property certified as a rental with the City for repairs and related fees.
Having your experienced property manager involved with this process and your investor-friendly contractor will make this process much easier, more timely, and more cost-efficient especially if owning out-of-town. Your investor-friendly Realtor can introduce you to these important members of your team.
Sometimes, if recent work was not done with permits, the City will require retroactive permits and the work being redone up to code so at least check the permit history before buying.
If you are planning to add rooms, baths, or egress windows in the basement, now is the time to do that work so the City can inspect it and it can be reflected on the Certificate of Occupancy how many people you can have staying in the house after the work is complete.
Why Having a Good Property Manager is Critical to Your Student Rental Ownership Experience in Ann Arbor
The property manager is such a critical member of your ownership and investing team for any real estate investment but especially for a student rental due to the unique management demands of a student rental.
Many investors undervalue the asset a quality property manager is for their investment returns.
A quality property manager will be with you from the beginning from helping you identify the right student rental property, helping with due diligence and verifying leases and rent rolls, advising on how to add and maximize value, managing the property and maintenance, and providing a quality experience to the tenants to retain them and provide the highest return on investment as a result for you as the investor.
A quality property manager is critical.
Here is a list of some of the things the property manager will do to keep your property compliant and well run.
1. They will know about all the Fair Housing Laws and rental compliance for landlords.
2. Rental housing laws in the City of Ann Arbor and there are many with penalties for non-compliance. The Renters Commission, which advocates for tenants, is also active in Ann Arbor as well as legal services and other advocacy groups for students. Here is a sample of the required lease renewal process in the City of Ann Arbor. This is just one requirement of landlords that your quality property manager will handle for you!
3. Your property manager will make sure your lease language is compliant for the national, state, and city lease language requirements.
4. Property maintenance will be ongoing and your property manager should have their own in-house maintenance team and/or relationships with preferred contractors. For bigger projects, your investor friendly contractor can be brought in.
5. Responding to tenants and providing a quality experience for the tenants so you retain them and don’t have constant tenant turnover.
6. Manages the property to increase value and market rents.
7. Advises you on how to structure your lease so you have a house lease for all the students being responsible for the total house lease rather than renting by the room.
8. A quality property manager will make owning your student rental as enjoyable and passive as possible.
Indeed, a quality property manager is an invaluable member of your student rental investment team and your investor friendly Realtor can introduce you to them.
Why Having an Experienced Investment Insurance Agent Matters When Buying a Student Rental in Ann Arbor
Insurance rates have been going up every year in Ann Arbor because of powerful storms and the number of corresponding claims. Some properties are easier to insure than others.
Having an experienced insurance agent on your team is especially important when buying a student rental because you have to make sure you have all the coverages and amounts of coverage you need while not overpaying.
Some insurers don’t even want to touch student rentals or will charge an arm and a leg if they do give you coverage.
Why Having an Experienced Asset Protection Attorney is Critical When Purchasing a Student Rental in Ann Arbor
Whether you are buying in an LLC or a Trust, you want to have the best asset protection attorney on your team.
Disclaimer- This information is for educational purposes only and is not intended to be legal or tax advice. Please consult your attorney, investment advisor, or CPA before making any decisions unique to your situation.
A Trust can be used for asset protection and estate planning and to establish ownership interest to dependent, adult students.
If not buying in a Trust, investors may want to hold the property in some kind of asset protection vehicle like an LLC to minimize liability and protect the asset. Each property can have its own separate LLC. You can also have a holding company LLC that acts as a management company for all the other property LLCs after you have several properties for an additional layer of protection. Your asset protection attorney can also act as your registered agent for the LLC so the only owner of record for the LLC is your registered agent and they have to contact them about any potential liability issues with the property.
This year there is an added wrinkle with the Corporate Transparency Act which requires anyone with what is considered a beneficial interest in entity – and possibly including a Trust – to register all potential beneficial parties with the Department of Treasury Financial Crimes Enforcement Network. Each person with a beneficial interest in an entity like an LLC or Trust must register and disclose this to the U.S. Department of Treasury. Newly formed entities have a very short window to register, like 90 calendar days after forming the entity, starting in 2024. Older entities formed before 2024 have until the end of the year to register. All entities must be registered separately. All beneficial members must keep their records up to date about who they are and where they live and their interest in each entity. There are stiff penalties for non-compliance.
As you can see, having a competent asset attorney is critical for your own protection, estate planning, and compliance.
Why Having an Experienced Investment Lender or Paying Cash Helps When Buying a Student Rental in Ann Arbor
Having an experienced investor lender will ensure you have the widest array of loan options available to you and their experience to overcome potential issues, and there are always issues, in order to get your loan to close successfully.
One loan product that is very popular right now with investors is called a Debt Service Cover Ration loan or DSCR loan.
The DSCR loan has been available for a long time in the commercial lending world, but has found its way into investor’s consciousness for residential investment properties or 1-4 units instead of 5 or more units.
Basically, a DSCR loan qualifies the loan on the rental income of the property and if the income is 1.2 or 20% greater than the mortgage payment, the property qualifies for a DSCR loan. As an investor, they don’t qualify the loan so much on your personal income but the income of the property and your credit score.
This is a low document loan and very popular with investors currently – especially, busy, high-income earners who do not have time for a traditional full documentation, conventional investor loan.
Paying cash is great if you can and is still king but in the hyper-competitive Ann Arbor real estate market someone may have more cash or offer better terms. Your experienced, investor-friendly Realtor can introduce you to an experienced investor lender and structure the most competitive offer for you to win.
Bottom Line on Why Owning a Student Rental in Ann Arbor is a Fantastic Investment
The demand for student rentals in Ann Arbor has always been extremely high, but with record high enrollment at U of M, even with University and private investment in new student housing, there is a shortage of available student rentals and that is expected to continue for the foreseeable future.
The opportunity is great for student rental investment in Ann Arbor.
It is important to know where to look for the best student rentals. How to find the best on- and off-market opportunities and have the best professionals on your team including an investor-friendly Realtor, property manager, property inspector, insurance agent, asset protection attorney, and investor lender.
There are also many requirements and laws governing rentals and student rentals nationally, in the State, and the City of Ann Arbor especially.
Finally, there are floodplains in the City and environmental and property issues to make sure are avoided or mitigated when buying student rentals.
The opportunity and demand is great. Having the right team to represent you will provide not only the best ownership experience but the highest return on investment.
To Your Success!
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