The student housing industry has been booming in recent years. Developers and investors both in the U.S. and internationally have jumped on the student housing bandwagon to take advantage of its many benefits. In her 2018 National Real Estate Investor article, national real estate investor Mary Diduch highlights her belief in a continued strong developer and investor interest, increased rent prices and increased occupancy rates in the coming years. It’s certainly an exciting space to be in right now.
But in order to break into the market, there are a few basic things that any investor should know. Here are seven things you should know before you consider investing in student housing property.
1. Understand the university
When evaluating student housing, the first thing you want to look for is the university itself. You want to make sure your economic anchor is stable and that enrollment is consistent year after year, decade after decade. You also want to look at how economic cycles have affected enrollment historically. This is where the true value of student housing lies—you’re leveraging the historical stability of a major institution as your investment vehicle. It is also known that student housing is not historically very affected by outside economic forces, so this kind of property may not be as correlative to the rest of your traditional real estate portfolio.
2. Understand the property
Second, you want to look at the property itself. How did the property perform during the Great Recession? Were they able to raise the rent? Were they able to keep the building full? Basically, were they able to remain stable in tough times?
3. Understand the competition
You also want to evaluate the competitive set. You want to take a look at the four or five top competitors in the area and look at their track record over the past several years. Believe it or not, but you need to make sure that the other properties that you are competing with are doing well, too. You don’t want to be in a market where your competitors are selling off concession or discounts—that’s a sign of a weak economic area. If they are leasing faster, that then creates more demand for you.
4. Understand the area
Some universities have been around for centuries and, unfortunately, the majority, if not all, of the land has been developed. There’s typically not a whole lot of land within walking distance of campus. So, if you’re able to find a property that is well-located and well-positioned within a couple of blocks of campus, that’s a gold mine. If you are able to find a location like this, it makes it really hard for competition to come in and change or replicate that.
5. Understand your target market
Another vital component to investing in student housing is understanding who you are trying to lease to. What kind of students are you attracting? Is it a growing segment within the population? Is it new students? Your target market will help you determine what kinds of amenities and activities you should include in the property and which kind of students are going to pay the highest premium to live there.
6. Understand the cap rate
What a lot of people don’t know about commercial real estate is the primary tool used to evaluate a certain piece of property. The cap rate is determined by dividing the net operating income (NOI) by the property sales price. This will help you evaluate the potential for growth of the property and assess the likelihood of safety of the income. If you can increase the net operating income in the cap rate model, you essentially increase the sales price.
7. Understand expenses
One of the greatest things about student housing is how low your expenses can be. If you have a property right next to a major university, in many cases the university offers great amenities. Things such as a union center, pools, and exercise facilities are on most major campuses today, and that means you don’t have to spend the money on them. In this scenario, your square footage is nearly 100 percent revenue-producing. This leads to a favorable expense ratio and greatly affects your bottom line. And that means even in bad years with lower occupancy, you will still be able to remain cash positive, making your property safer and more stable.
There has never been a more exciting time to hedge your real estate bets on investing in student property. The market has demonstrated a historical potential for stability, mitigation of risk, abundance, and most importantly, potential for income. As long as you have a hand on the pulse of these seven vitals of student housing property, we believe a partnership with NB Private Capital could be a good addition to your portfolio.
DISCLOSURE: This is not an offer to sell nor a solicitation to buy securities. All investing involves risk. Discuss investments with your tax professional prior to investing. Securities offered through Emerson Equity LLC, member FINRA/SIPC only in states where Emerson is registered or operating pursuant to exemption from registration. Emerson Equity LLC and NB Private Capital are not affiliated.