The need for student housing has become a burgeoning business in recent years. More and more students are attending college, and that means there is a higher demand for quality student housing choices once they’re enrolled in their desired university.
As an investor, chances are that the commitment to building, investing in and maintaining a student housing property may be a sound decision. However, you want to arm yourself with knowledge of the student property space before making the leap. Here are just a few things to consider before you begin your journey into the world of student housing investment.
Top factors that make student housing a potentially suitable investment
A successful housing property, no matter the strata of population you are targeting, is a mixture of several different factors. Some of these to consider for the longevity of your investment include:
Quality of school: This factor is something that is near and dear to NB Private Capital. We like to target universities with historically great local, national, or worldwide academic reputations. Number of students, enrollment growth, endowment size, Division 1 sports teams, and quality degree output are just a few things we look for in a quality college or university.
Location: Where you decide to build your student property is perhaps the most heavily weighted factor in the success of the property. Consider elements such as proximity to campus, walkability of surrounding areas, and amenities. Student pedestrian locations offer students the ability to roll out of bed and make it to class within minutes.
Demand: Real estate fundamentals still apply to student housing, and perhaps more so than other traditional real estate properties. You need to be in tune with enrollment growth, student demographics, university housing requirements, the current supply of housing options as well as the prospect of current and future supply for additional housing in that particular ecosystem.
Size of school: The size of the university is important because it plays into your exit strategy. Investing in a property near a smaller school may potentially provide you with a sufficient cash flow, but when you go to sell it, you may find yourself in a pool of fewer buyers. This does not always bode well for the appreciation of your property.
Expenses vs. revenue
The equity groups we invest for are constantly searching for greater opportunities for cash flow. And that’s what we at NB Private Capital primarily focus on targeting—finding recurring, year-in and year-out cash flow for our investors
Student housing in today’s world has changed a lot. It is no longer the old stereotype of the out-of-control party-style houses depicted in the countless college movies from the ‘80s. Students nowadays are a bit more conservative (parental guarantees play a big part in that), meaning that maintenance expenses for landlords are typically much more manageable and predictable as with other types of housing assets in the market.
The niche of student housing now provides a year-round cash flow in the use of 12-month leases. It used to be that during the summer months, the majority of students would go back home to their parent’s house, leaving the surrounding areas all but abandoned. Today, we are finding that students have a desire to be more independent and are willing to live near campus year-round.
There’s also no doubting the current increased rate at which high school students are attending college. The National Center for Education Statistics found that college enrollment increased by 14% between 2005 and 2015. In today’s world, a college education provides high value for job placement and is an essential prerequisite for some of the most sought-after positions. For investors, this means there is presently an increasing demand for places for students to live, bolstering potential opportunities for revenue.
A lot of the investors we work with at NB Private Capital are looking for stability and cash flow. Surprisingly, student housing properties have the potential to meet these two requirements adequately today.
When you combine the decreasing liability of expenses with the possibility of continued tenets year after year, it’s easy to see how student housing is a viable investment consideration.
The build vs. renovate dilemma
While the student housing market is anything but tapped out these days, there are an increasing number of investors stepping into the space. If you visit a larger campus and its surrounding areas as an investor, it might be disheartening to see the volume at which student housing is being developed. However, the potential may still be there—you just need to decide whether to renovate or build.
Investors looking to renovate properties are typically looking at buildings constructed in the late ‘90s and early 2000s that are structurally sound but perhaps just needed a few updates at least 10 years ago. These properties often have good locations. There will always be a need for renovation—as newer properties age, new investors can always look to rejuvenate rooms and amenities to fit the times.
A new build is a little different, a lot more risky, but ultimately has the potential for bigger, investment yields. For one, you are adding more supply to the market, so you need to be absolutely sure you are not oversaturating the demand of the area. Also, the timing aspect for new construction is a key factor as it will take 13-24 months to deliver to market. You also need to be aware of the student demographic you’re targeting with your new property.
Construction of new buildings is expensive, therefore you will need to offset these costs with a heightened price. Are your potential tenants willing or even able to pay up to live at your property two years from now?
How to ensure you are filling your property
All students need housing, but there is presently an increasing pool of options for students to choose from, each one with more lavish and accommodating amenities than the last. So, how do you make yourself heard in a market screaming for tenants to try to get the most out of your investment?
The best thing you can do for your investment is to remember that you’re in the service industry. We cater to students, and the reason we are in business is because of these schools, and we are there to help make that academic success happen.
Anything and everything you can do to assist your tenants in obtaining their degree is vital to your success as a property owner. This can be things such as fast internet, study areas, a fitness center, and perhaps just free coffee down in the lobby. A healthy social life is also important to the work-life balance of a student, so providing elements such as a common area, barbecue pits, or a pool can be attractive to potential tenants as well.
Student housing is NOT multi-family
This is a misconception that a lot of first-time investors have when making the decision to invest in a student property. With a multi-family property, you can see a lot of fluctuation in your tenents—if someone’s lease is up or they decide to move out, you can more than likely have arrangements for a new tenant to move in within days or weeks. This is not the case with student housing as you only get one shot at the apple.
As students sign 12-month leases based on the academic year (August to July) The operation of student housing starts the day the students move in, and once in, they are with you for 12 months. The leasing season for the following academic year starts as soon as students move in for the current school year. You’re not going to get a whole lot of leasing throughout the year. So, if you miss the mark in filling up your property during this time, you’re underwater in your investment for next year’s cash flow.
Just a few decades ago, the student housing market was but a small sliver of the investing population. Now, with the increasing popularity and growing requirements of a college degree in the workforce, we are seeing all-time highs in college enrollment. We believe that there has never been a better time to join in on the wave of student housing, and if you invest with NB Private Capital we will strive to help you achieve your investment goals.
As CIO for NB Private Capital, Paul Perkins has more than 26 years’ experience in the commercial real estate industry. He has a broad knowledge of property and note acquisitions, property dispositions and financing, as well as real estate investment brokerage and the acquisition of real estate operating companies. Perkins has worked in the private as well as the public sector of real investments and recently served as CIO for several local Southern California investment companies before joining NBPC. He received his undergraduate degree in business from the University of Southern California and a master’s in real estate and development from New York University.