Successfully Investing in Student Housing

Back-to-school season is right around the corner and this may be the best time to start shopping around for new investments. Axiometrics released an extensive report which demonstrates that student housing transaction volumes totaled more than nine billion dollars in 2016, which was a 62% increase from 2015. Most of these numbers were driven by sizeable portfolio sales.

Jay Morrison, CEO of the Tulsa Real Estate Fund mentioned, “The student housing real estate investment market is virtually untapped, which means there’s plenty of room for opportunity for new investors in this market.” Student housing investments opportunities are far from fully realized as they are not as mainstream as other investment opportunities and few people recognize the potential of investing in this type of real estate.

Two men, Isaac Sitt and Elliot Tamir, were investing in real estate for years before they stumbled upon the idea of student housing. In 2008 the two purchased a few apartment buildings in Brooklyn, but after the major financial crisis, they were struggling to find tenants to rent units. Sitt and Tamir decided to put up ads in hopes of attracting people to rent units. They started near Wyckoff Heights Medical Center to target doctors but instead they received several interested medical students.

The two men realized that the dwindling job market was resulting in many people going back to school. Investing in student housing ended up being a great choice. Sitt recalls thinking, “Hey, this is a good business,” even in a downturn. “Not only does it make sense, but I think we can raise equity for it.” Now the men run Vesper Holdings LLC, which is one of the largest owners of student housing in the U.S.

While it has traditionally been more difficult for investors to get access via public markets, Randy Hubschmidt, Managing Partner at Fortis Wealth, has said, “On the private side, we’re seeing a tremendous amount of investment in that asset class.”

Investing in student housing has shown a prominent degree of stability that usually isn’t always present in other real estate sectors, especially during periods of market volatility. When the market crashed horrendously in 2008, the housing market took a huge hit. Home values sharply decreased but student housing remained largely unscathed.

“One of the main advantages is consistency,” Morrison says. “Demand for student housing is always going to be there, which means year after year, there will always be viable tenants for your investment.”

Beth Mallette, a Real Estate Series Fund Manager at Manning & Napier Advisors also chimed in saying, “Student housing tends to be less economically sensitive, relative to other sectors, due to the nature of the industry. During economic downturns, enrollment tends to remain steady or may even rise due to fewer employment opportunities, which typically leads to growth in college and university enrollment.”

Many who consider investing in real estate worry about turbulence in the market or the possibility of a recession but, student housing is one of the only sectors that can offer predictability. Lease renewals are often easier to obtain as well since students generally know ahead of time if they plan on returning to school the following year or not.

“The sector is exposed to more seasonal volatility given the need to fully lease facilities every year for the school year over a relatively shorter window,” Mallette says. “This degree of seasonality is more unique to student housing versus other sectors.”

Another positive relative to investing in student housing is that the profit potential is much higher. There is a consistent demand for student housing which can lead to strong returns. Seth Stevens, Director of Sales for Renters Warehouse Seattle in Tukwila, Washington says, “Generally, a landlord can charge more money per square foot in a student rental than say a single-family home in the suburbs because there are roommates involved.” He also mentioned student housing offers more security for investors because often students receive a helping hand from parents, though that is not always the case. He continues, “Whether they’re paying for the rent or co-signing the lease, the parents’ involvement generally means rent is paid and paid on time.”

Of course, location always has a huge impact on the profits of any real estate, and residential rates are determined by the location of the housing and its proximity to colleges, universities, and other businesses. Stephens says, “Neighborhoods near college campuses tend to be more expensive than surrounding areas because of their proximity to campus.”

Morrison mentioned that investing in student housing does have risks just like any other investment. According to Morrison, one of the biggest risks is the volatility of having teenagers and young adults as tenants. “You’re dealing with the personalities and quirks of dozens of maturing adults who are very different to most other tenants.” And if your tenants rely on financial aid for part of their income, “you may have to get used to quarterly or semesterly payments instead of your usual monthly rental cash flow.”

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