Is student housing the real estate investing niche for you?
Student housing is a massive, multibillion-dollar real estate sector. Much of the smart money out there is hungry to occupy this space; however, there can still be room for individual investors to make a mint on this side of education. Why is this niche so attractive? What are the real pros and cons of renting homes and apartments to students?
Student Housing 101
College students need somewhere to live. Even if they are going to school in their hometown, it’s an age when they and their parents are motivated to cut that umbilical cord and let students move out on their own. Some will stay in on-campus dormitories — 22% do stay in old on-site facilities — while many others will stay in rented off-site and private accommodations.
Dig into the investment portfolios of the wealthiest endowment funds, and you’ll find schools like Yale, Stanford and Harvard could be described as real estate investment businesses that just happen to make their money from tuition and student housing.
• RealPage reports student housing at 60% pre-leased in March.
• Student housing vacancy rates are at just 2.6%.
• The University of Minnesota is experiencing 15% rent growth.
Big funds are hot on this sector too. Greystar recently bought a student housing portfolio for $3.2 billion, and then partnered with Blackstone on another $1.2 billion deal, according to Bloomberg.
Ways To Invest In Student Housing
There is more than one way to participate in this real estate sector.
You could invest in a fund that holds student housing in its portfolio, though most investors want to be closer to the action and to keep more of the profits and cash flow.
So, alternatively, you could partner with others to acquire multifamily apartments that can be rented to students.
Or, you may simply acquire rental houses in college towns near university campuses and rent to the students directly.
This can be especially attractive if you have kids going off to college yourself. Instead of paying ludicrous rents on top of expensive tuition, why not own it, rent it out and have that investment cover the college expenses? Managing that property may even be the best education your student gets out of the whole college experience. They can get roommates and either rent rooms individually, or stack them deep with shared rooms.
With the high potential rents, this method has the potential to generate the most cash flow you could hope to get from a rental unit. It could be a property’s highest and best use. The only alternative that may come close is using those properties as assisted living facilities, though those may come with more regulations and liability than you want to take on.
As another option still, maybe you have an empty nest with extra rooms and want to dip your toes into real estate investing by leasing your spare rooms to students for extra income, enabling you to live for free.
The Pros Of Renting Homes To Students
Higher rents are probably the most obvious advantage of renting homes to students. You may easily be able to get up to four times the regular rent by converting to student housing. You can squeeze a lot more students into a house than you’d get with a conventional annual rental, and each of them will be paying for their own space. For example, if a three-bedroom home normally rents for $750, you may be able to rent each room separately for $500 a month. In high-cost cities, new models are cramming four or more renters into rooms on bunks, with as many as 20 residents per home. These co-living arrangements often charge $1,000 or more per person each month.
This means more profitability and cash flow, and far better returns. College towns and areas closest to thriving university campuses appear to perform well when it comes to maintaining value and appreciation as well. As a landlord, you can feel good about providing a good service and helping to foster education and empowering the next generation.
The Cons Of Renting Homes To Students
Of course, for every pro, there is a con too — the most obvious in this real estate investment niche being the impact of having students as tenants. You can imagine the wild parties, potential damage and noise complaints.
Then there is the churn rate. You may turn 70% of your tenants each year. If there are many repairs to make at each turn, that can get expensive and dig into your net. It really depends on the students you get as tenants, and their expectations of housing quality.
Looking at the bigger picture, it is also worth thinking about the future of education. Traditional college education as we’ve known it for the past few decades appears ripe for disruption. Soaring tuition rates and the student loan crisis mean the returns on this type of education can be negligible or even negative for students. Online learning options mean students can now learn from the best schools, while still living with their parents for free or far cheaper. If there is a big pivot in this arena, could it vaporize the need for student housing on a massive scale?
Summary
Student housing can be one of the most profitable uses of rental homes. You don’t even need a degree to qualify to do it. It may be one of your best investments if you have your own kids going to college too. Still, it is important to understand the cons as well as the pros and keep an eye on the bigger picture, as well as today’s intense demand and high rents.