I’m president of the school board in my community and at this time of year as I interact with our seniors the first question is, “Where are you going to college?” That reminded me about the opportunities for us as real estate investors to get into the student housing market.
Two elements we look for in a good real estate investment are location and a surrounding industry that is stable and growing. Colleges and Universities generally provide reliable revenue to communities. The student population is a good source of renters, whereas the professional and staff population will buy homes and keep values high. It’s all good!
There are three ways to invest in college student housing: Individually (one property at a time), in a partnership or as a shareholder in a REIT that focuses on student housing.
The positives of student housing investments are the reliable influx of renters and that often renters that will have a guarantee associated with them (i.e. parents) which allows for fewer defaults. There is some risk and student housing is far more management-intensive than conventional multifamily properties. Student housing, however, has a long history of growth and stability. And, unlike other industries, very rarely does a University close.
Students are also expecting more amenities these days such as Internet access, units that are fully furnished, full kitchens with appliances including washer and dryer inside each unit and ample parking. There is also an expectation of resort-style amenities such as swimming pools, tanning booths, basketball and volleyball courts, game rooms, coffee bars and community clubhouses with regularly planned social activities. All of these perks cost money; the common expectation for operating expenses of a standard property is 30 to 35 percent of revenues. According to Michael Orsak, Vice President at Campus Advantage, expenses on properties with full amenities run at least 45% of revenues. On the revenue side there is an expectation of 10 to 20 percent higher rent. So, if done correctly there can be a larger profit margin but it’s a cash flow issue which can be hard on the individual owner operator.
REITs that focus on student housing are big players in the game so let’s spend some time looking at them. You might be surprised that large pension funds are investing heavy in student housing REITS. In fact, Campus Advantage Inc., one of the Nation’s largest private student-housing companies, is managing and helping to develop properties for Californian Public Employees/Retirement System. “These investments return pretty stable cash-on-cash yields going in and should continue to hold up in the long term versus other similar product types that might have larger peaks and droughts in occupancy and rental-rate growth,” said Michael Orsak, of Campus Advantage, which manages and owns 50 properties across the US, most in the Southeast, Midwest and Texas.
The industry measures its size based on beds, which for Campus Advantage that translates into 25,000+ beds. These REITs are producing a cash-on-cash yield of 8% to 9% the first year. A pension fund would be hard pressed to find a better return in the stock market or bond market today.
Most of the REITs now operate off-campus housing; there is a predication however, that a large chunk of the budding development in student housings REITs will start to be on campus housing. Why? University administrators are strapped for cash and need to focus on resources for educational activities. This leads administrators to see what can effectively be outsourced. They see housing and development as functions that are more profitable and manageable if outsourced.
For more information on student housing REITs check out REIT.com.