By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
Each Fall, more than 20 million students begin their academic year. The question of where to live poses a significant opportunity for investors. Indeed, student housing (housing located in close proximity to colleges and universities) has seen tremendous growth in the last few years. What’s driving student housing development? Enrollment growth. Schools are expanding their enrollment, with a 28% increase since 2000. Moreover, we expect this niche to continue growing. With an overflow of students, colleges are finding it difficult to accommodate greater housing needs. This creates high demand for off-campus rental properties. However, the benefits of increased demand, namely greater cash flow, can also come with unintended consequences. Before you start thinking about investing, here are a few pros and cons of operating a student housing property:
Recession-proof Tenant Population
An economic downturn typically catalyzes the decision to enroll in graduate school, strengthening tenancy trends. The largest uptick in enrollment growth took place from 2007-2009, when the US was in the middle of the worst recession in modern history. Young people who were unable to find jobs in the market moved back home and returned to school.
Lower Risk of Default
Many student housing properties require a co-signer for each student, ensuring the reliability of timely payments. This provides an extra level of protection for investors from rent delinquency. Additionally, for students that lack this luxury, there are many forms of financial aid that cover the costs of living. These factors make the default rate very low.
Student rentals need not be luxurious, basic housing will often do. Most college students don’t expect to live in high-end rentals and are just looking for a space that can accommodate their basic needs. Landlords typically enjoy the lowest level of required maintenance, cleaning and repainting. This is in contrast to the traditional rental market, in which replacing big-ticket items every few years is an industry standard.
Students are not going to stay for the long term. The academic year governs leases, and in the best-case scenario, students will stay in the same residence for 2-4 years. Such high turnover requires investors and landlords to actively seek out new tenants on a yearly basis.
Management of student housing is anything but passive. Noise complaints, roommate conflicts and damages are just the beginning of the issues that face this rental sub-industry. Accordingly, this type of management is only feasible with a property manager on standby, or in close proximity and a crystal clear delineation of the rental terms upon signing the rental agreement.
Students Being Students
Property damage is very common in college housing, as students can be careless and do not always consider the consequences. Damages are often more than the security collected, and damaged floors, holes in walls, and broken cabinets and windows are not unusual for college tenants.
Ultimately, investors must weigh the costs and benefits of engaging in student housing projects. The fleeting nature of clientele coupled with the low level of required investment and upkeep render this type of investment a double-edged sword. Landlords can get away with putting less effort and investment up front, but the difficulties facing investors in the long term if they are not cautious and meticulous can be detrimental to their return on investment.
Investors must take care to ensure that they have proper support on the ground to succeed in this market. Doing so often requires close relationships with property managers and brokers. This can help guarantee that properties are inhabited by students who respect the property, pay their rent on time and renew their leases at the end of the year.
Are you interested in investing in Student Housing? Are you looking for capital for your next investment property? Our creative financing options have helped thousands of investors finance more than 40,000 units and close over $5 billion in loans. Contact us to explore your options. CoreVest is the leading lender to residential and multifamily real estate investors.
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions.