How to invest in student housing

As a landlord and real estate investor, cash flow is king. The goal is to generate steady cash flow regardless of the economic cycle you find yourself in. Student housing offers such opportunities, and that's why there has been an increase in investors buying up properties in college towns for student housing.

With the projected number of students enrolling in college hovering at 20 million by 2029, the demand for off campus housing accommodations is on the rise. Add the many investment alternatives ranging from single property to multi-storied apartment buildings, and you have a variety of ways to capitalize on this investment opportunity.

What is student housing?

Student housing is an off-campus housing facility for college students who may have graduated from the dorm room experience and are potentially looking for more privacy and independence, among other things. These apartments or houses are usually owned by landlords and are becoming preferential accommodations for students due to the rising costs of dorm fees. 

Unlike dorms that come with smaller spaces, furniture, food, and strict curfews, student housing just comes with the physical space (in some cases, it may be furnished). The student is responsible for making the space a home—stocking the fridge, decorating, and in some cases buying furniture. 

The student housing investment landscape

There's a big opportunity in student housing investing, and investor activity in this asset class has been on the rise. Data from CBRE shows that annual student housing investment volume has tripled since 2014, and reached $11 billion in 2018. Investment activity has been driven by sustained high levels of college enrollment and limited new supply. 

But, there are pitfalls investors should be aware of when making student housing investments. For example, it's important to remember that property maintenance could be a potential issue as tenants are young adults leaving home for the first time—they may not be as responsible as family tenants or professionals.

As a traditional landlord and investor, remember that you're in the business of hospitality. Your property has to be above average, while being reasonably priced to achieve a high rate of occupancy. If you can't handle property management, you’ll need to get a professional or company to help you with it. 

Aside from a property manager, you may need an accountant or bookkeeper to balance the books and file taxes, and a real estate attorney to opine on state laws in the locations you choose to buy properties. You’ll need a team to help make investing in student housing as seamless and profitable as possible. 

That being said, there are ways to reap the benefits of student housing investing without the hassles and headaches of managing the investment or the property. Innovative investment products and platforms, such as online investment portals, offer passive investment in student housing opportunities. 

Benefits of student housing investing

There are qualities specific to student housing that benefit investors: 

• Investors generally get relatively higher rental income compared to conventional rental properties. 

• Students typically cosign with their parents or whoever is willing and able to pay rental fees on time to avoid distractions from their academics. 

• Students often stay with one accommodation until they're done with school, which helps occupancy rates. 

There are also certain market characteristics that favor student housing investments. As with most investments, returns are affected by economic cycles. When things are good, investments yield dividends and are valued higher. But when there's a downturn in the market, valuations may decrease and income streams may dry up. For student housing, this isn't the case. During recessions, there is often a pattern of higher enrollment in college, particularly given weak job markets and lack of employment opportunities. This could mean increased demand for student housing. In addition, more people are getting college degrees each year—enrollment has been steadily increasing and is estimated to reach 17 million in 2029.

Investing in student housing is a relatively stable venture. Historically, only a small percentage of colleges have filed for bankruptcy, and when it comes to demand, children are born each year and will need to be educated. 

What to consider when investing in student housing

Beware of saturated college towns. Certain schools may have an oversupply of student housing that surpasses demand. If you see rental ads during the tail end of the school year and during the summer offering deals and discounts, you may want to do extra diligence on the location. As with any real estate investment, location is crucial, and it’s important to engage with people locally who truly understand the market. Property management companies, students, and other investors can offer smart market intel.

When developing and/or renting out student housing, it’s important to consider the lifestyle of a college student. Typically, each room is rented out individually, and college students can often get creative to maximize living situations. Students also prefer communal space such as big living rooms, basements, and attics for socializing, and may pay a premium for larger spaces. Certain amenities, such as outdoor space, modern appliances, and smart-home technology may also be attractive to the modern day college student. 

Location considerations in student housing investing

When looking to buy or invest in a property near a college, location is imperative. Student housing properties within walking distance of college campuses are considered to be well-located and may be more expensive, but may also generate higher rents. 

On the other hand, though, if you’re looking at a college town where driving is the norm, properties further away from campus could also be attractive investment opportunities. It is important to get an understanding of the school’s surroundings and culture, and get inside the minds of college students to understand what they might be looking for when renting a place. 

The future of student housing

Though college accommodations may look a little different in 2020, we anticipate that campuses will ultimately see a return to normalcy. People, especially college-aged students, are inherently social, and so much of university life revolves around physically being present at school. In a post-COVID era, students will be eager to reclaim their independence from mom and dad, and will be ready for the college experience. 

This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.