Investing in student housing can seem like a shortcut compared to other classes of commercial real estate or multifamily investments.
Before purchasing a share of multifamily or commercial real estate in a major city, you’ll need a careful analysis of the metro area’s economic strength, local landlord/tenant laws, and other factors that will influence rental demand.
But with student housing, while you need a thorough analysis, your focus jumps straight to potential demand. In this case you’re focusing your real estate investment around a mini tenant factory: a college or university.
With such strong rental demand on your side, this investment class can be highly lucrative.
But as all investments involve risk, investing in student housing property is not without a few potholes that, if you slip into, can impact your profits.
In this article, we’ll outline the pros and cons of the student housing real estate market.
Advantages of Investing in Student Housing
One of the hallmarks of real estate investing is that it is traditionally less volatile than the stock market. The student housing asset class takes this even further.
For instance, let’s say you own a share of a commercial unit in a city with strong economic potential. Suddenly, one of the market’s chief employers relocates, followed by another. The ensuing job losses drag on rental demand.
With student housing, the demand for rentals is based on a local college. Whether the economy is good or bad, you have a strong chance of finding tenants.
Secondly, though real estate investing, in general, is somewhat insulated against economic downswings, according to the United States Census Bureau, matriculation rates have actually increased in recessions since the mid-twentieth century, including the Great Recession of December 2007 to June 2009.
In good times and bad, students are going to attend college and need a place to live.
Student housing generally involves higher tenant turnover than some other classes of real estate. Tenants rarely stay put for too long. Students graduate, find new roommates, or (hopefully not) drop out of school.
While that sounds like a negative for landlords and investors, it comes with a big upside: The influx of new tenants allows landlords to sign fresh leases at current market rates.
By refreshing leases frequently, student housing landlords are less affected by rent control or other legislation that can prohibit price increases and reduce profits.
Favorable Price Per Square Foot
Because many college students live with roommates, student housing can enable landlords to collect more rent per square foot.
For example, many units built for student housing include a common area, such as a kitchen and living room, with one to four bedrooms built around it.
Since a landlord will draw up a lease and negotiate a price for each bedroom, four parties are renting largely the same space, raising the price per square foot.
Sustained Demand Driving Record Appreciation
According to Real Capital Analytics, United States student housing prices have soared since 2007, reaching an all-time high in 2019, as prices per bed climbed over the $90,000 level.
But could this be a bubble? We don’t think so.
As Real Capital Analytics also points out, while the rise in student housing prices has followed growth in the college-age millennial population, the U.S. Census Bureau estimates the student-age population to remain around the 30-million level, not far off its 31.5 million peak of 2013.
As they put it, “This large cohort suggests that college admissions will continue to remain competitive. For real estate investors active in student housing though, they will not face the oversupply issues which universities faced in the 1980s.”
This boom doesn’t look like an impending bust.
Disadvantages of Investing in Student Housing
Increased Tenant Screening
College students are shorter-term tenants, and the student rental market involves a lot of turnover.
Landlords will have to screen a high number of tenants, which can be costly and subtract from an investor’s bottom line.
If a landlord can operate with modern processes and efficiencies, they can reduce these costs, but they won’t be able to eliminate them.
Most students go home for the summer, leaving a landlord with three or four months of unpaid rent to swallow.
Unless they can sublease or offer incentives to find a tenant, landlords may only collect 8 to 9 months’ annual rent, which could impact your potential for a cash-flowing property.
Since they are generally 18-24 years old, many college students are first-time tenants, giving landlords two potential headaches.
For one, college students, whether justly or unjustly, have a reputation for being rough on their rentals. Whether through partying just a little too hard or plain ignorance on how to maintain their apartment, students can create more repairs than more experienced or reserved tenants, adding to your maintenance costs.
Second, landlords won’t dig up much information on a first-time tenant when they perform a background check. And while they may be able to have parents co-sign students’ leases, it may be difficult to weed out any irresponsible tenants.
An In-Demand Property Type
With its stability, frequent lease renewals, favorable prices per square foot, and record appreciation, it’s clear student housing is a sound real estate investment.
And while there are some drawbacks that could impact your profits, an experienced landlord can help minimize them.
After all, even a scenario where a landlord is frequently dealing with their tenants would be better than the theoretical nightmare of dealing with no tenants at all.
At Birchstone Investments, we help investors create passive income streams and grow long-term wealth through strategic commercial real estate investments. If you’re interested in learning more about investment opportunities, join our investor community today.