Student housing investing is a proven money maker. But like any niche, you need to know what you’re doing.
In this educational episode, Robert and the Godfather take a look at the pros, cons and how-to’s of this aspect of real estate investing.
Discussing if a student housing investment may make sense for you :
- Your student who has now become the master … show host, Robert Helms
- The Godfather of Real Estate who knows a thing or two about schooling real estate investors, Bob Helms
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(Show Transcript)
Overview of the Summit at Sea
Robert Helms: Welcome to the Real Estate Guys Radio Program. I’m your almost fully recovered host, Robert Helms. We took a week off last week because we were on the 14th Annual Investors’ Summit At Sea. And I, as usual, lost my voice.
Next week on the program you’re going to hear a great show we recorded in the middle of the ocean. But for this week, sitting in for our co-host Russell Gray, it’s the Godfather of real estate, Bob Helms.
Bob Helms: Great to be here! What an amazing trip the Summit was. It was phenomenal.
Robert Helms: You know, every year, we wonder, how can we top the event? And last year was such an amazing year, we thought, “Woah, what are we possibly going to do?”
And this year, miraculously as always, totally amazing event. Our very first day, our panel on the Future of Money and Banking, with G. Edward Griffin, author of The Creature from Jekyll Island; the amazing Peter Schiff, author of Crash Proof; Patrick Donahoe from Paradigm Life; Robert Kiyosaki author of Rich Dad, Poor Dad; Anthem Blanchard, of course an expert in gold and all things money, and the producer of the New Orleans Investment Conference, Brian London joined us, plus, unbeknownst to any of the Summiteers, a very awesome surprise appearance by Simon Black; an incredible panel.
The next morning, we talked about gold and had Anthem and Brian as well as Mr. Kiyosaki, and Jim Rickards, the author of Currency Wars and the Death of Money showed up via Facetime – an amazing event in the first two days, and it only got better from there.
Bob Helms: Well it was a powerhouse. I sat there looking at these guys thinking, not only are they experts, but several of them, first of all they’re all authors, and historians. So it wasn’t just a quick, shallow look at today’s money. It was the history of currency, money, value, investment.
The Student Housing Investment Market
Robert Helms: Crazy, good stuff. You’ll hear more about it in the coming weeks because we’ve done a lot of recording on the Summit. My voice is almost back. This week as we prepare all that for you, we thought we’d take a little diversion and talk about a unique aspect of real estate investment, and that’s the student housing investment market.
Cash Flow In a Student Housing Investment
A student housing investment is lucrative in the right markets, and a nightmare in other markets. And yet, as folks are looking for yield – as we’re looking for durability in rents – this is certainly one of the things to consider.
And I remember one of the first properties I was involved with, was a project you owned a block from a major university.
Bob Helms: Yes, indeed. And that was a property that we hadn’t intended to buy, but the opportunity popped up.
In other words, we didn’t start by saying, “Oh we can’t wait to get into student housing investment.” We were simply looking for properties that would cash flow well.
This particular property was a 50 unit apartment building one block from San Jose State University. And it was kind of beat up and chewed up, a class C property, as often is the case.
We kept that property for a long time – over 25 years, improving it significantly, and of course learned a lot of things about the student housing market by operating.
Students As Tenants
Robert Helms: Of course, one of the things right off the bat is the fact that students have a limited lifetime. They’re only students for a period of time.
So you hear stories of the folks who own investment property with the same tenants for 20 years. Ironically, you had a tenant in that building who was there more than 20 years, long past the days he was a student.
But, still – for the most part, students are short lived. They’re in there for 2, 3, 4 years.
But let’s talk about the durability of income. Anytime we look at investment real estate, especially buying old property for cash flow, we’re not concerned with the tenant in the building, we’re concerned with, “Who’s the tenant who’s going to replace them? And the tenant that’s going to replace them?”
So one of the things about student housing investment is, if you choose your location wisely, you’re going to have an endless supply of people interested in renting, based on your proximity to the college or university.
The Student Housing Investment Opportunities Vary by University
Bob Helms: Yeah, and of course you have to be prepared to compete rent-wise in the market, in the space. In other words, the rent has to be appropriate, and has to be within budgets. The mixture of available housing at any specific university will vary quite a bit.
Often times there are dormitories where college students can reside, but not always. Sometimes, the only availability is commercial property. So it will depend upon the kind of university, the size of the university, and the curriculum.
In other words, a junior college which maybe has a two year span, is very different than a full institution that offers Bachelor’s, Master’s, and full PhD’s.
Robert Helms: Yeah, good point. And of course, you’ve got to choose your markets wisely. Overall, the price of education or the cost of education is going up, and attendance in many areas is going down. So you need to choose wisely.
There’s other colleges and universities that are thriving. And so I want to pick the market, just like I’d pick any other market, where there is a demand.
Types of Student Housing
But back to the housing type. When you talk about a dormitory, that typically is university owned. Doesn’t have to be. So one of the early opportunities for investors is, is there a way to come alongside the university and provide what is their dormitory housing. In several campuses I know of, there are private owners of what look like dormitories.
In fact, just last week, there was an article about a CEO of a REIT, a real estate investment trust, that was focusing on student housing investment, and ground up student housing. And in many cases, they were coming alongside the university to provide this housing.
And their whole pitch was, listen, schools are already having a hard time meeting their economic needs. Why worry about having to come up with construction, and all those funds, and qualify for loans. We’ll come in as a private industry, we’ll build the housing, and you’ll point to us. So, a dormitory might traditionally be owned by the university. That’s not the only opportunity.
But where else would you stay? The student might be a member of a fraternity or a sorority. And typically, that includes housing.
And so when we’re talking about the comps – and you talked about the rental rates – you can be competitive by looking at, what are students paying in dorms. Now, dorms often include a meal plan of some kind, so you’re going to have to take that into consideration. What are they paying to stay at a fraternity or sorority?
Then there are certainly apartments and single family homes that are available. And that’s probably the largest opportunity for individual investors.
But also, rooming houses. A rooming house is an interesting type of real estate. It generally is not as liquid as other types of real estate, because of its unique use. But picture a three story house, with 12 or 14 bedrooms, and three bathrooms. That’s a unique use, but could be perfect for students. In fact, one of your properties I can distinctly remember was a property that lived a long, long life and kept changing use.
Bob Helms: Yeah, it was relatively near the university, meaning, not one block away, but maybe 10 or 12 blocks away. But definitely within the traffic pattern. You could ride a bicycle there if you chose.
Now, that property also was an old property. It was in the historical preservation district. It was a Victorian style property, and it was over 100 years old. One of the interesting things about that kind of property compared to the brand new property that a REIT would be building is higher maintenance costs, and some limitations in terms of what you could do to the property within that historical preservation district – some tougher and more detailed rules.
In that particular property, let’s talk about it for a minute – it had originally been about a 4,000 square foot single family home – a two story home. When we bought it, it had been converted into a rooming house. It had 7 separate rooms, it had two bathrooms – one upstairs, one downstairs. That meant that its only use was as a rooming house.
We decided to improve it, and were able to make a conversion, flirting carefully with what was allowed in the city. What we did with it was refurbished the property to the extent that we could, and added bathrooms. So each of the apartments ended up with its own bathroom and kitchen, and was indeed an apartment.
A Mixture Of Potential Tenants
Interestingly enough, at its location, we had some students, but we had at least half of the tenants who were not students. And by the way, that is one of the things you see anytime you’re near a campus, is a mixture of tenants, perhaps.
Robert Helms: Well, that’s also part of the decision made by the landlord, right? For a dormitory, you’ve got to be a student. Fraternity or sorority? Generally that’s going to be a student. As an individual owner, you might decide that, “Yeah, I’m going to focus on a location that’s near a college or university, and that’s my primary tenant,” but you don’t necessarily have to restrict the use.
Over time, with the building you talked about in the beginning, the mix of students changed a lot over the years. And that’s also part of the understanding of the college or the university, and the market you’re in.
There are some markets where students absolutely move out of their apartments for the summer, and they move back in the fall. Which means, you’re looking at a pretty big chunk of vacancy.
Since I managed that building, we would often give incentive for students who would stay over the summer. They would get a reduced rate because they were using less utilities, there was less wear and tear – easy for a student to pack up their suitcase and move out for a couple of months, and then they’ll go through the brain damage of finding a new unit. Explaining to them that, “Hey, you don’t have to do that, you can just leave your school stuff here, and don’t worry about it. It’s all going to be good.” And give them the incentive – let us take our occupancy rate up higher.
The Student Housing Office Role
Bob Helms: There’s another interesting factor. When we first bought that building – and again, remember, we kept it for 25 years, the administration of the local college had essentially control of all the student housing. They had not yet built any dormitories at San Jose State University. And the student housing office was essentially in control.
So, if you were going to rent a property, you had to go through the student housing office. So that led to interesting things.
The University of California at Berkley has had very strong control over all the properties surrounding it.
So, you have to make sure you do your homework, and understand what does it take to make this work successfully, commercially.
Marketing to the Parents of Incoming Freshmen
Robert Helms: The Godfather of real estate is with us today. We’re talking about student housing investment, and there’s lots of different ways to play.
I can remember a mentor of mine who had a great, great niche when he was selling real estate. He would market to the parents of incoming freshmen. So, back to what we were talking about before the break, Bob, how do you find the parents of incoming freshman?
Well, you had an arrangement with the university and their student housing department to get those names, and he would reach out and say, “Mr. and Mrs. Johnson, congratulations on your son or daughter attending this wonderful four year institution. For your consideration, there are many condominiums and town houses in the area that could make great sense as a home for your student during the four years they’ll be here.”
And he had this wonderful write up he did that showed what the cost would be to be in a dorm, or be in a fraternity or sorority, or be in their own unit. And basically, he could show these folks that he would help them buy the unit, hold it and manage it for the four years, and then sell it, most likely to another incoming freshman’s parents, four years later. And he did a ton of business that way.
And the win on the side of the student and their parents were, they were able to make an investment, and in many times, recoup a lot of that when they sold. Some of those parents of course, didn’t sell. After their student moved out, they said, “Well, this has been a great rental from our perspective. Why don’t we keep it and rent it to an incoming freshman?” Which is exactly what they did.
Layout of Properties
Bob Helms: Yeah, and I remember specifically, Robert, one of your friends whose parents bought a property, and there was conversation about new properties being built that were specifically tailored, not unlike a rooming house, for those students.
For example, instead of buying a single family house that had one or two bathrooms that you split up and the tenants had to share that bathroom, they built a property that was a 4 bedroom house with four bathrooms and a shared kitchen. Much easier to share a kitchen than a bathroom for most people. And again, those were specific, aimed at that niche, but cleverly done.
Robert Helms: That’s exactly what this EDR REIT is building. They’re building 3 and 4 bedroom units, with a common kitchen and living room area, and then 4 or 3, depending on which model, independent bedrooms and bathrooms. So the student has their own bedroom, own bathroom, but their common area’s shared.
And students are very social; young people in general are very social. Back to the first apartment building that I managed. It was set up where each unit had a shared kitchen and bathroom with two people. So, you had your own room, but you shared your bathroom and your kitchen with another same sex student. And that was a great way, from a landlord’s perspective, to get a lot of yield per square foot. We essentially rented the kitchens and bathrooms twice if you will, and they were fairly small units. And yet, the students and the folks that lived there, loved it. They loved having some solitude, but not always being alone.
Bob Helms: Yeah, that was very effective. And it was a surprise in many ways. I remember when we first looked at that building – I had never done that, exactly, so I couldn’t imagine how it worked.
Now when I say exactly, what I mean is that when I started, I was also a graduate of San Jose State University. But I didn’t live in student housing. I lived at home. And I shared a room and bunk beds with my brother at the beginning of it.
So, it really is what your habits are – what you’re comfortable with – but we take advantage of what’s there. And that building worked really well. Again, we kept that building for over 25 years. So that system operated well.
Fraternities and Sororities, and Student Housing Investment – Master Lease
Robert Helms: Now let’s talk a minute about fraternities and sororities. Some fraternities and sororities own the real estate. But many do not; many lease those properties. So that could also be an opportunity for an investor to know that you have what we call a master lease.
Now a master lease doesn’t have to come from a fraternity or sorority. We have a good friend who, while he was going to college, for six years in his case, he didn’t buy a house. He rented a four bedroom house, and then he turned around and sublet three of the rooms. Based on that, the rent he got from those three rooms covered almost the entire cost of renting the house.
So, for one thing, if you’re not yet to the point where you have a lot of money, that could be a way for you to create a scenario where your housing is mostly covered. But the bigger picture is, think about the landlord.
That landlord didn’t have to deal with four individual people who might come and go, and move in and move out, and have their issues, and be able to pay and not be able to pay, and have whatever issues tenants have. They had a single tenant who rented the entire house, with the provision that he could sublet – and he did.
After living in that house for 6 years, he had dozens of roommates over time, but he was the consistent factor. So, one way to benefit from student housing investment is to look for a master lease scenario.
Managing Students
Bob Helms: I think it’s a great way to do it. It’s very, very simple, and as you pointed out, you’ve only got one student to deal with. Students can be flighty. Most students attend college, they work very, very hard, and the only focus they have is, the books – is studying – is getting through the curriculum. But, students are young people who have a lot of other activities, and managing students, Robert, what can I say? You managed students for years. What’s your take on managing students?
Robert Helms: Well, I’ll tell you, I have so many stories from property management, but we had this one poor gal, I mean, I remember, her mom died twice – that’s how hard it was for her to pay the rent. She had to use the same excuse, that her mom had passed away, and she used that excuse two years later. And then we had the folks who thought, “Well, if I have a check in the checkbook, I guess I’m good,” right? And they’d write checks that would bounce, and just all those stories.
But for the most part, you get the folks who have never lived away from home. And that’s a whole new reality for them. Sometimes they’ve been under the thumb of their parents for a long time, and now they have this newfound freedom, and that can be scary.
So, depending on the jurisdiction you’re in, the state or county and its tenant-landlord law, I’m always in favor of student housing of having a pretty firm rental agreement, where the rules are clear, where there’s quiet hours, where there’s specific uses.
What I liked about the smaller units, where there was just a bedroom and bathroom, or in the case of the one where they were shared, is that you couldn’t fit too many people in those rooms. They weren’t having big parties.
Now again, one of the great things about student housing is, who normally pays for it? The parents! So you’ve got the young person staying there, and you’ve got the wear and tear maybe associated with that, but at the end of the day, you have a guarantor. You have a strong person who’s applying.
Most students who don’t have a job, and they’re just going to college aren’t going to pass muster when it comes to applying for your rental, anyway. So you always look through to the parents to say, “Hey, are you responsible for the rent?” And that the answer you want is yes.
Bob Helms: You not only want a yes, you want them to cosign the rental agreement. In general, it’s part of the game of growing up.
So, you’re going to expect that the kids are going to make some mistakes. It’s going to be a big learning curve for them. But it’s part of becoming a viable citizen.
And it’s really not that difficult as a landlord. You don’t even have to manage it directly; if it’s a larger property, you certainly can hire a property manager to do that for you, or you can hire a resident manager – somebody who lives there, and reports to you directly. It depends somewhat on your skills and your inclination, your time, and your ability to do that.
Robert Helms: Well, and before we’re done, we’ll talk about where there are some unique opportunities within student housing investment. Because if you’re thinking this might be a niche you’re interested in, there’s some cool ways to do it.
More Group Scenarios
Let’s talk about one of the ways that people get into student housing almost de facto, and that is, you buy a single family house that’s close to a college or a university, and you rent out the rooms. It’s quite possible to rent the rooms out individually, and have those individual rental agreements. But why would you want the brain damage of that? Well, because it allows you to move as the market moves. You can change the rate.
One of the challenges is when you put total strangers into the same house, is their ability to get along, and you not to have to be their drama coach and referee. Right? Because things happen, and so, I generally am in favor of a group that comes together to rent.
We’ve had this happen many times over our investment career, where we’ve got you know, these five girls that came and they wanted to rent a house. It was a four bedroom house. And they said, well, two of us were going to take the master bedroom and we’re going to share, and the other three are going to have their own bedroom.
And they were all charming girls, and they had good financial backing, and it all worked for the first four months. Then all of a sudden, when they rent check came in, it wasn’t for the $2,000 rent, it was for $1,600. It’s like, wait a minute! So I called up the gal who was my contact, and she said, “Oh, well Beverly moved out, and so she hasn’t paid the rent this month.”
And we had to explain that “Well, you’ve signed the lease collectively, and you’re all responsible. The fact that you decided to make it $400 per girl – that’s your business, but collectively, you are responsible for $2,000, not the $400 each.” Which, she got, eventually, and she went back and they all threw $100 in the hat, and they made good, and guess what? They now had 4 people out looking for a roommate.
Now make sure that if you’re in that type of situation as a landlord, that you have the ability to prove any additions to the rental agreement. So, they can’t just bring in some unknown person. That person should go through the same vetting process you or your property manager has, before you allow them in the unit.
Rules About Rent
Bob Helms: Yes, and let’s look at this. Rental housing everywhere – in every state in the US at least is a regulated industry. So, this is a matter of regulations that protect the tenant so that they’re not taken advantage of by unscrupulous landlords. But it’s also – those rules are meant to make it clear how it works, so that the landlord is also protected. So, what am I getting at? It depends on the kind of property, and the specific location, what those rules are about.
For example, in most places, if you owned a single family house, and you decided to put renters in, and it’s your house, there aren’t any regulations. You can decide how many people you put in, what the rules are – you can’t do anything that’s illegal, of course, and your agreements always need to be in writing. However, if you were in a state like California or New York, you probably are subject to rent control.
Now, rent control’s an interesting game. And I’m never a big fan of it. However, I absolutely am in favor of people helping tenants who can’t afford to live some place. What I’m not in favor of is them voting for me to be the payor, if I’m the guy who owns the apartment building.
So, that’s just a caveat depending on where the properties you’re looking at are. It’s always a great idea to look at whether there is any form of rent control, and then you need to decide can you abide by it.
Now, it sounds like I’m condemning rent control. But the truth is, we’ve owned properties, including that 50 unit building we talked about, that was in a rent control district. But you know what? It wasn’t that onerous. It was an agreement that you could live with.
And we did for over 25 years, and it worked just fine. So I’m not just condemning rent control; what I’m saying is, if you’re thinking of investing in the sector, then it’s worthwhile for you to understand what the rules are.
Student Housing Offices
Robert Helms: Yeah, and a market analysis is different in this product. You know, you mentioned the student housing office. You definitely want to go find out what that’s about. At some colleges, it’s simply a bulletin board where landlords can list vacancies. In other places, they do a full on matching service, to look at what you can afford, the areas that you might be able to consider, what’s open in terms of roommate situations – all that.
So that’s a good place to start. You also want to know whether or not the majority of the housing in the area is sponsored or not, meaning is it owned by the university, or by the Greek organizations, or is it independent? And that answer varies greatly.
The needs for student housing are diverse, but generally it falls into the same three categories all other real estate does – location, location, and location. A good friend of ours has about 10 single family homes that are a block from a university in the state of Texas, and he has held those properties for the last 20 years, and they have been absolute cash cows.
In fact, the university has come to him on several occasions attempting to buy them from him, because they own a lot of student housing in the area, and he has simply and politely said no, and those have been great investments. They’re walking distance from campus.
So, as you’re looking for property, you want to understand the nuances of the student market, and who’s paying the bill. One of my favorite things about student housing is that it’s generally the parents, as we’ve talked about, and one of my least favorite things is that, maybe these folks haven’t lived with others, in the same regard. And they’re learning that, and they’re feeling their way around.
We’ve got the Godfather of real estate sitting in for Russ Gray, who is in even worse shape than I am in terms of recovery, but he’ll be back next week.
We’re talking about student housing investment, and of course, over the years Bob, you’ve been involved with a lot of student housing investments – not only owning a lot of it, but brokering deals for folks, too.
Opportunities for Student Housing Investment in Apartments
And what I thought we’d talk about is where the actual opportunities are when it comes to student housing. We’ve bid on some of them. You can go look at a marketplace that’s near a college and find a single family house you want to rent out. You might seek out a master lease tenant.
The other side of it – the big, tall side of it – is the apartment side. A lot of apartments are geared toward student housing.
Now, just like every other part of the apartment niche right now, cap rates are squeezed down, there’s competition – but one of the unique things about the areas near many colleges and universities, is we’re not talking about 300 and 400 unit apartment buildings; we’re talking about 8 units, 12 units, 15 units.
Bob Helms: Yeah, you’re right. There’s a lot of variety, and by and large, these aren’t all huge buildings. The huge buildings turn out to be the dormitories. And, for some universities, that’s a significant part of the housing they have. It generally depends on how they began, and how they changed over the years.
If we look at universities in the United States, there are a lot of very old, very storied establishments, and there are newer ones. In fact, there’s a trend toward getting education online in a lot of places. There are colleges like, I think of Arizona University, who have done that for a long time, who have those kinds of programs.
Generally, what we’re talking about is people who are going to physically attend the university, and are going to reside in the locale, so they can get back and forth easily. So we’re generally talking about proximity to the university’s physical campus. And once you’ve figured out – and that may take a while by the way, to decide what kind of market you choose to be in – once you’ve figured that out, now you’ve got to start digging down into “What the available housing is, and what do I want it to do for me?”
Short Term Versus Long Term Student Housing Investment
The first question we should ask as a real estate investor is, “What do I want my real estate to do for me, period? Am I in this for a couple of years, or am I in this for probably a career? Is my plan specific in terms of when I’m in and out, or in fact am I trying to build a lifelong portfolio that continues to grow, continues to provide a lifestyle and the income that I’d like to have?”
Robert Helms: Well that’s an important point, because when it comes to student housing investment, you know, kind of either way works. You could take over one of those rooming houses, and do some of the conversion, and add bathrooms, and add some student amenities, which we haven’t talked about, but we will – so that you make it more valuable to a buy and hold as a landlord, and you could just flip out a property and make a profit.
So you can be short term in this market. And because the tenancies tend to be more short term, right? Students don’t always make the grade – they don’t always stay at the same campus – they might move out after a certain period of time.
Many single family home markets have one year and two year leases as kind of the standard. Many student housing buildings are month to month, because that’s just how they’re set up. So you need to know that. But there is an opportunity short term.
Long term, you want to look at the economic viability of the campus, with this idea of the change in education. Do you expect there to be future demand for education? And there’s a lot of great colleges where that absolutely is going to be the case. You just need to do that work.
Essential Student Amenities
And then, student amenities. I still remember the building that you and your brother had. We had a big area downstairs that you converted into a study. It was a big, unused space that became like a study hall, a library. Very attractive to these students who were in these small apartments, who could come down to this larger, big living room area. There were couches, there were tables that were set up so you could sit and do homework, or you could lounge around. There was a pool table down there at some point. So the kinds of things that students are interested in, are also going to dictate what you do with the real estate.
Broadband and WiFi are critically important today. A good cell service – critically important today for students. So you need to think through, in any real estate niche, who is your tenant, and what do they want, and how do you provide that affordably?
Bob Helms: I like the idea of thinking about adding value, because it’s one of the classic things that people do to realize a relatively short gain. If you buy a property of any kind, and “fix it up,” if you add value to it, so that you have improved what you’re offering to people, that normally will coincide with an increase in rent, which drives the value up, and allows you to make it short term, or what we call flip and hold; fix it, and then hang onto it. So, it can do either one of those things.
Robert Helms: So, long term, if you look at what’s available in student housing, you see these mid-level apartments we talked about, and certainly on some campuses there are larger apartment buildings. You just want to understand what the student demand is, and of course, the more generic the property is, then you have the opportunity to rent to non-students.
So that’s the trade-off. If it’s too student-centric, then maybe you’re leaving out a potential part of the marketplace, but if you’re trying to attract students, you do want to have the amenities that they want.
Is it on the bus line, for instance? A lot of students don’t have cars. They ride their bike, or they take public transportation. How close is it? The property you had, right on the corner was the bus line, and on the corner one block away was a great little restaurant, and across the street from that was a laundromat – all things that students need.
Parking and Student Housing
Bob Helms: Absolutely. One of the interesting things, too, is if they do have a car, what kind of parking is available? Some universities have huge parking garages. Others are permitted parking only; you can’t park on any of the streets near the university unless you are a student, so that you can have a permit. Your car won’t be there when you come back that night if you haven’t paid attention to those rules.
So those are all things that just add to the desirability. If you’re going to have working tenants instead of students, they’re all going to have a car, or mostly all going to have a car. And you’re going to have to figure out what’s available to you. As a university grows, and begins to take up and consume all the space around, it’s often at the expense of parking. So that’s a careful consideration to look at.
Robert Helms: We look at all types of real estate investing, and this week we’re talking specifically about residential investing, and student housing investment – students that live in your property and pay you rent. And the student housing investment market is an interesting niche.
There’s an article that came out a few months back that said, “student housing stats, demographic and economic trends point to continued growth in this niche sector,” and it goes on to talk about how the campus dormitories and apartments in town often will help each other in terms of their rents.
Because the dorms tend to have a higher price tag, because of the inclusion of food and beverage, and college kids know how to eat cheap, sometimes they do that analysis, and decide, “No, I’d rather be in an apartment, and buy top Ramen and Bisquick then have the meals that are made by the dorm. And students are often on the go. They have a lot going on; they have a lot that they’re involved with. And so, they’re going to make their housing decisions usually along with their parents, based on this whole value proposition.
Classes of Student Investment Property, Based on Offered Amenities
Now just like in apartments when we look at A class, B class, C class, and the renters for those various types have different amounts they can afford, it’s the same in student housing. Not every student is broke. We often talk on the show about, how do we market to the affluent? Well there’s a lot of ways to market to the affluent. And many colleges are designed for the children of affluent parents.
Bob Helms: Yeah, here we’re generally talking about amenities, like anything else that you rent. What do I get for my money? And what’s there? For example, if we’ve got a minimal apartment, and a student is going to live there, and they’ve got a kitchen privilege, or a kitchen, what kind of tools and equipment do you have for them? Do you have a hotplate? Do you have a full stove? Do you have a microwave? Do you have a refrigerator with a freezer section? In other words, just for food alone – we’re not talking about anything else – what’s provided?
Do you have built in television and WiFi, or is that something the student’s responsible for? You can see pretty quickly that, if amenities are the game, the more I provide, the more I’m likely able to get for it, and it’s just an economic trade off of what makes the most sense.
Robert Helms: You know, this article by Byron Moger says, “Parents who went to college 30 years ago may now be surprised by modern, off campus student housing that offers everything from tanning salons to spas, retail shops, and 24 hour fitness centers. Each project seems to add a new amenity to attract student tenants.” So the idea that there might be laundry in the building that was available, right? I mean, think about the coin operated laundry machines that you had. That was a great source of income as a landlord.
And there are ancillary services that you can offer to students that can also be profitable. It’s possible that rather than include the WiFi, you know, you may do that, you may put in a great WiFi system, but students need good WiFi, maybe that becomes a subscription service. There are all kinds of things that you can do, but it starts with, “What’s the need of your tenant?”
Bob Helms: Well, when you think about something like a gym, or some kind of a workout facility, that’s typically available in class A apartments. You’re not going to find that just everywhere. If you look at the parallel here, if you’re going to have exceptional facilities, you’re talking about being in the top end of what’s offered in the marketplace.
Ground Up Student Housing Investment
Robert Helms: You know, I think one of the opportunities today is this whole ground up construction. And that’s a lot, right? For most investors, they want to buy something that exists – they want it to be pretty easy, pretty turn-key.
But if you’re that next level – if you’re looking at, “Hey, I want to raise money to go do a project,” specific student-built off campus housing can be great, because of the unique nature of these buildings, where you’re building a higher density – therefore your rent per square foot is much higher.
Think about that for a minute. Your rent per square foot is much higher; the cost to build isn’t necessarily higher, but the rent per square foot is higher. It’s exactly why these 200 million dollar REITs are in this business.
And, there’s a lot of antiquated, old, dilapidated student housing around. So there could be a huge opportunity in that regard.
In a couple of weeks, you’re going to meet a gal who came on the Investor Summit, and her niche is really unique. She and her husband invest in the UK in properties that are essentially student housing, except not for students. Their demographic is the student who graduated last year or the year before. So they like the social nature of being together. They’re single. And so they’ve got these units that are four, five, six bedrooms, with a shared community area. And they seek out and retrofit units. The next level of evolution from that is, to design and build something.
You’ve heard Gene Guarino on our show talk about senior housing. It’s not that much different. Taking a property that you can convert to more bedrooms and more utility, and get a higher dollar per square foot – student housing is one of the niches where that’s possible.
Bob Helms: The reason that idea may be frightening to you if you’re a beginning investor is simply the trade-off of risk. Anything that you’re going to build ground up, it does not exist at this moment, has the highest risk involved. Guess what? Coincident with that – it also has the highest reward when you complete the project.
So you’ve got to be sophisticated enough – experienced enough – to allow your appetite to allow you to do this. But the truth is, anything that you build ground up has several advantages.
First of all, it’s new! The maintenance and issues of keeping the property going will be the minimal that you will ever have. So new is a big plus.
It also gets to be designed the way you want it, which is certainly nice if you’re looking at high-end and best amenities.
It has also probably the best long term cash flow and appreciation potential. So there are an awful lot of reasons to think about doing it ground up. So you just need to get in touch with your inner investor and decide, “Is that something that works for me?” And if it isn’t, “What do I have to learn to make that palatable?”
Robert Helms: So if student housing investment is for you, your mission is go figure out marketplaces, and just like you’d look at any market, you’re looking at long term demand.
The nuance is you want to meet with the student housing office and find out, is there a need? A lot of campuses will tell you, “No, we’ve got plenty of rooms. That’s not our problem.” Others will say, “Oh my goodness, yes. We’ll do anything we can to get more units. We’ll point at you.” All those kinds of things. And of course, that’s cyclical as well. But we’ve certainly benefited over the years from student housing investment, and it may make sense for you, as well.
Hey, if you want to come find out about a great real estate market, The Real Estate Guys are heading to Belize April 1st through 4th. This is an amazing trip to see an amazing market. Not a lot of student housing in Belize, but certainly a lot of amazing opportunity. If your mind is open to investing off shore, if you think with all the turmoil happening in the economic system, it might be good to plant a multiple flag, and maybe have some of your assets in another country, and maybe those types of things – you’ll learn a lot on the trip. It’s April 1st through 4th, in beautiful Ambergis Caye, Belize. Find out all the details on our website, at realestateguysradio.com.
A big thanks to Godfather for sitting in for Russ Gray today. Next week on the show, you’ll meet a lot of the faculty members from our 14th Annual Investor’s Summit at Sea. Until then, go out and make some equity happen.
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