Real estate investors are always on the hunt for the next big thing. A product that presents itself as an opportunity to see significant returns on investment for one reason or another. To these savvy investors, the most important consideration is a fundamental question: “Where can I get a good return?” The answer lies in understanding the basics of how rental property finance works and looking at student housing through this lens, like Nelson Partners and other firms, have done.
In this article, we will look at how a savvy investor can take advantage of the growth in student housing by understanding some simple concepts that drive student housing returns. Here are some of the reasons to consider student housing as an investment vehicle:
1) Limited Supply; Growing Demand
According to the National Center for Education Statistics (NCES), the number of students enrolled in postsecondary institutions grew by about 39% over the past decade to exceed 20 million students. This is expected to continue growing through 2025 using the NCES data. Their analysis shows an additional 4 million students could enter the system by 2025.
2) Limited Competition for Available Units
With rapid enrollment increases, the last thing a student wants to worry about is finding housing near their school. This has resulted in a limited competition for units, allowing landlords to charge premium rents and still have good occupancy rates. Combine this with the fact that these students are not in the market for a primary residence, and units will most likely be occupied throughout the duration of their lease (9 months in most cases).
3) Investment-Grade Cash Flow
As is true with any real estate investment, it’s all about the cash flow. The good news for investors in student housing is that cash flows can be very strong. A good rule of thumb is that student housing units can command 10-15% more than traditional multifamily units, allowing investors to earn attractive returns on their investment. Other factors can affect the potential cash flow, such as whether or not utilities are included in rent and how many people live in each unit (students tend to live with 3-4 roommates), but 10-15% is a solid benchmark.
4) Market Preference For a Durable, High-Quality Product
Due to the student housing market’s investment-grade returns and tenant profile, investors have been drawn to this product as an alternative real estate asset class. As a result, there has been significant development of new projects in recent years. From 2010 – 2012, over 12,000 beds came online nationally, with approximately 5,400 more expected between 2013 and 2015. In essence, developers are constantly creating new opportunities for investors by building a product that meets demand – a great recipe for success.
5) “Hidden” Value Propositions
Many would be surprised to learn that at some schools, students can actually live on campus during their freshman year and return home every weekend if they choose! This can be a great opportunity for investors if they can lease units to students that live off campus and then rent the same units out during breaks at a premium price. This phenomenon is known as “drive-for-free” and it allows investors to earn rental income even while the unit isn’t occupied.
Student Housing is on an upswing, has limited competition, offers attractive returns on investment, and presents itself as an alternative asset class. Nelson Partners believes in this product so much – we’ve made it our mission to help educate more people like you about how this market works.