Student housing as a real estate investment is one of the most attractive investments before the 2020 coronavirus pandemic. Once there is a vaccine, and schools open back up, student housing will once again be a very popular commercial real estate investment.
In the past, college students would simply live on campus. Sometimes they’d live at home to save money and commute.
But as the average dorm complex has aged to 52 years old, developers have come in to create new units and redevelop old ones.
Real estate investors have slowly realized that this is a major opportunity, especially as the demand for attending college has never been higher.
As we learned in the FBI probe, even already successful and rich families and paying $250,000 – $500,000 in bribes on average to get their kids into schools! You would think if you were already rich and successful, no such illicit activity would be necessary.
Chalk one up to the tremendous desire for a college degree.
Student Housing Investment Activity Rising
- In 2018, the average rental rate per bedroom increased 3.6%, while occupancy rose by 0.5% according to CBRE. We’re talking close to 99% of off-campus housing occupancy during the school year because supply is so tight.
- There was an estimated $9.8 billion in transaction volume in 2016, which was a $4.2 billion increase over 2015, and was more than 3 times higher than in 2014. In 2019, transaction volume is still at elevated levels due to the continued increase enrollment of college students.
- The average price per bed reached a record high in 2018 at $70,000 according to CBRE. Prices are up over 50% since 2014 and continue to rise.
- Rental rates continue to grow at the relatively moderate annual rate of around 2 percent, according to Axiometrics. The national per-bed average is now around $630 a month, with monthly rates starting as low as $250 and rising to $1,500 and up, depending on the condition of a property and, more important, proximity to campus.
- Cap rates are 0.5% to 0.75% higher than conventional multifamily housing.
Positive Reasons For Investing In Student Housing
1) Relatively recession proof. When the economy turns down, more people go back to school. During the 2008-2010 financial crisis, MBA applications surged 50%.
2) Stability of cash flow. Whether in a bull market or a bear market, student housing supplies a reliable cash flow stream so long as the university is in good standing.
3) Enrollment continues to increase. Between 2000 and 2015, enrollment in U.S. undergraduate degree programs increased by 30%, from 13.2 million to 17 million. By 2026, that number is expected to increase to 19.3 million. There is an insatiable demand for a college education.
The Negatives Of Student Housing
There are of course no guarantees when it comes to investing in student housing. Here are some potential negatives:
1) First-time renters with unestablished credit. These student renters are often renting for the very first time. You don’t really know how responsible they will be in terms of taking care of your property or paying on time. It’s important for parents to co-sign the lease since students have no money.
2) Potentially higher damage to your property. Students drink and party, which results in excessive wear and tear on units. The more partying and wear and tear, the more time it takes to maintain the unit.
3) Potentially increased liability. Given students are considered more high risk tenants, rental insurance costs may be higher due to the higher potential for damage.
The Best Way To Invest In Student Housing
RealtyMogul was founded in 2012 after the JOBS Act was passed. They are one of the best real estate crowdfunding platforms as they are focused on steady and stable growth.
I spoke with the CEO and co-founder, Jiliene Helman at length before and we also had lunch in San Francisco. I like how she spoke to me about the importance of quality and building a multi-generational business rather than focusing on growth at any price, like some other VC-funded platforms.
Here are some positives about the RealtyMogul platform.
1: RealtyMogul Does Good Due Diligence
Many critical pieces of information are reviewed before investment opportunities are approved and opened up to investors.
In real estate circles, this analysis is called due diligence.
RealtyMogul provides due diligence on behalf of their investors, and here are five core criteria they consider during the due diligence process.
A) The Real Estate Company
The first thing that one should look at when analyzing an investment is the real estate company involved in the project. This is also known as a sponsor, who is an individual or real estate company that will acquire the real estate and execute on a business plan.
B) The Market
The second thing we review when looking at a real estate investment is the market of the property. Realtors often say that the only thing that matters is “location, location, location” and not without good reason.
C) The Asset
While the real estate company and the market are both important, so too is the asset, or the property itself. It is important to review not just whether it is the right time in the real estate cycle, but also whether it is a good time to purchase the asset. The asset is so key to the investment that at RealtyMogul we do an in-person site visit for every investment.
D) Capital Structure
When investing in commercial real estate, the capital structure must be looked at closely as it directly impacts the return.
Moreover, real estate companies can further complicate the capital structure of a transaction by adding a combination of a second lien, preferred equity or mezzanine debt as a layer of capital in between the senior mortgage and the common equity. The terms of each of the slices of capital have material impacts on the others.
E) Risk and Return
The last, but not least (and arguably the most important), thing that an investor should look at when determining whether to invest in an opportunity is the risk/return of the project.
Once it is determined that each of the elements of a transaction are on point, on balance and strong enough to accomplish the stated investment goals, it is worth considering making an investment in the opportunity.
2: RealtyMogul Provides Strong Investor Benefits
Real estate investors all get solid benefits through RealtyMogul, which further makes these folks a reliable source of potential wealth.
For example, Realty Mogul offers:
1) Pre-Vetted Investments — Less than 10% of the deals first shown on the Realty Mogul make it through to their platform for their investors. The vetting goes through the sponsors history, track record, and individual backgrounds to ensure deals have the highest chance of providing a positive return.
2) An Easy Process To Invest — Real estate crowdfunding is taking off largely due to its ease of investing. Realty Mogul’s platform allows investors to thoroughly analyze a deal with the research provided. An investor can view pictures, videos, and even ask the sponsors questions before making an investment.
3) Opportunities That Are More Focused Than REITs — A publicly traded REIT generally has dozens, if not hundreds, of properties in its portfolio. It’s harder to invest in specific areas of the country, such as the heartland, or the east coast, or the west coast with a REIT. Real estate crowdfunding with Realty Mogul allows you to be much more surgical in your investments.
4) A Low Investment Minimum – Instead of coming up with a $200,000 downpayment for a median-priced San Francisco or NYC property and borrowing $1,000,000, you can invest as little as $10,000 in a property on the Realty Mogul platform to gain exposure.
3: RealtyMogul Provides More Access
With RealtyMogul, investors can diversify their real estate investments through a wide range of opportunities available around the country, including commercial real estate projects that would normally set individual investors back 10s of millions of dollars.
Through the power of crowdsourcing, RealtyMogul provides more opportunities for more people, which brings potentially lucrative real estate investments within reach of the average investor.
Investment examples include:
- multi-family dwellings,
- office buildings,
- industrial sites,
- medical buildings, and
- hospitality establishments
RealtyMogul enables typical investors to invest in single-family properties that are bought for the purpose of rehabilitation and flipping. Just about any property can be invested in as long as it is not used as a primary home or as a secondary residence.
4: RealtyMogul Simplifies The Investment Process
With RealtyMogul, investors typically purchase shares in a Realty Mogul limited liability company (LLC) that turns around and invests that money into an LLC or Limited Partnership (LP) that holds title to the real property.
Investing in this way minimizes overhead for the investment sponsors and provides access to more investment opportunities, as well as streamlined reporting of distributions through the platform.
Loan investments are generally 6-12 months, while equity investments are anywhere from three years up to 10 years. Equity investments generally pay distributions on a quarterly basis, while debt investments pay monthly.
These are just general rules, and it’s important to understand the distributions on any investment are never guaranteed.
5: RealtyMogul Has A Long Track Record
Since their founding in 2012, Realty Mogul has distributed over $100M, has 170K members, and has funded over $2B in property deals.
What’s interesting to note is that as of 2019, Realty Mogul has not raised any additional venture capital money, yet they are still growing. This means to me that Realty Mogul has found a way to be more self-sustainable as they focus on quality, not quantity. Unlike other platforms, they are not growing at any price and are focused on the bottom line.
Given they have higher barriers for whom they do business with, it feels like they really are focused on hitting singles and doubles instead of home runs, which is more in line with how I like to operate my own business.
Student Housing: Steady Income
Real estate is one of the best ways to build wealth over time. Real estate is easy to understand, provides utility, has a steady income stream, and rides the inflation wave. The original billionaires all were massive land owners.
Sign up for RealtyMogul for free and explore all they have to offer. Not only do they have occassional student housing investment opportunities, they’ve also got a couple REITs and many more innovative offerings to review.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding.