No matter how much I try to persuade the public to not spend so much time and money going to college, let alone an incredibly expensive private school is a losing battle. Therefore, we might as well figure out how to profit from the college admissions scandal. The best way I know how is to invest in student housing real estate!
The college bribery scandal shows that parents have no limits to how much they are willing to spend to get their kids the best college education. The more guilty and rich a parent feels for not spending time raising their kids instead of chasing money, the more they will want to spend.
Given everyone is caught up in the rat race of trying to make as much money as possible, it's clear the enrollment of college students will continue to go up, up, up.
Further, the allure of a U.S. college education is only growing in attractiveness to international students. They are walking money bags because often only the richest international students get to afford to attend US colleges. As a result, they pay full tuition and maybe even something extra. They certainly won't be living at home with their parents!
Student Housing Real Estate Is A Beneficiary Of The College Scandal
The easiest way to make money from the college bribing scandal is to invest in student housing. Once the economy opens up and a vaccine for the coronavirus arrives, colleges will be in full swing again.
The investment thesis is similar to investing in San Francisco Bay Area real estate over the past 20 years based on the growth of major tech giants like Google, Apple, Facebook and the creation of new tech giants like Uber and Airbnb. They're all paying big bucks and their employees need a place to live.
Here are some positives of investing in student housing real estate.
1) Defensive investment. When the economy turns down, more people go back to school. During the 2008-2010 financial crisis, MBA applications surged 50% for two years in a row. Part of the reason why I decided to get my MBA part-time between 2003-2006 was that I thought I might get fired by my new employer in the wake of the post-dotcom collapse.
2) Steadily rising enrollment figures. Enrollment in postsecondary institutions is expected to increase 14% to 23 million by 2024, according to the National Center for Educational Statistics. As a result, rental rates are estimated to grow by about 2% a year according to Axiometrics.
3) Cash flow. Regardless of what type of market we're in, student housing provides a stable stream of cash flow assuming the school remains in good standing.
Risks Of Student Housing Real Estate
There's no such thing as risk-free investing when it comes to student housing investing. Here are some potential negatives:
1) First-time renters with unestablished credit. Student renters are almost always first-time renters. Although you can hope they will be responsible tenants who will pay on time and take care of your property, you just don't know for sure what they will do. Having a parent co-sign the lease is an absolute must. You've also got to properly vet the student's parents. Hopefully, they're really rich like all the parents who got caught in the bribing scandal.
2) More wear and tear on your property. Students drink and party, which results in excessive wear and tear on units. Sometimes they bash into walls when drunk. Sometimes they overflow the washing machine and cause the ground to flood. The more wear and tear, the more time and money it takes to maintain the unit.
3) Higher liability. Given students are considered more high-risk tenants, your rental insurance costs may be higher due to potentially higher risk activity. Sometimes college students like to throw bonfires on the balcony and accidentally burn your unit to a crisp. You just never know what newly free young adults will do away from their parents. I remember having a jolly good time when I was in college.
4) A trend towards more online learning. Despite higher enrollment, there is also a trend towards learning remotely, just like there's a trend towards working remotely. But so far, only the lower tier schools or for profit schools allow students to take courses remotely. Therefore, avoid investing in student housing of lower tier universities who don't have a rich history and massive enrollment figures.
Ways To Invest In Student Housing
The best way to invest in student housing is either through a publicly traded REIT or a privately held REIT.
The main public REIT is American Campus Communities, ticker symbol ACC listed on the NYSE. ACC is the most established student housing REIT with a ~$6.5 billion market cap. They pay a ~3.8% yield and have done well over the past 12 months.
There used to be another large player called EdR, but it was acquired in 2018 by Greystar Student Housing Growth And Income Fund for $4.6 billion.
Another way to invest in student housing is through real estate crowdfunding, which started aggressively growing in 2012 after the JOBS Act was passed.
Real estate crowdfunding is a way for individual investors to invest in commercial real estate projects that were once only available to institutional investors or ultra-high net worth investors.
Instead of plunking down millions of dollars, real estate crowdfunding allows you to invest as little as $1,000 in a particular student housing or commercial real estate project.
My favorite real estate crowdfunding platforms are Fundrise and CrowdStreet. Both are free to sign up and explore.
Fundrise is geared towards non-accredited investors and has more private eREITs. They are the most innovative platform in my opinion, having invented the eREIT category. They are also opening up an Opportunity Fund to take advantage of new tax rules for investing in lower-income areas of the country.
CrowdStreet is a way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Student Housing Real Estate
The combination of strong domestic college enrollment plus rising international college enrollment in the US bodes well for the student housing real estate sector.
The best way to own student housing real estate is through REITs, private or public. To physically own a multi-unit student housing property would be a real pain in the rear!
Check out my two favorite real estate crowdfunding platforms Fundrise for free today.
I've personally diversified my real estate investments away from expensive coastal city real estate and into the heartland with real estate crowdfunding to the tune of $810,000.
It feels good to earn real estate investment income 100% passively.
About the Author: Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income, most recently helped by real estate crowdfunding.
He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.