Student accommodation has long been regarded as an excellent property asset class because it has shown resilience in the face of economic fluctuations. Many commercial real estate investors (CRE) see student housing as a stable opportunity.
The most recent recession and the current COVID-19 pandemic seem to show that this is true. Many seasoned CRE investors and property experts are confident that there will be a massive wave of demand for student housing once vaccines have been rolled out massively and schools begin to open back up. No wonder there’s been an increase in student housing investment activity.
A steady CRE investment
CBRE studies show that the average rent per bedroom increased by 3.6% in 2018 while occupancy improved by 0.5%. During the same year, 99% of student housing off-campus was occupied because supply was so tight. On top of this, the average per-bed price reached a record high of $70,000.
Will it ever get back to these highs? Many experts believe that yes—this will happen again when schools open once the pandemic is under control.
Student housing rental rates continue to grow at a moderate 2% annual rate, based on numbers by Axiometrics. The per-bed average in the US reached $63O per month, with the rents ranging from $250 to more than $1,500, depending on the property’s location and condition.
Because of these solid numbers, many commercial real estate investors realize that student housing is a significant opportunity as the demand for attending colleges and universities continues to go higher. Are you interested in this asset class? Let’s talk about some of the many benefits of investing in student housing:
1. Relatively recession-proof
The words’ recession proof’ is widely misused in the property investing industry, but in this case, it’s true. Student housing is genuinely resilient to economic dips.
Why? Because when the economy turns sour, more people tend to go back to school. The proven trend in the 2008 financial crisis, which saw a 50% surge in MBA applications.
Economic downturns usually have the opposite effect on college and university enrolments—and therefore, on student housing. During tough times when job prospects are hard to come by, many people prefer to stay in school to complete their undergraduate degrees or their master’s degrees in an attempt to make themselves stand out in the labour market.
2. Stable cash flow
Student accommodation can generate a reliable cash flow even in a bear market for as long as a property caters to a university that is in good standing. Investors can count on almost guaranteed demand if they have the right property in the right area.
Another great thing about student housing is that there is almost no chance of 100% income loss. That’s because many types of student housing are shared; it’s not uncommon to have five students sharing a flat and paying $500 each, for example. Even when one student leaves, a landlord still has 80% percent of rental income coming in.
3. A continued rise in enrolment statistics
Despite tuition costs increasing, enrolment in undergraduate degree programs in the US increased by 30% between 2000 and 2015, growing from 13.2 million to a whopping 17 million. This number is expected to reach 19.3 million by 2026. No wonder savvy property investors are putting their money in student housing in anticipation of an ever-growing demand.
On top of this, universities can’t provide enough student housing for their population. More often than not, on-campus housing is only offered to first-year students. Older students have to look for apartments and purpose-built condos outside of campus, so investors can provide concrete opportunities to provide what they need.
4. Maintain market rents
If you’ve ever been a landlord, then you know that rent control—which prohibits you from raising rent until there is a new tenant—can ruin your entire business model. This is not a problem with student rentals.
Students finish their degrees and move out, so you won’t be stuck with long-term tenants that pay low amounts. You will have a new crop of renters every 2 to 4 years, allowing you to ‘mark to market.’
5. Lots of affordable opportunities
Investors who know what they’re doing can usually find student housing properties in cheaper areas, including inner-city locations. These buildings typically have good price appreciation prospects.
Are there any disadvantages?
Of course, like any property type, student housing also has its downsides. One is potentially increased liability. Young people tend to drink and party, resulting in more wear and tear on your units. Rental insurance costs may be higher because insurers consider students as higher-risk tenants who may damage the property.
Students are also first-time renters without established credit histories. Student housing landlords often require parents to co-sign the leases.
Finding the best student properties
Are you ready to search for investment properties that are suitable for student housing? Here are some tips to keep in mind:
1. Location is everything.
It’s hard to go wrong in areas near highly rated universities with high rates of enrolment. But do note that several major universities are considering relocating, so do your research where a school relocates its main buildings that dramatically impact the local market.
It’s also essential to think about what students prefer. Some renters favor properties in central locations where they can be close to their university and the nightlife. But in some areas, traditional inner-city suburbs are still more popular. Research your market to figure out the most strategic locations.
2. Check local demand.
Talk to letting agents who specialize in handling student properties. They can tell you more about the supply and demand in the area you are interested in. Check if there are newly launched purpose-built student accommodations in the neighborhood and what the occupancy rates are.
3. Choose the right kind of property.
Most student renters prefer to share with several friends and split the rent. Properties with multiple bedrooms (at least three) tend to be more popular.
4. Offer a high-quality property.
Students these days are more discerning than ever—especially if their parents are helping them pay their rent. You can attract more high-quality tenants by offering nice communal living areas, large study spaces, and ample bathrooms. Good security and Wi-Fi access are also essential.
5. Consider catering to older students.
Postgraduate students often have the financial ability to pay more. They tend to seek student housing outside traditional areas, too.
There are also opportunities and catering to international students who can pay more rent for housing that suits their preferences and requirements. To see if there is a market for these kinds of tenants, check how many postgraduate and international students nearby universities have or are planning to accept.