Cashflowing on Student Housing

August 18, 2022 •

Welcome to the real estate asset class that even the great Sam Zell got started in… student housing.

Welcome to another edition of a Cashflow asset class playbook.

This time we’re discussing a subcategory of real estate whose demand will (almost) always be there. We’re talking student living. Not National Lampoon frat style… but the style that provides ways for you to make money on housing near college campuses. Earn while they learn.

Summary

Intro: Never Graduate; Always Cashflow

Many individuals consider college to be the golden age of their lives. Young with newfound freedom and independence to learn, explore, experiment, and engage.

Over the past two decades, college enrollment for 18-to-24-year-olds has increased by six percent and about two-thirds of high school graduates enroll. As of 2019, there are an estimated 20 million undergrad students enrolled in colleges across the United States.

And they all need housing.

To be exact, 55 percent of students use some other form of rental housing.

About 60 percent of students live in off-campus housing. From apartments to houses and everything in between, students need a home to sleep, study, and yes, party.

As an investor, real estate in college towns presents an interestingly unique four-pronged real estate thesis.

Recession Proof

The perfect case study to prove if college rental housing was still viable took place from 2020-21. Covid-19 forced universities to go online only for months and were forced to compete against a new pack of online educational competitors.

Free ‘MBA’ Twitter threads and other cohort-based learning classes took off like a rocket. Many questioned if it would replace the traditional high school and university learning infrastructure altogether.

However, students are back in the classroom and there is a demand to continue to get a traditional four-year degree.

Isolated Valuations

The college town often forms an isolated bubble within the city they are located in. A new sub-culture is formed with separate demographics, businesses, and daily operations.

This is beneficial for a real estate investment because your properties will be desirable and in demand even if the surrounding areas of the city are not.

Consistent Demand

Universities have navigated the choppy waters of online learning and have seemed to sharpen their value proposition of why students should pay for their service.

Two pieces of that are due to factors outside of the classroom. First, there is a social element of learning and interacting with others as the next stage of growth in a young person’s life. Second, is that universities have big athletic programs, which is an enticing feature.

As long as major universities continue to offer unmatched social events and field competitive athletic teams, students will continue to enroll and create a robust economic climate. You could even pivot to an AirBNB business plan for fans that will always want to attend.

Built-in Security

Universities are densely populated areas and as a result, there will always be people around to keep an eye on your properties. This means there should be plenty of operator candidates to work with to provide property management services and ensure that the house does not fall apart.

Many universities also have campus police who work closely with local police to keep the campus and surrounding areas as safe as possible. Most schools have text messaging alert groups that you can sign up for as well.

Real estate within a university’s footprint has value uncorrelated to the city; is isolated from depressed economic conditions; is more secure due to increased traffic and has consistent demand from new tenants.

Cashflow Conversation: Mike Muniz

Mike Muniz built up a 17-property real estate empire over the past five decades in San Antonio all while working a full-time job! Though not exclusively, he has rented to students from four different universities and colleges in the Alamo city.

We spoke with Mike to get his advice on how to best work with students and what did and didn’t work. Check out the full report of the conversation here.

Key takeaways:

Having a property in a terrific location is key and Mike made sure to look for properties that were in good neighborhoods and a short driving distance away from popular attractions.
Mike recommends multifamily units for maximum cashflow. The money flow is better with multifamily. Duplex, triplex, four-plex, etc.
Red flags to look out for are: if the student or family complains about the rental application; makes mistakes or leaves an application incomplete; does not have a valid ID; raises concerns that make it seem like they will be a needy tenant; do not dress professionally; arrive late or state that they are looking to party.
The key is to set very clear expectations on the front end with both the students and the parents regarding what’s allowed and what’s not, and whose responsibility it is for utilities, cleaning, etc.
If it’s a new RE venture for you, take small steps first until you’re more familiar with the type of work that will be required to maintain it.

Playbook

Here is the step-by-step guide on how to find, vet and execute on adding a student housing rental to your portfolio.

Step 1: The Location; where to find it

There are lists of the top college towns, but where is the best college town to invest in? And there are some iconic ones:

Waco, TX
Madison, WI
Austin, TX
Tuscaloosa, AL
State College, PA

At the end of the day, this is a real estate transaction. Search for listings on the following methods:

Zillow.com
Realtor.com
AirBNB
Contact off-market property owners via cold calls.

Step 2: Understand the pros and cons

The waters may look smooth to buy a rental property and lease out to students, however, it is vital to be aware of all the pros and cons before diving in.

There are many pros for making this type of investment:

Semi-absentee investment
Plenty of student demand to max out occupancy rates
Opportunity to hire a nearby property management company or other operators
Can charge higher rents as multiple students live together and split rent
Relatively safe areas
Flexible to praise or downplay the surrounding city
Opportunity to give back to the new generation (if they want it)

There are many negatives to be braced for:

Unable to find renters in time
Being in price wars with other housing options
The trouble with getting the lease signed
Challenges collecting payment
Too many people living in the house (i.e. not on the lease)
Communicating with helicopter parents
Tenants throwing parties that trash the house

We spoke with our pal Eric who lives in Dallas and has had experience with renting out small one-unit apartments to college students. He likes to keep his operation small and manageable by renting out to a maximum number of two students.

In that regard, he told us that the issues were never with his tenants—two undergrads from Baylor and then an SMU law student. Any core problems came from the property, which included short-term rental (STR) limits, a sewage backup, and an HOA special appraisal for a structural breakdown on the second floor that affected the ground units.

But what about someone with a larger sample size?

An anonymous Twitter account that has carved out his expertise in the student rental niche is @StudentRentalPro. He has managed over 2,000 students who have rented his properties. He is interviewed by Chris Powers of Fort Capital and offers a revealing thread on 25 key lessons learned.

Step 3: Evaluate the valuation, DYODD!

At the end of the day, this is a real estate transaction. You must factor in the following:

The current value of the property today
Infrastructure investments needed
Potential property appreciation
Estimated Rental Market Demand
Accompanying Monthly Rates

Based on this 2021 National Student Housing report by CBRE, transaction volume exceeded $10 billion and while cap rates declined by about 38 basis points, it was determined that investor demand caused the cap rate compression.

In fact, Class A and Class B housing properties indicated significant value-add opportunities for investors. Furthermore, when comparing student housing properties at ‘Power 5’ or major universities, CBRE found that investment yields were higher than multi-family properties in other cities.

Therefore, CBRE hypothesized that capital will continue to move towards these student housing properties in order to achieve higher yields than they can receive in Tier I, II, or III cities.

Of course, each city, university, and property is different. As a result, we recommend referring to this financial modeling resource when evaluating a deal to determine if it is a viable investment strategy.

Step 4: Financing

Properties are typically purchased in one of three ways: in cash, with a loan of some kind, or by raising money from other outside investors.

Since these would be real estate properties for a non-primary residence, the financing rules differ slightly depending on how many units the property has. Try to construct a deal on your terms, as getting the property under your terms may be more valuable than saving a few bucks on the price.

Single Family House

More often, a 20 percent down payment is required for a single-family property not being used as a primary residence. Sometimes, parents buy a property for their son or daughter to live in and are able to reduce the DP if you were buying for a family member or using another method (FHA, military, etc).

Ask your lender how they can assist in lowering DPs to 10 or 15 percent if necessary. Often they may be able to accommodate, especially if they want to earn your business.

Multi-Family Structure

Contingent on how many units the property has, the DP required is often 25 percent. If you have many properties in your portfolio, sometimes that is raised to 30 percent.

Existing Rental Business

That could be changed if you are buying an existing rental property operating under an established business. Then you could potentially finance using a business loan such as an SBA Loan.

Keep in mind, however, that to be approved for those loans requires three years of official financial statements from the business and can take up to 90 days to be granted the money. Many rental businesses are not operating under an official business name and only have basic financials.

Since the loans may require such a high down payment or a lot of paperwork to get approved for a business loan, the best strategy here is to potentially use ‘other people’s money.’

You can work to raise money from family, friends and other investors to buy the property in all cash. If you are buying in all cash, it may be worthwhile to see if you can purchase the real estate for much less at auction. Sometimes up to 50 percent less! Check out the YouTube video and playbook for more information on how.

Step 5: Leasing the Property

The ultimate goal as a landlord is to quickly lease out the property to reasonably good tenants. However, there are a few variables when the tenants are students.

Acquire the Property

Understand the school schedules of the area you are looking to buy in. Are they on a semester or a quarter system; when do classes officially start; and do many students stay for summer school?

Often many leases for the next school year are signed between December and February. Your goal should be to have your property ready to lease prior to this timeframe; otherwise, you could risk having a vacant property for a few months.

Sign your Tenants

No way around it, you will have to accommodate and communicate with many parties. You will likely have more than one student living at your property, which means you will have to work with all of them.

You will likely also need to work with their parents in order to answer all their questions and assuage their concerns. That could be a laundry list of items or it could be fairly straightforward. Sometimes they will prove to be the ‘bank’ for their son or daughter.

The more prepared you are and the more resources you have to communicate with your students and parents, the higher likelihood of closing and getting your tenants onboarded. Aside from a general lease agreement, here are a few other templates that may help when working in multiple scenarios:

Check out the surrounding universities. Do they have a list of online resources to help students with housing? Can you create a document with city ordinance information; university rules and other resources such as utility or property management contact information? For example, the University of Colorado has a resource website dedicated to helping students understand off-campus housing.

The easier and clearer you can communicate with college students and their parents, the smoother the entire experience should be for everyone. A few critical rules to live by:

Have anyone living in the house sign the lease
Have parents be co-signers to protect yourself
Be specific in when, how, and who to pay (collect one payment)
1. i.e. Full amount on the first of the month via check or deposit
What is the deposit? What are the tenants responsible for fixing?
Are pets allowed? How many cars are allowed?
Who to contact in case of an issue? An emergency?
1. What is your plan to resolve?

Move In

Once your tenants move in and are living there full time, work to establish touchpoints with them. This will help build the relationship with both tenants and parents and keep them (and the property) on top of your mind.

Here is a welcome letter template as well as a holiday letter template that may be valuable.

Step 6: Turnaround & Add-ons

The major turnaround would be if you can buy a fixer-upper property and restore it to a place where students want to rent. As the saying goes, you make money when you buy.

Student housing is a cyclical business and while some students will lease for the entire year, some may only do eight or nine months. You will want to prepare for other opportunities to maximize your cashflow.

Fill your funnel – Be prepared to execute on new leases for the fall, spring, and summer semesters
Develop an online presence and ask for reviews – Showcase your property and make it easy for both students and parents to use (leasing, payment, etc)
Partner with student-athletes at the college to promote and market your properties
Develop a mini property management company with an operator
AirBNB the property when it is not leased

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