The Globe and Mail reported on January 21, 2019, “Andy Knapp wagered there was a market for luxury off-campus housing when he first invested in student housing rentals six years ago in Waterloo, Ont. Now, he owns seven dwellings that bring in nearly $17,000 in monthly rent.
“It’s not hard to get these places filled,” because the condos are right next door to the city’s two universities, says Mr. Knapp, 40, who, in addition to investing in real estate, is the founder of a Toronto renewable energy company and a Waterloo University graduate. “I rent now to a lot of [Wilfrid] Laurier University hockey players and foreign students.”
“Student housing rentals are gaining more attention among higher-net-worth investors. Some are buying newly built apartment-and-townhouse condos targeted at this niche, while others are investing in private real-estate investment trusts (REITs) that own student accommodations.”
But in order to break into the market, there are a few basic things that any investor should know. From NBPrivate Capital here are seven things you should know before you consider investing in student housing rentals.
When evaluating student housing, the first thing you want to look for is the university itself. You want to make sure your economic anchor is stable, and that enrollment is consistent year after year, decade after decade. You also want to look at how economic cycles have affected enrollment historically.
Second, you want to look at the property itself. How did the property perform during the Great Recession? Were they able to raise the rent? Were they able to keep the building full? Basically, were they able to remain stable in tough times?
You also want to evaluate the competitive set. You want to take a look at the four or five top competitors in the area and look at their track record over the past several years. Believe it or not, but you need to make sure that the other properties that you are competing with are doing well, too. You don’t want to be in a market where your competitors are selling off concession or discounts—that’s a sign of a weak economic area. If they are leasing faster, that then creates more demand for you.
Some universities have been around for centuries and, unfortunately, the majority, if not all, of the land has been developed. There’s typically not a whole lot of land within walking distance of campus. So, if you’re able to find a property that is well-located and well-positioned within a couple of blocks of campus, that’s a gold mine. If you are able to find a location like this, it makes it really hard for competition to come in and change or replicate that.
Another vital component to investing in student housing is understanding who you are trying to lease to. What kind of students are you attracting? Is it a growing segment within the population? Is it new students? Your target market will help you determine what kinds of amenities and activities you should include in the property and which kind of students are going to pay the highest premium to live there.
What a lot of people don’t know about commercial real estate is the primary tool used to evaluate a certain piece of property. The cap rate is determined by dividing the net operating income (NOI) by the property sales price. This will help you evaluate the potential for growth of the property and assess the likelihood of safety of the income. If you can increase the net operating income in the cap rate model, you essentially increase the sales price.
One of the greatest things about student housing is how low your expenses can be. If you have a property right next to a major university, in many cases the university offers great amenities. Things such as a union center, pools, and exercise facilities are on most major campuses today, and that means you don’t have to spend the money on them. In this scenario, your square footage is nearly 100 percent revenue-producing. This leads to a favorable expense ratio and greatly affects your bottom line. And that means even in bad years with lower occupancy, you will still be able to remain cash positive, making your property safer and more stable.
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