Investors in the student housing market are experiencing favorable conditions, thanks to surging university enrollment in response to job losses and the overall economy. Freshman enrollment saw the biggest boom in 40 years back in 2008, and many of those students are now looking to move out of the dorms and into off-campus housing. See the following article from The Street to learn more.
While the economic recession is bad news for the real estate industry, it’s a boon for prospective college-town landlords.
Housing prices have fallen by half in some areas, mortgage rates have sunk to a record low, while university enrollment is surging with people going back to school in the wake of job losses. That has led to a dearth in student housing, which means it’s a great time to buy low and rent high.
“An investor is certainly more likely to profit from a rental property than what was possible two to three years ago,” says David Stiff, vice president of quantitative analysis at Fiserv(FISV), which publishes the Case-Shiller housing index. “Home prices have dropped substantially in many markets. But absorption rates seem to be stabilizing, in part, because the surge in foreclosures has pushed many households into the rental housing market.”
Supply and demand is in the landlord’s favor. Freshman enrollment at postsecondary institutions in the U.S. surged by 144,000 students from the fall of 2007 to the fall of 2008, the biggest boom in 40 years, according to the Pew Research Center. The freshmen of 2008 are now entering their junior years — and junior year is often when students start living off campus.
For a prospective landlord, it makes sense to seek out college towns where prices are especially low. In Columbus, home of Ohio State University, housing prices have dropped 10% in the past five years, according to Case-Shiller. In San Luis Obispo, home of California Polytechnic Institute, prices have plunged 31% since 2007. In Tallahassee, home of Florida State University, prices have fallen 16% in the past three years, and are expected to go down another 1.5% in the next year. In Gainesville, home of the University of Florida, home prices are down 22% in the past three years and are expected to drop another 15% between the first quarter of this year and next.
Meanwhile, student-housing development and management companies seem to be holding steady. American Campus Communities(ACC), which operates 53 student-filled properties, booked second-quarter revenue of $76.7 million this year, up 7.6% from $71.3 million a year earlier.
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“We’ve been able to maintain high occupancies and growth even through the downturn,” says Michael Orsak, vice president of acquisitions at Campus Advantage, an Austin, Texas-based real estate firm that manages off-campus housing near 37 universities across the country. “And, in general, for the most part, rent per square foot for a college student is higher than the market value. It is going to cost you a little more for upkeep, but it is going to give you a better return.”
That upkeep issue is more important than prospective landlords might expect, says Don Stoppe, owner of Stoppe Management Services in Plymouth, N.H., which operates rental properties near Plymouth State University.
Tenants turn over annually, and today’s students may not suffer slumlords gladly. According to Stoppe, the economic downturn has made students — and their parents — pickier about where they’re willing to drop their money. They’re willing to pay rents well above market value — even in rural New Hampshire, Stoppe collects at least $3,100 per student each semester. This means a six-bedroom apartment will bring in $37,200 a year, and that doesn’t include summer residency.
But a dump won’t do. “People have been way more demanding,” Stoppe says. “Where they used to be happy with a kitchen that was done over in the ’60s, now they want a dishwasher. People who are trying to get away with keeping the broken cupboards from the last tenants are not going to be able to rent their places.”
Students are tougher on apartments than the average tenant, so prospective landlords need to take extra care to protect their property legally. That’s why Stoppe’s standard lease includes clauses such as this one: “No trespassing on any roof. Candle burning, fireworks or fires of any kind are prohibited on the property. Charcoal grills are not allowed. Gas grills must comply with fire codes. BB guns, paintball guns or weapons of any kind are not to be discharged or displayed on the property.”
Students can be harder to vet for financial liability than professionals. While the latter are generally subject to credit checks, young students don’t yet have credit to check. “We’ll run a criminal background on the students and run the credit of the parents because they’re the ones paying the bills,” Orsak says.
And to gauge relative domestic responsibility: “The schools will tell us whether they’ve been kicked out of the dorms or not,” says Stoppe, who favors students “who don’t reek of pot when they show up to look at an apartment.”
Landlords who want the benefits of rent payments without the hassle of making sure students don’t trash the property have the option of hiring a third party to play the heavy. Campus Advantage hires “community assistants,” tenants who get free rent in exchange for acting as “24-hour eyes and ears,” Orsak says.
Landlords who own only one or two rental properties may want to consider hiring a property manager to deal with rent collection and maintenance. Property-management fees often range from 10% to 15% of the rent, which can be well worth the peace of mind for an absentee landlord.
“If you [manage] the property yourself, you will more than earn that 13%,” Stoppe says.
This article has been republished from The Street. You can also view this article at The Street, an investment news and analysis site.