Why real estate investors are turning to student housing

Posted by MSF Real Estate Capital on May 06, 2016
Why real estate investors are turning to student housing

Investors looking for valuable real estate to put their money into often turn to student housing as an investment option. There are more than 20.2 million college students in the U.S. and this figure is projected to rise to 23.1 million by 2024. These students will need housing, making investing in these properties a lucrative opportunity once the right property is identified.

Why student housing?

Student housing is a profitable venture because investors already have a captive market. Many campuses can only handle a limited number of students in the dorms and, as a result, upperclassmen often have to find off-campus housing. Even if they are not required to secure off-campus accommodations, many seasoned students want the independence of living on their own in their own place. Whatever student motives are, housing in a growing college town is always in demand. The student housing market doesn't typically fluctuate like it does in other markets due to an ongoing need.

What types of properties to consider?

When seeking to invest in housing with the intention to rent to students, there are some key attributes to consider including location, college population and the layout of the property itself. Some qualities students look for in an ideal rental include:

  • Close proximity to campus buildings
  • Easy access to public transportation
  • Housing with extra rooms to accommodate roommates

While keeping student needs in mind, it's important to research other demographics relating to the college and its geography.

  • What is the current availability of on-campus housing? If it's limited, this is more promising for investors.
  • Is the college located in a rural area or an urban one? If it's the latter, there may be more commuters, which equates to a lower demand for housing.
  • What type of growth is the college showing?

For the latter, it's important to investigate to see what the current and projected student growth figures are for a school - a stagnant student population means less probable future opportunity. On the other hand, a school that is investing in additional buildings, academic programs and other assets designed to expand enrollment means stronger opportunities for earning.

Pros of marketing a rental towards students

There are several advantages to renting to students (or their parents). For investors, it means a steady rent because students are highly unlikely to move during the school year and prefer to secure housing for the fall and spring semesters. They'll also potentially return for the next academic year or, if moving on, recommend a property to fellow students.

Another significant benefit to investing in student housing is the ability to collect an attractive rent. Green Residential, a property management company in Texas, points out parents and students are used to the "outrageous" fees they are charged for room and board and typically welcome splitting housing costs with other students. Investors in student housing can charge per tenant as opposed to a flat fee for the space, bringing in extra cash.

Student Housing Lending

The Student Housing sector is not experiencing a shortage of capital sources. There are several capital sources willing to compete to place loans on well located projects at the right universities. Due to the strength in the Student Housing sector the Life Companies, GSE Agencies, CMBS shops and Banks have all been aggressive on Student Housing lending. The aggressiveness has taken place on both the construction and the permanent debt sides. On the permanent side we have experienced lending go up to 75% LTV as long as there is still some ‘skin in the game’ on recently developed projects (typically will max out at 85-90% of costs). Timing is very important in Student Housing financing as well as the leasing season is very distinct. If a sponsor is trying to obtain financing in the spring or summer it is critical that the property is leased up for the upcoming academic year or it may be beneficial to hold back on funding a new loan until leasing is complete. The Student Housing sector is its own asset class and here at MSF we have done several transactions on both the development and permanent side.


Additional sources not linked: