Investors offer tips on off-campus rental housing
by Mary Umberger
Brad Hastings is a landlord whose tenants are expected to follow certain rules: No candles. No American flags hung as curtains in the windows. And for heaven’s sake, he doesn’t want to find 50 beer cans on the lawn on Sunday mornings.
He and business partner Matt King decided five years ago to specialize in developing campus housing. They jumped from their former telecommunications careers into a growing real estate niche that seems to be fed by a rich demographic and economic diet.
It’s no secret that the recession has slammed American higher-education budgets, forcing a retreat from their plans to upgrade and expand on-campus housing, which would seem to offer an opening for private providers.
At the same time, colleges are bursting with students. Almost 40 percent of the nation’s 18- to 24-year-olds were enrolled in college last year, setting a new record, according to a Pew Research Center report. That amounts to 11.5 million students in two- and four-year colleges. The 2009 data isn’t complete, but the researchers estimated that current enrollment would be even higher.
All of those students have to sleep somewhere, and small real estate investors have taken notice.
While the general rental market struggles through the recession, off-campus apartments catering to students seem to be finding more success, according to Jim Arbury, an executive with the National Multi-Housing Council, a Washington, D.C.-based trade group for the apartment industry.
“I wouldn’t say it’s recession-proof, but it’s recession-resistant,” said Arbury. “It’s still one of the bright spots in the housing market.”
Arbury doesn’t have specific data on the occupancy rate of student apartments vs. the broader market, though he said it can vary widely by locale.
Hastings estimated that in Rock Hill, S.C., where his company, Walk2Campus, operates near Winthrop University, the local rental occupancy rate is 83 to 85 percent. By comparison, his 275 units in that town are 94 percent occupied. (And his company measures occupancy in number of bedrooms filled, rather than apartments rented out.) It also has another 125 units in Farmville, Va., near Longwood University.
Walk2Campus’ business model is based on buying and thoroughly renovating single-family homes that are an easy stroll to class.
“We thought there would be high demand for proximity to campus and houses,” he said. “Frankly, having gone to college where there are houses and generic apartment complexes (Madison University in Virginia), it appeared to me that houses filled up first,” he said.
Attracting and retaining college-student renters requires a certain touch, and the business is not for everyone, Hastings said.
“It’s management-intensive,” he said. “You have a customer base who, possibly for the first time, are living out on their own. There’s a certain amount of hand-holding, teaching of life lessons.”
Sotiria Krikelis knows. She owns a large house that she rents to students at Stony Brook University on Long Island in New York. There have been moments that have tested her, she says.
“Because I also went to Stony Brook, I know when the party nights are, and all the tricks,” she said. “I recently had complaints of parties being held at the house, and I had to drive over there. I live an hour away, in Queens.”
She said she has had to talk to tenants about the simple fixes they can do themselves, such as changing light bulbs or flipping a circuit-breaker switch to restore electrical service, rather than calling her.
Nonetheless, she said she genuinely likes the students and she says the rental income is especially welcome in a down economy.
Hastings said Walk2Campus builds a lot of dos and don’ts into its leases (no tiki torches on the deck, no parking on the lawn, for example), and parents are required to sign.
Parental involvement is key, he said — not only are they likely paying the rent, they’re deeply concerned about safety issues, and having them fully informed of the rules seems to deter some of the immature behavior, he said.
“I’ve had parents call up and interview me,” said Michelle Gordon, a Keller Williams agent in East Grand Rapids, Mich., who two years ago became a landlord when she bought a house for her son (a student at Grand Rapids Community College), and put his name on the mortgage.
Initially, he lived with three roommates he recruited; the academic year passed without serious problems, she said. Currently, her son shares the house with just his sister, also a student.
Gordon said not only did the purchase turn out to be cheaper than paying rent for him, but the roommate contributions covered the mortgage. She also figures it’s teaching her son some financial lessons, and eventually she intends to turn the house over to him entirely.
“There are so many affordable homes on the market right now, and homebuying-assistance programs from the city, I don’t understand why more people do not go this route,” she said.
They are, NMHC’s Arbury says, but it isn’t a slam-dunk.
“My advice (for newcomers) probably would be to invest in an existing property, not a new-build,” he said. “This market niche doesn’t work for somebody who says, we’ve got a great piece of land, let’s build a place and they’ll come.
“You have to know all the housing within a mile of the campus, and you’ve got to know what the dorms are charging,” he said.
Not all college markets are alike, Arbury said.
“Spend some time at that school, at least three or four days, and walk around,” he said. “Try to figure out if a property makes sense vs. all the other properties on campus. If there are vacancy signs, it means it’s an overbuilt property at this point.”
It’s critical to study enrollment projections, Hastings said. “Trajectory of enrollment is No. 1, followed by the price of land,” he said. “We couldn’t go to Charlottesville (for the University of Virginia), for example, even though we’d like to, because real estate is just too expensive there.”
And not all schools have shelved their goals of building more and fancier housing to attract students, he said, so an investor has to have knowledge of a school’s long-range planning.
“If Longwood, which has 4,500 students, were to build a new dorm for 400 or 500 students, that would be a big risk to the rest of us out here,” he said.
Tenant turnover is a given, Hastings said: The two colleges where his company has housing require students to live in dorms for their first two years, so his renters aren’t there long-term. Sometimes, he said, the application and screening process seem never-ending.
And the landlord or his management representative has to get a handle on the students’ mindset and their, well, tendency to socialize, Hastings said.
“We expect tenants to take care of the houses,” he said. “But I think if you approach them in a respectful manner, they respond well to that.
“It’s college, and certain things go on in college,” he said. “We give them a couple of ‘Get Out of Jail Free’ cards.”
Mary Umberger is a freelance writer in Chicago.
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