As the back-to-school season gets under way, you may be shopping around for new investments for your portfolio. Real estate is a solid diversification tool and student housing is an under-the-radar sector to consider this fall.
Take a Crash Course in Student Housing Investments
“The student housing real estate investment market is virtually untapped,” says Jay Morrison, CEO of the Tulsa Real Estate Fund. An aura of exclusivity surrounds student housing investments but it’s a sector that’s far from fully realized, “which means there’s plenty of room for opportunity for new investors in this market.”
As a smaller niche within the commercial real estate market, student housing has long been the domain of institutional investors and people with a high net worth.
“On the private side, we’re seeing a tremendous amount of investment in that asset class,” says Randy Hubschmidt, manager partner at Fortis Wealth, while it’s traditionally been more difficult for investors to get access via the public markets.
The barriers to entry for the everyday investor are beginning to crumble, however. If you’re ready to expand your real estate investment horizons, it’s time to get schooled on the benefits of student housing.
It earns good marks for consistency. Student housing offers a degree of stability that isn’t always present in other real estate sectors, particularly during periods of market volatility.
“One of the main advantages is consistency,” Morrison says. “Demand for student housing is always going to be there, which means year after year, there will always be viable tenants for your investment.”
That tends to hold true even when the economy stutters.
“Student housing tends to be less economically sensitive, relative to other sectors, due to the nature of the industry,” says Beth Mallette, real estate series fund manager at Manning & Napier Advisors. “During economic downturns, enrollment tends to remain steady or may even rise due to fewer employment opportunities, which typically leads to growth in college and university enrollment.”
That’s reassuring if you’re worried about turbulence in the market or the possibility of a recession. Student housing can offer predictability that other sectors may lack.
“One of the advantages is that students sign one-year leases,” Hubschmidt says. “Think of it as analogous to buying a one-year CD; those rates will reset annually, which can work to your advantage in a rising-rate environment, or in this case, a rising rental market environment.”
Lease renewals may also be easier to obtain, since students usually know well in advance if and when they’ll be returning to school for the next year. But, there is risk involved.
“The sector is exposed to more seasonal volatility given the need to fully lease facilities every year for the school year over a relatively shorter window,” Mallette says. “This degree of seasonality is more unique to student housing versus other sectors.”
Student housing can also be threatened by large exposure to new development, Mallette says. “This can provide investors with a growth engine however, it also brings with it the potential for periods of oversupply at specific universities, which can put stress on leasing progress as new supply is digested.”
Profit potential is high. Consistent demand for student housing can lead to a strong return on rental investment.
“Generally, a landlord can charge more money per square foot in a student rental, than say a single-family home in the suburbs because there are roommates involved,” says Seth Stephens, director of sales with Renters Warehouse Seattle in Tukwila, Washington.
Indirect investments can avoid student housing hassles. If owning a residential property and renting it out to students is too much to handle, you may want to look to real estate investment trusts, exchange-traded funds or real estate crowdfunding instead.
Mallette says public student housing REITs provide an attractive way to gain exposure to the sector since they have large, diversified portfolios that have been increasingly focused on campus, with strong university relationships to provide growth pipelines. Liquidity is an added perk.
“Public student housing REITs also reduce economic sensitivity by partnering with some of the highest quality universities that see less fluctuation in enrollment,” she says. Through the end of June, student housing REITs delivered an average return of 14.34 percent year to date.
In general, REITs also yield many of the same benefits you’d get with direct ownership. That includes dividend-based income, liquidity, appreciation, an inflationary hedge, diversification and favorable tax treatment.
Real estate crowdfunding affords similar benefits, along with increased accessibility. There are real estate crowdfunding platforms that allow you to invest with as little as $500 to $1,000, which is a steep discount from the five- and six-figure minimums often associated with private student housing investments.
Whether you go the direct or indirect route with student housing depends largely on what type of investor you want to be, Stephens says.
“If you want to be very involved and a hands-on landlord, it’s best to purchase real property. If you want to be more of a passive investor, someone who simply wants a return, then a REIT or an ETF can be good,” he says. Just remember to look at “cash flow, appreciation benefits and tax benefits of a real property when trying to make this decision.”
Source: money.usnews.com
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