Student housing gets good investment grades

Gayle B. Ronan

Images of crushed beer cans and empty pizza boxes aside, a growing shortage in student housing has private investors and even financial firms heading back to school for investment returns.

According to Michael Zaransky, co-CEO of Prime Property Investors based in Northbrook, Ill., and author of Profit by Investing in Student Housing: Cash In On the Campus Housing Shortage, the opportunity has staying power. “About 80 million 'echo boomers' will turn eighteen over the next ten years,” he says.  As they do, they will head to college in record numbers, further straining their chosen school’s already stretched budgets, especially if it is a public university.

“After funding enrollment, research, and hiring more professors, there is not enough money left for building dorms,” explains Donna Preiss, founder and CEO of The Preiss Company, which rents, manages and develops investor-funded student housing. This is why many schools are relying on the private market to supply off-campus housing instead.

“At Purdue, they tore down the older dorms and are busy building classroom facilities. Yet, they say this fall’s incoming class is the largest,’ says Pam Howard a co-owner of Livesay Property Management in West Lafayette, Ind.

That is a good thing for Howard and her husband who own a rental building close to campus. “So far, our building has been a very good investment,’ adds Howard, whose business —managing student housing investments for other owners — is also thriving as students scramble to find a place to live.

Not only is full occupancy typical for student housing, says Zaransky, so is the ability to increase rents.  The students show up regardless of local unemployment or interest rate levels, and they pay the going rate since they have to live somewhere — besides adding roommates can keep even increased rents affordable.

That this niche operates primarily on supply and demand is its key attraction to investors. Also key is its positive cash flow despite hefty expenses — real estate taxes, high insurance premiums (reflective of the reputation of student renters), utilities, repair, maintenance, advertising and fees for management services.

But not all college towns or investment opportunities are created equal.  Like any investment, selecting a property requires some homework.

Location, Location, Location
The best properties are within walking distance of a campus, says Zaransky. They are also located where the kids are increasingly choosing to go to school.

“The southeastern and southwestern states especially draw the most kids,” says Preiss, who notes the northeastern schools are more likely to institute enrollment caps which limits their attractiveness to investors.

Zaransky also warns against going where rental properties are already abundant, as in large urban areas like Chicago and New York, especially after the recent run up in property prices there.  “The odds tip in an investor’s favor with moves to pure college towns,” he adds, noting that Boston is the exception to this.

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