Profitability in Student Housing: Addressing the Urgent Shortage

Students across the country looking for housing at college have increasingly found themselves staying in luxury hotels, trailers, on friends’ couches or simply attending class from their parent’s homes due to a limited supply of student housing options at universities such as Ivy League universities.

Securing Investment Opportunity
Housing’s shortage has opened up tremendous investment potential for developers and landlords who understand that housing costs don’t have to come directly out of pocket, thanks to mortgages or student loans that cover tuition and food expenses.

The Wall Street Journal recently reported that in pricey cities like Austin, Texas, an off-campus room with no natural light in a four-bedroom home could rent for as much as $1,300 monthly. Given Austin’s median listing sold price was $499,000 as of February 2024 despite higher interest rates, student housing is one of the most profitable segments for landlords.

Student housing remains at a premium at large public universities, with median rents costing $801 per month according to Moody’s Analytics as reported in the Wall Street Journal. Large public universities had just over 613000 beds available for student occupancy by 2023 which were necessary to house an undergrad population of over 1.8 million students.

Rents Are Rising Data from Zillow is alarming: in 2023, off-campus rents averaged an astonishing $2,062, up 28% year over year since 2021 when rents averaged only $1,614. While these numbers include apartments and single family homes, their rising trajectory combined with limited student housing availability have rendered some students unable to attend college; further compounding matters are rising costs of construction materials which has delayed universities’ efforts at housing students.

“Many schools face the daunting task of developing quickly yet affordably,” according to Bill Mattera, Housing and Residential Life Director for Texas State. As quoted by NPR.

Colleges Are Desperate
With university housing shortages worsening due to pandemic infection, some universities have taken extraordinary steps. At Middlebury College in Vermont – an elite liberal arts school – administrators took an unprecedented step by offering upper-level students $10,000 for voluntary leave of absence during 2023-24 fall and winter terms due to the housing crunch caused by post-pandemic housing pressures on campus where all students must reside.

Students attending the University of Tennessee Knoxville were housed at a nearby Holiday Inn; 23 students attending College of the Redwoods (a public community college located in Humboldt County in northern California) stayed at Bear River Casino and Resort located 6.5 miles southwest.

Student Housing as an Alternative to Short-Term Rentals
Investors concerned about short-term rentals could find student housing an attractive solution in today’s climate of high interest rates and tightened regulations regarding guests staying less than 30 days may benefit from investing in student housing as an alternative solution. It can also provide parents with a win-win scenario: They could secure housing for their child while charging other students rent for use of the property – while at the same time providing their child an invaluable lesson in landlording and responsibility, potentially giving rise to their own investment journey in later life!

Student housing attracts high-net-worth investors, making it ideal for syndicators searching for maximum returns and an effective way to hedge against future risks.

CoStar analyst Chad Littell recently told the Wall Street Journal, that capital was flowing toward student housing because rent growth is strong in this market segment.

Noticing Key Considerations when Investing in Student Housing
Investors eager for high cap rates but wary of college parties and trashed apartments will find comfort knowing landlords have safeguards built-in as part of the current college accommodation crunch.

Here are five advantages of student housing investment that could make owning it worthwhile.

1. Guaranteed Tenants: With limited student housing stock, landlords often rely on built-in tenant pools as an assurance for rent during academic year and potentially summer as students try to secure their residence for next academic year, even if they are physically not there during summer vacation. Furthermore, student eviction carries much greater weight than with traditional tenants as student eviction is seen as jeopardizing education by not paying rent or throwing wild parties; in addition to this finding another place midterm will often prove challenging even with their parents’ financial assistance.

2. Rents Are Way Higher than Normal Rental Prices: Students often rent rooms by the room, leading to higher rents than normal rental costs.

3. Parental Guarantees: Assigning parental guarantees on your lease provides not only rent security but also covers damages in case a college party goes awry.

4. Sustainable Long-Term Investment: Investing in a college town means harnessing its ongoing success by aligning yourself with an established university – selecting carefully among them can bring generational wealth!

5. Charge extra fees: Student rental properties enable landlords to charge extras such as parking, high-speed internet, in-unit laundry services, parking and storage space.

Cons of Owning Student Housing
Investors interested in owning student housing should remain aware of these four potential drawbacks when purchasing such investments.

1. High Turnover: Student housing must take steps to address its high turnover by developing an organized approach for tenant screening, lease renewals, repairs and cleanings in order to avoid vacancies or complaints from residents.

2. Immaturity Can Lead to Poor Decisions: Renting to 18-22 year-olds who have never lived independently before may result in irresponsible behavior that damages property or results in missed rent payments. For this reason, careful screening, discussions with parents, and parental guarantees on lease agreements are vital. Weeding out party animals from academics is also key – by keeping an eye on social media accounts as well as individual lease agreements, it will make evicting those responsible students easier should one of them default and prevent losing all rent.

3. Upkeep: Workforce housing or mid-term rentals usually employ a weekly or monthly crew to perform maintenance repairs and clean public areas within their residences. While this may add another expense for landlords, it provides another means of keeping tabs on property while making sure garbage doesn’t build up too quickly.

4. Misuse of Home and Appliances: As a landlord, your goal should be to create an environment which is hard for tenants to damage as much as possible. That may mean installing vinyl flooring instead of carpet and refrigerators without exterior ice dispensers (preventing ice accumulation on floors), using induction cooktops only ( to reduce risk of fire) and low-maintenance hardscape/artificial turf areas to help minimize unsightliness exteriors.

Final Thoughts Real estate investing is all about increasing cash flow while mitigating risks; student housing investing offers exceptional results in this regard.

Built-in markets do not rely on city economies. Rent is guaranteed by parents, with access to student accommodation shortages serving as extra protection against bad behavior, missed rent payments and property damage.

Finding student housing can be both time consuming and costly due to limited supply. But long-term investment makes this venture attractive: profits will continue accruing long after initial acquisition is made.