Investment Properties: Spotlight on Student Housing

In the face of uncertain economic conditions unleashed in the aftermath of the COVID-19 pandemic – including elevated inflation and interest rates along with recent trends toward under-performing commercial real estate (CRE) assets in the downtown office sector – investors looking to diversify their portfolios are increasingly exploring purchasing or developing investment property in the untapped and underserved student housing sector.

With plans for new, on-campus housing over the next five years in Canada not predicted to make any meaningful dent in the demand for space, both Canadian and a growing number of international students have no choice but to turn to off-campus housing for accommodations during their school year. This captive demand, along with the need to attract and retain top talent in the face of shrinking endowments and stagnant government funding, has resulted in newly-minted private and public partnerships designed to accelerate the construction of student residences off-campus, providing a positive long-term outlook for the sector. Developing purpose-built student housing can also reduce affordable housing pressures by keeping student demand out of the mainstream housing market.

Pros and Cons of Student Housing as Investment Property

While not yet an official asset class and not yet supported by a vast collection of data validating student housing as a viable long-term CRE investment, the increased interest from insurance companies, pension funds and private developers to invest in student housing as a stable source of income and ROI, hints at its ultimate potential.

Still, as with any real estate investment opportunity, you’ll need to do your due diligence and consider the pros and cons before investing in student housing.

Pros of Investing in Student Housing

First, let’s start with the pros of investing in student housing.

• Constant, High Demand
  Canada has led the G7 in the percentage of its population with post-secondary graduate degrees since 2006, with 57.5% of its working-age population (aged 25 to 64) holding a college or university credential. People with post-secondary credentials generally have higher employment rates and earnings than those without, leading to greater economic security. This pattern became even more pronounced during the pandemic, as people with lower levels of education faced steeper declines in job security, greater earnings losses and slower time-to-earnings recovery.With the demand for post-secondary credentials likely to increase in the face of advances in the tech sector, including robotics and artificial intelligence, and because more people look to re-skill or upskill when an economic crisis happens, a continuing need for student housing is all but assured.
• Guaranteed Lease Payments
  Since most college and university students have a limited credit history, landlords usually require parents or guardians to co-sign lease agreements for their student tenants. Because a co-signer is legally responsible for paying any debt the borrower does not repay, there’s less likelihood of rent default.Unlike other types of renters, students also have unique options that can help them afford housing, including:
  • Financial aid (which sometimes covers room and board)
  • Student loans
  • Stipends (for grad students)
  • Awards and scholarships
• Low Property Refurbishment Costs
  Students aren’t usually as picky about their home away from home as other, higher-income tenants might be, making expensive property refurbishing somewhat less important than you might experience in other commercial real estate sectors. As a result, the cash outlays for renovating investment property in the student housing sector can be less.  That said, innovative firms focusing on creating purpose-built, attractive, modern housing that optimizes space and fosters quality of life for students while still allowing them to lower their overall living expenses are reaping more profit by building or refurbishing with higher-grade materials that last longer and require less maintenance. They also realize higher yields when the properties are resold for the same reasons.
• Decreased Marketing Costs
  By posting your student housing avails on social media sites and online groups dedicated to helping students find accommodations – or even going old-school and posting on physical bulletin boards in libraries, athletic centres and restaurants on-campus – you should have no problem filling vacancies. But since you want to attract ideal, rather than just any tenants, you’ll also want to meet and interview them in person to determine if they’ll be a good fit. You might also consider marketing your location to organizations such as sororities, fraternities or athletic clubs. Because the organization pays the annual rent upfront and does its own recruiting, you may never have to worry about vacancies again.
• Consistent Income
  Because students stay on campus from nine to ten months a year, you’ll have consistent income. You can avoid dreaded summer month vacancies by signing student tenants to year-long leases and allowing them to sublet their units during summer months or co-op work terms. Students appreciate this option, as it reserves their space and enables them to take on work terms in other locales. To decrease the likelihood of late or missed lease payments any month, you can require tenants to set up recurring bank-to-bank transfers or use online rent collection software to do the job.
• Higher Profit Per Square Foot
  Because college and university are as much about meeting new people and making new friends as it is about academics and athletics, students enjoy sharing multi-room spaces. Because each tenant pays a portion of the costs, you can keep rates affordable but recover a higher revenue per square foot by renting a four-bedroom house to four students than you could if you rented to a single family.

Cons of Investing in Student Housing

There’s one con that looms larger than all else when it comes to investing in student housing.

Property Damage

If the students you rent to fail to care for or damage your property, you could end up whittling away profits paying for extensive repairs. You can protect yourself and your investment by purchasing comprehensive insurance for your property and deterring risky or irresponsible behaviour by clearly outlining repercussions in your lease contract and requiring a damage/security deposit upfront.

Tips to Increase Tenant Satisfaction

Just like traditional renters, student residents want amenities that make their daily lives easier.

Choose the Right Location

For most college and university students, being able to roll out of bed and get to class quickly is an amenity in itself. Purchasing an existing building or developing vacant land with proper zoning and within walking or biking distance to campus – or just a short transit ride away – is critical to maximizing occupancy in your student housing investment property.

Renovate, Refurbish, or Design With Student Needs in Mind

Tailor your investment property to your ideal customer’s needs, and you’ll be their preferred choice. For students, key housing amenities include:

• High-speed Internet
• Smart-tech entry and security systems
• Eco-friendly tech, such as solar panels and smart thermostats to decrease utility costs
• Shared-goods rooms or vending solutions for items like ironing boards, vacuum cleaners, etc.
• Package pickup rooms (think mail rooms with more capacity)
• Lockers to hold stuff during summer sublets
• Modular and functional built-ins and furniture that can stand up to high usage and still look almost new
• Common spaces inside and out for get-togethers and gathering

Financing Your Student Investment Property

When it comes to financing property purchases or developing purpose-built student housing, finding a lender can be more challenging than other CRE asset classes.

Banks may still lend you money but charge higher interest rates and add stricter loan repayment terms. For better rates and terms, try creating partnerships with nearby colleges and universities, approaching the Canadian Mortgage and Housing Corporation (CHMC), the Business Development Bank Of Canada or smaller lenders in the community.

In the future, public partnerships or incentives related to revitalizing downtowns and converting empty office space into student housing may also be available.

Consider Student Housing for Your Next Investment Property

While investing in student housing comes with challenges, its higher ROI potential and increased demand due to rising college and university enrollment offer a potential hedge against market uncertainties in other CRE sectors.

Whether you explore renovating and refurbishing, developing purpose-built housing or partnering with governments on initiatives for converting office space, making your next investment property student housing could get you in on the ground floor of a commercial real estate sector where big things are about to happen.