Investing Trends

Mention college to most parents, and their first thought is mostly likely how much it will cost. But a growing number of savvy real estate investors—parents or not—are thinking of college as a way to make money rather than spend it because students all need a place to live. Three key demographic, sociological, and economic factors are coming together to create a lucrative trend for student housing investors.

"First of all, more than 80 million people will turn 18 over the next decade," says Michael H. Zaransky, author of Profit by Investing in Student Housing: Cash in on the Campus Housing Shortage (Kaplan Publishing). "Second, more young people are pursing college educations than ever before. Finally, state budget deficits are causing a serious shortfall in university-owned housing. Someone is clearly going to make money from the convergence of trends—so why shouldn't it be you?"

The budgets of colleges and universities across the country are stretched by the demands of funding enrollment, research, and hiring more professors. In many areas, older dorms are being torn down and replaced with new classrooms, reducing the availability of campus housing. Increasingly, these schools are looking to the private market to supply off-campus housing.

You can approach the student housing market from two primary angles: as an investor who owns property and provides the housing or by managing properties for other owners. Zaransky says the easiest and lowest-cost way to get started in the student housing business is to purchase a single-family home or condo in a college town and rent it to students. However, keep in mind that aging housing stock may not have the amenities today's students demand. Your chances of success are increased when your properties offer student tenants spacious rooms, private baths, air conditioning, storage, cable television, and high-speed internet access.

Zaransky offers these tips for investors:

The property should be located near a school with a low bed-to-student ratio. Zaransky says that the national average school-owned housing capacity is 30.12 percent of the total student population, which means almost 70 percent of college students need to find some type of off-campus living quarters.

- Think public, not private. Private universities tend to apply greater restrictions on housing and may even require students to live on campus. Housing for public university students will usually make more economic sense.

Avoid schools located in large cities. Typically these schools have a significant number of part-time students and commuters who don't need housing.

Approach areas with a substantial amount of new construction and an abundance of property opportunities with caution. Zaransky prefers to invest in areas where property is hard to come by. He points out that too many owners wanting to sell at the same time could be an indication that they are having difficulty finding tenants.

Be sure your NOI projections make sense. Be thorough in calculating your estimated net operating income; don't overlook any potential source of income or expense.

"Never forget the discipline required to walk away from a deal that's overpriced and doesn't provide enough cash flow to cover expenses, contingency reserves, mortgage payments, and a reasonable return on the equity investment," says Zaransky. Even with that caution, he says that the time is right for both new and seasoned investors to profit from this real estate investment niche.