What about student housing?

An old friend from highschool recently posted on the blog asking what I think about student housing as an asset class. Thought I’d go ahead and answer publicly.

First, take all this with a grain of salt. I’m not in the student housing business. But I have spent a fair amount of time looking into it, both in LA and in other parts of the country. With all that in mind, here are my impressions of the business:

  • Students put a lot of stress on buildings. They tend to live in crowded apartments, have guests and throw parties, none of which are great for your plumbing. You’re going to see a bunch of holes in walls, broken windows, etc. Have your repair crews ready, and make sure you include larger-than-normal repair reserves in your pro formas.
  • Student tend not to care about their credit. So you need to get the parents on the lease, preferably with a large security deposit. Threatening a student’s credit won’t get you very far; threatening the parents probably gets you the rent you’re owed.
  • Students tend to move in and out all at once. You basically have the second half of August and the first half of September to lease all of your units. If you fail to rent one, you may find yourself with a vacant or deeply discounted unit for a while.
  • Summers will be slow. If you’re in a market where the landlords have the power, you may be able to force students to sign 12 month leases. If not, you’re probably going to eat 2-3 months of vacancy each summer; be prepared.
  • Financing is more difficult. While there are banks that understand student housing, particularly when the assets are large, your average multi-family lender is going to be uncomfortable looking at a building with two months of vacancy and 100% tenant turn-over each year. So you’re probably going to have to use less leverage and it’s going to be more expensive.

Personally, I’d only be interested in student housing around expensive, private universities where I could offer a truly distinctive product and thereby command really great rents. Otherwise, it’s not worth the hassle.