Posted By: Pat Nelson / Jun 05 2017
Once you’ve recognized the benefits of investing in student housing, the next logical question is: How does one go about it? Nelson Brothers Professional Real Estate co-founder and Principal Brian Nelson shared his company’s successful business model in an “Ask the Brothers” video series.
“What a lot of people don’t know about commercial real estate is that the primary evaluation tool is the cap rate, which is the net operating income divided by the sales price,” Nelson explains.
This is an area where student housing has done very well. The New York Times reported in February that capitalization rates, or the rates of return on investment, in the student housing sector typically run one-half to three-quarters of a percentage point higher than with traditional multi-family properties.
Still, not all student housing is created equal. Nelson Brothers has many factors that it considers before purchasing student housing properties, but they can be broken down into three primary categories: the university, the property, and the location.
“When evaluating student housing, the first thing you want to look at is the university itself,” Nelson says. “You want to make sure that your economic anchor is stable, that enrollment is consistent year in and year out, decade after decade, without a whole lot of other things impacting it.”
Another factor is the size of the school. As a rule of thumb, Nelson Brothers primarily focuses on universities that enroll more than 20,000 students, but it doesn’t close the door to opportunities at campuses with an enrollment of 10,000 to 20,000 students.
Nelson Brothers also looks at the school’s economic fundamentals, not its football team. A mistake that some people make is investing because they are alumni or because they are fans of the sports teams. But just because a school is great in football or basketball doesn’t mean that the property you’re investing in is going to be profitable.
Nelson Brothers completes a thorough examination of the competition before purchasing any property. It does this by looking at four or five primary competitors and examining their track record over the past several years.
“You don’t want to be in a market where everyone is throwing off concessions or discounts,” Nelson says. “You want to be in a market where everyone is doing really well, and in many cases because they’re leasing up faster, it creates demand for you and you’re leasing up faster.”
For the target property itself, Nelson Brothers will go back further into the books, Nelson said. “How did it perform during the Great Recession? Were they able to raise rents? Were they able to stay full?”
Finally, it’s important to understand the property’s target market, so that the facility’s amenities, activities, and marketing will align with the type of students that you are hoping to attract.
One of the wonderful things about investing in student housing is that most universities have been around for a long time, in some cases hundreds of years, so the land around the campus is usually built up. That creates a barrier to entry for new competition.
If you invest in a property within a 10-minute walk from campus, as Nelson Brothers strives to do, that provides a competitive advantage in the marketplace that nobody can take away.
“If you’re able to find a property that is really well-located, well-positioned, that is a couple of blocks from campus and a five- to 10-minute walk to most classrooms, we think that is a gold mine,” Nelson said.
Being close to campus helps the bottom line in a lot of ways, Nelson says. Most universities have state-of-the-art fitness centers and swimming pools, along with game rooms and study rooms. So if the apartment complex is close enough to campus, it doesn’t have to provide those things to attract students.
“In that case, your square footage is almost 100 percent revenue-producing,” Nelson said.
In many cases, a well-located property will have a very low expense ratio. There might only be a handful of fixed expenses: real estate taxes, common areas, utilities and debt service.
“One of the best things about student housing that is often overlooked is how low expenses can be,” Nelson said. “In many cases with lower-expense properties, you can escalate the net operating income at a much faster pace than you can on traditional complexes or apartments that have really high fixed expenses,” Nelson said.