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Investing Strategies

How to Spot a Sublime Student Housing Investment - Part 1

dougAs you may recall from our recent lesson about “Why You Should Invest in Student Housing”, new faculty member Doug Fath is a total rockstar in the student housing niche.  Not only is Doug a serial award-winning entrepreneur and investor, he’s also a gifted teacher and coach for real estate investors (like you?) who are interested in student housing.

Let me elaborate…

Doug knows student housing investments like Tiger Woods knows golf.  This guy started four companies and sold two of them right after he reached the legal drinking age.  Now he runs a multimillion dollar real estate and development company which would be more than enough for 99 and 44/100ths of the population. 

But it’s not enough for Doug!

Doug also enjoys educating others in growing passive income and entrepreneurship through another company he runs – Wealthy Passion Corporation.  He has awards for entrepreneurship out the wazoo, and he loves (loves!) talking about the opportunities in student housing. 

To our delight, Doug was recently able to join Real Estate Mogul for another insightful investigation of this often-overlooked real estate niche – with a special focus on how to spot a sublime student housing investment.  And since Doug has plenty of hard-hitting advice on this topic, we will be splitting his feedback into two new lessons.

Today, in the first lesson of our new series with The King of Student Housing Awesomeness, we focus on:

  • Researching a college town
  • What makes the surrounding area “fertile ground” for real estate wealth?
  • How Doug buys and sells all sorts of student housing assets (from small single-family properties, to large apartment buildings)
  • And Doug’s customized spreadsheet* for evaluating potential student housing investments (available FREE for Mogul Elite members)

*Don’t worry if you’re not a spreadsheet expert.  Later in this lesson, Doug also provides a video to walk you through exactly how to use this helpful Power Pack tool!

searchingHow to Spot a Sublime Student Housing Investment - Part 1

Mogul:  Student housing can be anything from a 4-bedroom house to a 100-unit apartment building, and everything in between. What would you recommend for folks starting out?

Doug:  Everything from single family to large apartment buildings are pretty comparable. You can start out wherever you're comfortable. However, I recommend starting small and working your way up.

Before I entered the student housing market, I purchased three or four properties in the $13,000 to $50,000 range. My first student housing purchase was $75,000.  From there, we went to $300,000 to $500,000 multifamily properties and now we're looking at million dollar deals. 

There is a temptation to make a splash and purchase a thirty unit apartment building.  I'd say that's probably not the best way to go, especially if you've never purchased Real Estate before.  The only exception might be if you have other businesses or means of income that make it easy for you to put large sums of money down.  

toobigWhen I started I was a broke college student.  If I started with a thirty unit apartment building and had problems, I would have gone belly up. There's no way I would have been able to turn that around. Start small, and stick with something that you have experience in.

Mogul:  In a second I'm going to pull back and let you take us where you think we should go next.  But first I would like you to explain why a multifamily property that is within walking distance of a university may not be a very good investment.

Last night I was looking through our local MLS, and came across a really great looking duplex right next to Rhodes college. Rhodes is one of the most prestigious colleges around. The building is within easy walking distance and the place looks nice. Its one of those kind of places that investors would be proud to own. It's a high-quality converted single family house that college students would love.  I found myself emotionally drawn to it. But when I looked at the numbers, the list price is $150,000 and the total rents are $1,400 a month. The investment doesn’t make sense at this price.

That's kind of common sense for a Real Estate investor not to like this deal.   But you can let yourself get carried away by a property that seems sexy to you because it is near a university and in an area that will have high rental demand.  You still have to make sure the numbers make sense.

Why don’t you walk me through the crash course in student housing, as you think it should be laid out? You've taught this a number of times. Take us into it.

Doug:  Before I do that, I took the numbers you gave me and plugged them into the acquisition and cash flow tool. $150,000 for the acquisition price and $1,400 for the monthly rent. You also need to add what the property is worth. I plugged the numbers in and the tool says, 'you don't want to spend anymore of your precious time on this deal.  Aren't you glad you have this tool?' The tool is literally as simple as that.

You heard JP just give me that info and I plugged it in. In less than a minute, I know I don't want to spend anymore time on this deal.  We’ll make this tool available for Mogul Elite members to download in the Power Pack section of this lesson.

Click here to view Doug Fath’s demo of his acquisition and cash flow tool…

Mogul:  Awesome.

Doug:  It's interesting that you spoke about a crash course on student housing.  Anytime someone hears the words crash and Real Estate, it brings them back to 2008. One of the things I'm going to share with you is why I was able to survive the crash in 2008 and actually profit handsomely during that time.

I bought my first piece of Real Estate in 2004, right before things peaked. The peak actually may have been in 2006 or 2007 depending on where you were.  Then 2008 was the big sub-prime crash.  Even though I started out just a few years before that, I was able to not only weather the storm but actually do quite well.

One of the reasons why is really important, especially if you're a brand new investor. I highly recommend you pay attention to this.  Even if you're an experienced investor, you want to keep learning to bring your investments to the next level.  Or use this as a refresher course.

I highly recommend you develop an investment principle for yourself. Your investment principle is your guidebook. It's your roadmap that you do not veer from.

Your investment principle gives you a strong foundation to stand firm, especially when you have sellers and Realtors trying to sell you on all sorts of deals. When you are faced with multiple deals, you can ask yourself the question, 'If I purchased this property, would it be consistent with my investment principle?' If it is, great. If it’s not, you must say no.

cashThere are many investment principles out there, but mine is investing cash flow. Investing cash flow means I do not purchase a property unless it will produce income.

It doesn't have to be an income-producing property on day one, because we may buy land or properties that need renovation. But once it’s renovated, stabilized and rented, it has to be a property that produces positive cash flow. Using this principle allowed us to not only survive the crash, but to do well.  And we are still doing well.  When you invest in cash flowing properties, there are many different strategies that you can use.

First and foremost I'm a buy and hold investor. When you buy and hold cash-flowing properties, you're able to make pretty much tax-free passive income. You gain the tax benefits of depreciation, AND the benefits of appreciation as the property values go up. But in addition to those benefits,  you can still flip and wholesale those properties.

That's what I love about student housing.  Even though we primarily buy and hold properties, I've also flipped and wholesaled some deals. There are many different ways that you can generate income:

  • Passive income by buying and holding
  • Earned income by wholesaling
  • Portfolio income by flipping

It really gives you quite a nice array of options.  There’s more than one way to 'skin a cat', so to speak.

Mogul:  Which is a great phrase that brings a vivid picture to mind.  Where did that come from? Who ever skinned a cat?

Doug:  I'm going to stop using that example, because I don't really like that picture. But I encourage you to use an investment principle as your foundation either for student housing, or any other kind of real estate.

You can incorporate many different strategies from your investment principles. Once you're clear what you're looking for, and you're using the investing and cash flow tool, you can separate the good deals from the bad.

opportunityNext you want to identify the right market to invest in student housing.  At the beginning of the last lesson, I shared with you the demographic research, and those are national demographics. Student housing is an opportunity no matter where you live. Opportunities are not only in Philadelphia, where I'm based. Good deals in student housing span the United States.

But, like other real estate, markets are regional. You still need to do your due diligence in your specific college or university town.  You want to make sure that the demographics are strong and that investing in student housing is going to be profitable.

There are a couple of things I look for when I'm identifying markets:

  • The properties must cash-flow.
  • I can pick up properties at a discount.
  • I’m able to get the returns that I'm looking for.

When I plugged JP’s numbers into the investing and cash flow tool earlier, I saw in less than a minute that the deal didn’t work. But in a new market, I would look at other deals as well.  Let’s say we find enough deals that make sense in this area. I would do some more due diligence, but not just on the deals.  I would also research the college or university itself.

We're looking for large universities. We want colleges and universities that have an enrollment of 20,000 or more. If it's a little less than 20,000 that's okay. But we really prefer 20,000 plus. The next questions we ask are:

  • 'What are their plans for growth?’ and
  • ‘What has their growth been?'

You can obtain this information from the university.  You can often find it directly from the university website.  If you don’t find it on the website, you can also call the administration office.  They will be able to direct you specifically to the information.

We want to see signs of growth in the past, present and future.

In the past, we want to see that enrollment has been growing at the university. Then we want to see enrollments growing in the present time. And even more important than the past and the present, is the future.

belushiIs there projected enrollment growth? The college students are the ones that will be leasing your places and paying the rent. You have to remember the demographics and make sure they are strong in your local market.

When I talk about plans for future enrollment growth of enrollment, many people think that the college or university will be building more student housing.

More housing is not always the best indicator. That's just one criteria to review.  By talking to the university administration, and by looking at the investments they are making, you'll see if they're planning for increased enrollment.  Find the answers to the following important questions:

  • Are they investing money in the campus?
  • Are they building new schools and/or new buildings around campus?
  • Are they investing in the infrastructure around the college and university?

Those questions are different than just asking about student housing.  One of the colleges where we invest here in Philadelphia has been been growing for the last five to seven years.  Every year, the enrollment keeps getting larger and larger. They've just built two or three new schools, and new buildings on campus. But they're not building anymore student housing.

The business of a university is education, not student housing.  So the administration is taking their endowment, and their funds, and investing in the infrastructure around school.  They are not building any more dormitories. Just because they aren't building any more dorms, it doesn't necessarily mean that they aren't expecting more growth.

Look at the full picture, not just dorm construction. Are they anticipating enrollment growth?  Are they investing money, or putting up new buildings around campus?

Mogul:  Could you rate those criteria in order of importance? Or would you consider them all to be equal to each other?

Doug:  They're all important.  If you look at just one and not the others, you may end up in a bad situation. Here is how I would rank their importance:

  1. The investing and cash flow tool.  The deals have to work. 
  2. Enrollment.  The past, present and future need to show growth.
  3. Size.  Look for colleges and universities with greater than 20,000 students

As an example, I started investing as a college student. I was going to school at NYU in Manhattan, and the enrollment was over 20,000 there.

The past, present, and future growth was all positive. But when I ran the numbers, the properties would cost me over a million dollars and would not cash flow.

By using the investing and cash flow tool, you can tell right away if there are good deals. If the deals don’t work, it doesn't matter what the enrollment situation looks like.  As you can see, the deals are the most important. 

{Mogul Elite Members: Download Doug’s customized spreadsheet for student housing investments – and an audio recording of today’s interview – in the Power Pack Tools for this lesson.}


Do It To It! Immediate Action Steps

Before jumping into a potential student housing market, do the research Doug recommends:

The Deal – If you are a Mogul Elite member, download Doug’s spreadsheet for evaluating real estate investments.  Then plug-in some of your potential student housing deals to see if they make sense.

The College or University – For any potential markets on your radar, read the college’s website and talk to administrators.  Has enrollment grown over the years?  Is it still growing?  Is the administration investing in buildings (and not just dorms), in order to accommodate future growth?

Size – Find out how many students attend the University.  Is it over Doug’s magic number of 20,000? 

If you are finding good deals around a college or university, and if the enrollment is growing, and if there are plans for more growth, and if there are more than 20,000 students, then it may be time to invest!

Stay tuned for Part 2 of this lesson to complete the picture.

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