Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I’ve been looking around at multi-family properties lately to add to my portfolio. While I love single-family houses, there’s something really cool about having 20 or 30 units in one spot generating an obscene amount of cash flow.
I had been looking around in the suburbs – where I have bought before – when a friend of mine told me about a really cool scenario over a scotch and cigar.
He described it like this... What if you could find a property where you have:
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Near 100% occupancy for the past 20 or 30 years
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Waiting lists as long as your arm every time there’s a vacancy
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A good percentage of tenants who pay in full – up front no less – for most or all of their leases
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And 85% or more of your renters have someone cosign on the lease
My reaction? Yeah right! Throw in a unicorn and you have yourself a deal.
But then he said two words that made it all clear….. Student Housing!
I had never considered student housing before. So I started to look into it. I found an article about it that even further piqued my interest.
The article stated that the demand for student housing is stronger than the supply on average across the country. How much stronger, you ask? Well, in the strongest student housing markets, privately owned off-campus housing properties were already full as of May for the academic year that will begin this fall.
That’s despite the largest building boom that the privately owned student housing business has ever seen. The new construction of student housing properties is creating a much larger market for off-campus, privately managed student housing than ever existed in the past.
Stronger demand than supply on average
In just four years, developers have created almost as many new beds as they built over more than a quarter century. Including the 49,977 new beds that will become available this fall, developers will have added 216,645 new student housing beds from 2012 through 2015. That’s just a 7,000 beds less than developers created from 1980 to 2006.
The cool thing is – demand for student housing is absorbing all these new units and then some. The average rent at privately owned student housing properties was $590 in May, up 1.9% from the year before.
Property managers report student housing beds for this fall have been pre-leasing more quickly this spring than the beds rented last year. At existing student housing properties, 76.6% of beds had already pre-leased by May for the school year that will start this fall. That’s up sharply from the pre-leasing rate last year at this time. Beds at new properties opening this fall were 74% leased as of May, up from 70% recorded a year ago for properties that opened in Fall 2014.
Strongest markets for demand
Existing privately owned student housing beds in three markets were already more than 99% pre-leased as of May 2015:
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The University of Colorado, Boulder
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Iowa State University
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The University of New Hampshire
Another seven schools had already pre-leased more than 90% of their student housing beds as of May. “On average, these universities have experienced moderate enrollment growth over the last 15 years,” the article stated. “So demand hasn’t been growing in vast amounts, but demand is still well outpacing supply.”
Development is coming to these schools, with developers planning to create at least 375 new beds by 2016. Three schools — the University of Tennessee, Pennsylvania State University and Clemson University — will receive more than 1,000 new beds.
Hardly a material increase for three schools with a combined enrollment of more than 90,000 students!
Biggest markets for construction
Several schools will have a totally different market for student housing this fall. Private developers plan to open 2,428 beds near Louisiana State University, hundreds more than any other university. The new beds will be a 37% increase to inventory of private student housing there.
The University of North Carolina, Charlotte will also receive 1,985 new beds this fall, another increase of more than a third to the existing supply — though more than a third of those new beds were delayed from their original delivery dates in 2014.
Some smaller schools will effectively get brand-new markets for private student housing. Developers will open 1,161 new student housing beds near Boise State University, more than twice the existing private student housing supply of 463 beds. Oregon State University is also getting more than 1,000 new beds for private student housing, compared to an existing supply of just 519 beds.
“Both of these universities experienced moderate to strong enrollment growth on average over the past 15 years,” the author wrote. “Little supply has been added to the market due to barriers to entry, leading to pent-up demand.”
Apartments in general are HOT HOT HOT…..
Adding to all this is the fact that the good news keeps coming for apartments. New resident rents rose 5.2% over the 12 months that ended in the second quarter. That’s the biggest rent hike since 1999-2000.
Demand for apartments is even stronger than experts anticipated. Younger Millennials in their early- to mid-20s still make up the biggest block of new renters. But older Millennial renters in their early- to mid-30s are staying in their rental apartments longer — even after they have coupled up and had children.
This creates additional demand, which spills over to college towns, as this group will often rent on the fringes of student housing to stay “close to the action.”
So student housing deserves a serious look from anyone interested in cash flow property.
You game?
Think you’ll have a go at the student housing game? Tell me why in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.