The Investor’s ‘Perfect Storm’: Seven Tips for Cashing in on the Latest Niche

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Over the next decade, 80 million “Echo Boomers” will reach their 18th birthdays – and many will head off to college.

A new book by Michael H. Zaransky explains how real estate investors can profit from this unstoppable demographic trend.

Chicago, IL – You’ve always heard that real estate is a smart investment and you’re ready to take the plunge. You’re just searching for the right niche. Perhaps you’re a disillusioned-with-Wall-Street novice who hasn’t yet tested the real estate waters. Or maybe you already own a rental property or two and are ready to take the next step. You may even be a seasoned investor anxious to try out a whole new playing field. If you fit one of these descriptions, real estate investment expert Michael H. Zaransky has two words for you: student housing.

That’s right. Three demographic, sociological, and economic factors are coming together to create a “perfect storm” for investors who direct their dollars toward putting roofs over the heads of America’s college students-and it’s a powerful storm, indeed.

“First of all, more than 80 million people will turn 18 over the next decade,” says Zaransky, author of Profit by Investing in Student Housing: Cash in on the Campus Housing Shortage (Kaplan Publishing, 2006, ISBN: 1-4195-2188-8, $18.95). “Second, more young people are pursuing 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 this convergence of trends-so why shouldn’t it be you?”

Zaransky’s book tells you everything you need to know to start building inroads in this lucrative niche. It covers everything from identifying promising college markets to securing financing to successfully managing your own student housing operation. Here, excerpted from Profit by Investing in Student Housing, are a few tips to consider as you begin your journey:

  • Make sure the property is located at a school that has a favorable-i.e., low-bed-to-student ratio. “If I were forced to choose one, and only one, factor that should be considered when selecting a particular college campus, it would be this one: the university-owned-beds-to-total-enrolled-students ratio,” writes the author, who provides a chart comparing the ratio favorability of the largest university in each of the 50 states. (Hint: the top six are all located west of the Mississippi River.) “School-owned housing capacity is, on average nationwide, only 30.12 percent of the total enrolled student population. This means that almost 70 percent of college students must rely on housing alternatives such as living with their parents, purchasing condos/townhouses, or renting apartments or houses for a place to live while away at school.”

  • Think public, not private. Here’s why: private universities tend to apply restrictive requirements on housing and, with a number of exceptions, sometimes even require students to live in the dorms for all four (or increasingly five) years of their higher education. The culture and social norms at private schools tend to place a great emphasis on students living and collaborating together in dormitories. What’s more, the number of enrollees at private institutions has a greater tendency to be capped or severely limited than at public institutions.
  • It’s usually best to avoid schools located in large cities. They probably have lots of part-time students and commuters who don’t need housing. “Watch out,” warns Zaransky. “The statistics for commuter school enrollment numbers can be large and misleading, while the number of university-owned dorm rooms is usually low. Experience shows that commuter schools make for poor private student housing investments. As a result, unless a compelling reason exists, stay away from investing near universities located in major cities.”
  • The more new construction going on in a particular college town, the more cautious you should be in acquiring only well-located, close-to-campus, new student housing properties. “Always be on the lookout for too much investment real estate in the student housing market,” writes Zaransky. “I’m always more comfortable making an investment when the property was hard to come by. If I discover too many student housing property opportunities in a particular college market-especially for an extended length of time-I know trouble is brewing. If too many property owners all want to sell at the same time, that indicates they have difficulty finding renters and raising rents.”
  • Be sure your NOI projections make sense. Subtracting projected operating expenses from projected income gives you an estimated net operating income, known as the NOI. In addition to rent, include potential income from these items: late charges, laundry, parking, vending machines, utility reimbursement, and damage deposit forfeiture revenue. Typical operating expenses include real estate taxes, insurance, utilities (including cable and Internet connection charges), repairs and maintenance (including turnover costs, outside contracted services for lawn care, snow removal, cleaning); supplies, advertising, administrative expenses; fees for legal, accounting, and management services; and capital reserves and expenditures.
  • In a perfect world, your student housing investment property would include these attributes . . .
    • New property possesses modern amenities

    • Located on or near a major public university campus (within walking distance)
    • Located in a high-enrollment growth state that has a low university-owned-dorm-beds-to-enrolled-students ratio
    • Community has old, obsolete university-owned dorm rooms
    • University has an unrestricted policy allowing all students to live in private housing
    • No competition exists from new-construction student housing
    • Growing enrolled student body population has at least 10,000 full-time students

– . . . But since we live in the real world, remember the following rule of thumb. “If some of these ideal property attributes are missing, I’ve found that ‘location near the center of campus’ trumps all other problems,” writes Zaransky. “Obviously, the ideal location alone can’t turn a dilapidated slum in need of substantial repair into a desirable high-occupancy building. However, on most campuses in high-growth states with favorable university-owned-beds-to-students ratios, a location that’s a block or two away from the quad frequently yields 100 percent occupancy and yearly rent increases. The rule of thumb is that the more negative issues with a campus or a building, the more important the property location becomes.”

Finally, remember this counterintuitive fact: when a property is too “perfect,” it tends to attract multiple offers and a lot of overzealous, optimistic buyers who are willing to overpay. Don’t get so swept up in this buyer’s hysteria that you make an emotional, rather than rational, decision.

“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. “Just because other student housing investors are losing their heads, don’t lose yours. I buy into an old but not overused cliche in this business: don’t fall in love with a building. Live by those words and you will stay out of financial trouble.”

Michael H. Zaransky is Co-CEO of Prime Property Investors, a well-established real estate investment firm in the Chicago area. He has more than 25 years of experience in real estate and is a recognized authority on investing in student housing. A speaker at many real estate investment events, Zaransky is an active member in several trade organizations including the National Multi Housing Council, the Chicago Association of Realtors and National Association of Realtors. He has published numerous articles on the subject of real estate investment and investing in student housing.

Profit by Investing in Student Housing: Cash in on the Campus Housing Shortage (Kaplan Publishing, 2006, ISBN: 1419521888) is available at neighborhood and online booksellers or by calling 800-245-2665.

Kaplan Publishing is one of the nation’s leading education, career and business publishers. Kaplan Publishing, with offices in New York and Chicago, produces more than 150 books a year on test preparation, admissions, academic and professional development, general business, management, sales, marketing, real estate, finance and investing. Kaplan Publishing is a unit of Kaplan, Inc., a wholly owned subsidiary of The Washington Post Company (NYSE: WPO). For more information, please visit kaplanpublishing.com.

Alan Gray is the Publisher and Editor-in-Chief of NewsBlaze Daily News and other online newspapers. He prefers to edit, rather than write, but sometimes an issue rears it’s head and makes him start pounding the keyboard. Alan has a fascination with making video and video editing, so watch out if he points his Canon 7d in your direction.