College Town Real Estate Investments Score High Marks
The closest thing to a sure bet in be going to college.
Investments in college towns -- places where the is shaped by a university's presence -- have done well while other niches in the housing market have, for the most part, fallen off the Dean's List. It comes down to the basic law of supply and demand. College enrollments have increased while the supply of on- hasn't. More often, students are turning to off-campus options. And that's where you should be standing with your wallet ready to fill with rent checks.
How secure an investment is college housing stock? The default rate for Fannie Mae and Freddie Mac's student housing portfolio has been less than one-half of 1 percent -- outstanding given what's been going on in the rest of the housing market.
Michael Zaransky, co-CEO of Prime Property Investors and author of "Profit by Investing in Student Housing: Cash In on the Shortage," says the formula to finding the best deals is simple. Take the number of students in a university and divide it by the number of on-campus beds. Start with the big universities that get a lot of applicants, the schools everyone wants to get into, Zaransky said.
Yes, you have to be willing to become a landlord, and some of your tenants may be frat boys majoring in Partying 101. But if you can get beyond that, there is money to be made.
A Steady Stream of Available Tenants
Zac Bissonnette, 22, a 2011 graduate from the University of Massachusetts, Amherst, agrees. He bought his first rental condo near campus at the end of his freshman year. While he intended to move into it, he realized that he could rent it out -- even hiring a management company to handle any problems -- and still be cash-flow positive. A year after he bought the first unit, he bought a second, larger condo that he shared with a friend whose rent helped cover the carrying costs.
"It's a smart investment," said Bissonnette, the author of "Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships, or Mooching off My Parents." He added, "When was the last time you heard of a college or university spending money to build a new dorm?"
Zaransky says the key to the success of the student housing niche is that the tenants' ability to pay rent isn't tied to their having jobs. In most rental situations, renters leave when they lose or change jobs. A vacant apartment is a siphon hose to an owner's bank account. But when it comes to students, there is a steady stream of them; those who graduate in June are replaced with new faces in September. College enrollment has been up, no one is building new on-campus alternatives and, even in communities with rent control, the turnover is so rapid that the laws don't seem to curb rental income growth.
Where the Growth Is
Zaransky likes the sun states with high population growth: Florida, Texas, California. He says to stick with the top-tier marquee schools -- "the places where everybody wants to go." At some state universities, like the University of New Mexico in Albuquerque and the University of Nevada in Las Vegas, fewer than 10 percent of students live on campus.
His company is the largest off-campus landlord for Purdue, Notre Dame, the University of Tennessee and Florida State in Tallahassee.
According to a national study by Move, Inc., investors are expected to outnumber traditional homebuyers in their local markets by 3 to 1, and 56.5 percent plan to put their investments to work as rental properties.
"Local markets with universities or colleges can be an attractive option for many local real estate investors," said Move, Inc., Chief Executive Officer Steve Berkowitz. "Housing demand in college towns is generally high and vacancy rates are usually low. Combine the supply and demand ratio with rising admissions and the 5 percent rise in rental rates expected by the end of the year, and rental property in college towns can be a smart option for the right investor."
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