Posted about 1 year ago

Student housing recession proof?

Most real estate investors and people looking to become real estate investors have asked themselves; what if there is a recession? I’m a glass half full type of person, but I’d be ignorant to think there won’t be a recession. One thing that sets most successful investors apart from those who end up in financial troubles is successful investors build their portfolio to survive a recession. They know it’s only a matter of time, so they find a way to weather the storm or even capitalize on it.

To reduce the risk of being financially crippled by a recession my portfolio is based on cashflow and never speculation. Even if I do buy a property for its eventual subdivision potential or natural appreciation, it has to cashflow in the mean time. If my returns increase because of future value that’s a bonus, but not a necessity. As long as my units are rented, I’m making money. But what if they aren’t rented?

Cashflow is a great way to ride out any decrease in your properties value, but what if you can’t find tenants? There are steps to protect yourself from this scenario as well; Don’t buy in “one trick pony” towns, make your rental units more desirable than other units in the area, make sure that even if you have to drop rents by 10-20% you can still be profitable (or at least break even). But vacancy rates fluctuate in every city. Even the largest, most diverse cities can see an increase in vacancy due to over building, migration to other parts of town, even a drop in housing prices or interest rates can convert hordes of renters into owners, driving up vacancy rates. How can you make investment vacancy rate resistant?

Student housing. Numbers will vary depending where you are so do your own homework but here in Canada there is a huge shortage of student housing. Canadian universities only supply housing for approximately 3% of its students. With over 1,500,000 full time students in post secondary education in Canada and only a small percentage able to get into purpose build student housing. Vancouver Island University in Nanaimo has over 14,000 annual students but on campus housing for only 450. There is an incredible demand for a place for these students to stay.

Statistics from the last two recessions show that enrolment in post secondary education increased when the economy took a down turn. When people get laid off, many of them head back to school in hopes that education will provide them with a more stable or higher paying job.

The number of international students is also growing in Canada. The largest contributor to nonpermanent residents coming to the country is post secondary education. With tens of thousands of students coming from other countries' I’m thinking they’re going to need places to stay.

So there is a huge shortage of housing for students, during a recession demand will increase and the percentage of international students is increasing rapidly. I’m going to go out on a limb and say that the vacancy for student housing around major universities is low and will be for years to come, regardless of economic factors.

What are the best ways to capitalize? Students have different requirements than other types of tenants. They want to be safe, they are often on a tight budget, they want furnished, they don’t require much space. The fact that students don’t have much money to spend on rent is offset by the fact that they are willing to live with roommates. If a four bedroom house will rent to a family for $1,800 but you can rent each room to a student for $750 you just increased the rent to $3,000 by placing four students instead of one family. If you can furnish the bedrooms and get an additional $100 you are up to $3,400. There will be additional costs. You will likely need to supply heat, electricity, internet and cable and your insurance will probably increase but even if you add $400-$500 in expenses you will still be ahead.

The property will be more hands on. Disputes between students will need to be handled, tenant turnover will be higher and you will either need to offer a discount in the offseason summer months, or risk being vacant (or maybe air BnB?).

In most municipalities students that are renting rooms are considered roommates and don’t have the same tenant rights reserved for tenants renting an entire unit. This means easier evictions if a student is causing issues or not paying rent.

You can read many forums and articles on the internet about how to setup housing for students so I won’t go into much detail but here a few things to get you looking in the right direction;

Focus on the number of bedrooms, not kitchens. A 5 bedroom house used as student housing is cheaper to buy than a 5 bedroom house with a suite and two kitchens and yet will probably generate the same incomes.

Buy as close to major universities as possible as most students don’t have cars.

Safe clean and modern. Would you want your son or daughter going to another country and staying in a rundown basement suite? No. Keep the units clean, modern and bright. Provide keyed doors for every bedroom.

In todays market a lot of investors say it’s hard to find deals so you need to make deals. This is a great opportunity to find properties that might not cashflow with traditional tenants but can be viable as student housing. With the number of students growing every year and no large quantities of housing being built for them, I see student housing as an investment that’s not only a safer investment than traditional housing, but likely more profitable.