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How to Know If Student Housing Investments Are for You

how to know if student housing investments are for you

If you're seeking a potential investment opportunity in a growing market, student housing is a logical option to consider. As enrollment rates continue to increase, universities are realizing a greater need for student housing. The U.S. student housing market is expected to expand by 700,000 beds by 2031. You can take advantage of this prospective increase in demand by investing in the expansion of student housing.

The investment potential is clear, but is it the right market for you? This guide will weigh the pros and cons of buying student accommodation to assist your decision-making.

Is Student Housing a Wise Investment?

Student housing is attracting more investors each year for several reasons. College enrollment is rising, and new students have higher expectations for their housing accommodations than past generations. Cinderblock dorm rooms with communal bathrooms are being torn down and replaced with private suites with social lounges on every floor. Universities are renting these upgraded living spaces to students at premium rates.

Student residence halls and apartments fall into the multi-family real estate sector. As younger generations postpone purchasing a home until much later in life, apartments and other multi-family residences are in high demand. The multi-family housing market is one of the most stable, experiencing steady rental increases each year. The rent for student housing has risen at an average rate of 3.4% from 2016-2019. This consistent growth makes the multi-family housing market appealing to potential investors.

Approximately 46 million young adults will reach college age in the next decade, and some universities need help keeping up with this demand. The student housing industry is on the rise, creating investment opportunities.

Why Is Student Housing an Appealing Investment?

why is student housing an appealing investment

Today, 33% of jobs require a bachelor's degree or higher. As a result, college enrollment is projected to increase over the next decade to over 20 million people by 2029. A steady stream of students will need accommodations to rent in upcoming years. The market for student housing is changing and showing potential for investors. The following advantages make student housing investments appealing:

1. High Demand

In 2020, 62.7% of high school graduates enrolled in a college or university. As enrollment in higher education increases, the demand for student housing will grow even further. Some colleges are already struggling to find housing for all of their students.

There is potential to capture the rising demand by investing in student housing properties.

2. Stable Industry

The student housing industry is one of the most stable. Some people say it's a recession-proof investment. Since all recessions are unique, there is no way to prove this claim, but history shows where the idea originated.

During the Great Recession, when many other industries suffered, college enrollment surprisingly increased. The higher the enrollment rates, the more housing is needed. College enrollment has remained relatively steady throughout history, making student housing real estate investments even more appealing.

3. Diversified Income

Another benefit of buying student accommodation to rent is that you have multiple sources of revenue. In a single-family home, you rely on one tenant for your entire income. Whether you invest in an apartment building, a collection of condos or one residence with several rooms, you'll receive payments from several tenants.

The chances of losing all of your income with student housing are very slim.

4. Reliable Payments

While college students tend to have lower incomes than traditional tenants, they have a positive track record for making consistent payments. Their ability to make reliable payments is due to several factors:

  • Parents: In 2021, a national study of college students and parents found that, on average, parents fund 23% of their child's higher education fees. If the student's income is too low to cover rent, their parents often contribute to their housing expenses. For additional assurance, you can require a parental guarantee, where the student's parents agree to pay the rent on behalf of their child. The security of their parent's financial resources makes student tenants an ideal rental demographic.
  • Financial aid: Many students pay for their college expenses using financial aid. They can receive funding from scholarships, grants, loans and credit cards. Nearly 72% of students rely on scholarships and grants to pay for college, and 32% use borrowed funds. They can use this money towards any of their expenses, including their rent payments.
  • Roommates: Student housing typically includes shared living spaces that are paid for by more than one tenant. The cost of rent is shared amongst multiple students to make the payments more manageable.

5. Flexible Rates

In some states, rental control legislation bars landlords from raising the rent for their current tenants. Due to these laws, long-term rental properties can get stuck renting their units for lower than market value.

The benefit of student housing is that tenants are constantly cycling in and out as they graduate. You can replace them quickly with the next class of students who are eager to find housing. In September 2021, the average occupancy in student housing reached 94.1%.

The constant stream of new tenants allows you to raise your rates as the market fluctuates to maximize your profit potential.

6. Profitable Returns

In college towns with limited housing options, student rentals can charge higher rates. Students are willing to pay higher prices because their options are narrow. The cost of on-campus housing has doubled in the last 40 years, making off-campus properties more appealing to students.

Students' priorities are generally price, privacy and proximity to campus. You can meet these needs with a simple, low-maintenance property to get the highest return on your investment.

Student housing costs less and can be rented out for higher rates than traditional rental properties, potentially earning higher profits for investors.

Student Housing Investment Risks

It's important to note that every investment comes with risk. Student housing investments are more reliable than most, but there are a few drawbacks to consider:

1. High Turnover

The student housing market has a high tenant turnover rate. While some might think this raises the risk of vacancies, this is rarely the case. The demand for student housing is high, and new students are interested in moving every semester.

Short-term leases can be beneficial. They allow you to adjust your pricing as the rental market fluctuates. And, if you have a troublesome tenant, you can replace them when their lease ends.

2. Property Maintenance

Student renters have a reputation for throwing loud parties, causing damages and disregarding proper maintenance. While this might be true for some, you can also find students who will respect your rental property.

how to lower the risk of an unruly tenant

You can lower the risk of an unruly tenant by requiring a security deposit and renters insurance in your lease. If something happens, the tenant will be responsible for the cost of repairs. You can also encourage them to submit maintenance requests over text or an easy-to-use online platform. They'll be more likely to reach out before a minor issue becomes a big problem.

While it might take some time, you can restore your property to its original condition.

3. Safety Liability

Some college students are notoriously reckless. However, many others are mature and responsible. In either case, there are strategies to protect your investment from liability risks.

You can outline your lease with safety rules and policies and purchase comprehensive landlord insurance. Student housing might require more insurance and closer monitoring to protect, but the higher rental rates often exceed the additional costs.

4. Seasonal Vacancies

Most students return to their hometowns between semesters, leaving your property vacant over the holidays and summertime. While this might seem like a risk to your profits, there are several strategies to overcome this drawback.

If your tenant wants to keep their belongings at your property, you can continue to charge them rent. If they prefer to sign a nine-month lease, you can increase their monthly payments during the rest of the year to cover this loss. You can utilize their vacancy as an opportunity to make updates and perform regular maintenance to your property.

Investing in Student Housing With a 1031 Exchange

The student housing market has significant potential. If you're considering selling your current real estate in exchange for student housing, you can maximize your investment with a 1031 tax-deferred exchange. A 1031 exchange is a procedure that allows investors to defer all or some of the capital gains taxes when they sell their current properties in exchange for like-kind properties.

The odds of finding someone with a property that they would like to exchange are slim. Therefore, most investors utilize the delayed exchange procedure instead. The process can be complex and requires a qualified intermediary to manage the funds involved in the transaction. It's a time-sensitive procedure. Once you sell your property, you have 45 days to find a replacement, followed by 180 days to make a purchase. Otherwise, all the funds from selling your property become taxable.

a 1031 exchange can help maximize your investment

A 1031 exchange can help maximize your investment by deferring taxes so you can put that money toward replacement properties. While the process might seem challenging, several strategies can make it run smoothly and efficiently. At 1031 Crowdfunding, we can guide you through it. We offer an extensive range of quality properties for investors to consider for their 1031 exchange. We've streamlined the process so you can complete your purchase in three to five days — well within the time limit.

A DST vs. a REIT Investment

The properties eligible for a 1031 exchange are limited. A Delaware Statutory Trust (DST) is an independent legal entity permitted by Delaware statutory law that offers shares of property you can purchase to defer capital gains tax in a 1031 exchange. A DST allows a flexible approach to how the entity operates. Investors own a pro rata interest in the DST and are entitled to receive distributions from the trust in the form of rental income or profit from the sale of the property.

With a Delaware Statutory Trust 1031 exchange, investors can benefit from the profits of the DST without participating in property management. The trustee and the investors share an equitable legal title, but the trustee is solely responsible for managing the property.

A Real Estate Investment Trust (REIT) shares some similarities. Like a DST, a REIT owns real estate and sells shares of stock to potential investors. Stockholders also receive a portion of all their net operating income in return.

The fundamental difference between a REIT and a DST is the regulations and requirements guiding their operations. The REIT technically owns the real estate, so investors are not considered to have a direct interest in the property. Therefore, the investment is not eligible to be part of a tax-deferred 1031 exchange.

Why Are DSTs Ideal for Student Housing Investments?

A DST allows investors to receive gains from student rental properties without taking on most of the associated risks and responsibilities. The benefits of purchasing student housing through a DST include:

  • Limited liability: DST investors have limited liability to their personal assets. If the trust goes bankrupt or faces legal challenges, the most you can lose is your investment in the trust.
  • Diversified assets: Some DSTs own multiple properties so that you can make gains from several sources with one investment. You can also invest in more than one DST to diversify your assets even further.
  • Minimal responsibilities: Student housing can require a significant amount of work to maintain. A trustee manages the DST, handling repairs, complaints, leasing and any other property maintenance. As an investor, your only responsibility is contributing funds for your share.
  • Passive income: Once you purchase beneficial ownership in a DST, you'll receive shares of all the income earned by the fund. You can potentially earn a significant income with minimal effort.

Invest in Student Housing With 1031 Crowdfunding

The market for student housing is increasing significantly, making room for investors to capitalize on stable cash flows. The demand for student accommodations is high, and the industry is resilient to economic fluctuations.

Purchasing student housing through a Delaware Statutory Trust provides all the benefits of owning a rental property with less risk and responsibility. A 1031 exchange can help you make a larger investment by deferring capital gains taxes on your relinquished property.

invest in student housing with 1031 crowdfunding

If you're considering a student housing investment, our experienced team of securities and real estate professionals can help. At 1031 Crowdfunding, our online marketplace offers a fully vetted selection of real estate offerings. Join the crowd to learn more about 1031's real estate investment options.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.