Let’s talk about investing in student rentals (aka student housing)—an area of real estate that’s near and dear to my heart, because it is the area that I got my start in.

I know what you’re thinking: “Student housing is scary.” That’s what I thought when I first started, too. And it can be!

There is that connotation when it comes to student housing that it’s just a dangerous and high-risk game, where you have students trashing the place. If you’re not careful, that can be true.

But the reality is, student housing is a bonafide area in real estate. There are companies that have built their business models around student housing.

And some of the unique aspects of student housing is really what I want to get into here. So, I’m going to talk about some of the benefits of student housing and how some of the returns you can get are even better comparatively to other areas in residential and commercial real estate.

Pros of Renting to Students

1. High enrollment

Despite tuition increasing in the United States, Canada, and other areas in Europe, there still seems to be a great demand for undergraduate and graduate degrees. Student enrollment continues to increase and some of it in certain states and countries is actually record-breaking. I believe in the U.K., in 2018 and 2019, the number of undergraduate applications surpassed any previous year.

So, we’re still seeing a huge demand. And as you know with real estate, that’s a huge component of how you’re going to perceive your longer-term outlooks. With other types of real estate, job growth and demographics are the most important indicators.

But in this case, when it comes to student housing, that’s really your proxy. Applications and continued application can indicate growth in a certain area or around a certain university.

Related: 4 Vital Tips for Tapping Into the Lucrative Niche of Student Housing

2. High demand

Universities just can’t keep up with the demand. If you’ve gone to university in the recent past, you’ve come to realize that the actual housing on campus often is only offered to first-year students. That wasn’t always the case for a lot of universities. That was the accommodation for students.

But because the actual supply is just not available on campus any longer, we’re seeing developers come in and build purpose-built student apartments for students outside of campus. And we’re seeing that all across the country, as well as in other markets across the pond.

3. Recession-proof

You hear the term “recession-proof” thrown around all the time. And sometimes it’s valid; sometimes it’s not. Student housing actually is a genuine area, in my opinion, that is as close to recession-proof as possible.

In many areas, an economic downturn can actually have the opposite effect on student housing compared to what happens in other areas of real estate. During a recession, more people do apply. When job prospects don’t look good for people who are about to enter the labor market, they see staying in school and perhaps getting an undergraduate degree (or an undergraduate student getting a master’s degree) as their best available option.

So, you still see that demand there—even during a recession.

When I first started investing, it was ’07/’08 and that was all student housing. We really saw no dip in vacancy in the student markets that we were in, despite dips in vacancy in the market abroad.

4. No chance for 100% loss of income

One nice thing here is that you usually don’t have 100 percent loss of income. What I mean by that is, when you have for example a single family house rented out to one family, if that family leaves, you’re now down at zero income—0 percent to 100 percent, that’s a big swing.

With student housing, for instance, the first property I bought had five students. They were each paying something like $500 or $550. And when you had one student leave, you still had 80 percent of your income coming in. In terms of your actual vacancy, sure, it’s not ideal. But it’s not as bad as losing your full income.

There were times where I had student housing that had eight students, lost two or three of them at one time, and then filled that spot a few months later. But you still don’t have the big wipeout down to 0 percent, given the demand in student housing.

5. Turnkey

We’re seeing actually a lot of turnkey student investments. And what that is, is we’ll see developers buy large apartments or condominiums and either sell the condominiums or rent out the actual apartment units.

In that case, you can purchase smaller units within a larger complex and have a relatively turnkey investment where they manage it. And that’s part of their business—you really don’t have to think about anything.

Related: Student Housing Is My Best-Performing Investment (But Yes, There Are Some Drawbacks)

6. Concrete structures

The great thing with these places is they’re often built concrete-based. So, the actual amount of damage a student can do in there is relatively limited. I heard one investor say they’re built like prisons—and the funny part is they are.

7. Less delinquency

If I told you there is a guaranteed investment, you’d probably think I’m crazy. But student rentals are actually one of the closest things. You do get a guaranteed income. I can’t remember how many times I’d have parents guarantee—actually signed guarantees—for their students. It’s not uncommon in student areas.

And the reality is, I have actually in my student rentals seen less delinquency than any other area in real estate. I think the reality is, when somebody is going to school, they’re going to school for a purpose.

Plus, a lot of times it’s the parents who are paying. Not all the time—but I find when the students are the ones actually paying, they’re even more prone to make sure that the rent payment goes in on the first of the month.

8. Maintain market rents

For any of the states that have rent control—by that I mean a specific time where you can’t actually raise rent until you have a new tenant—that can be such a pain. If you have long-term tenants that are paying such a low amount, you can never “mark to market” as they would say.

With student rental investing, what’s great is that you will have a new crop of students every two, three, four years—you’re always going to be able to mark to market. So if you’re in one of those states or one of those provinces where you have rent control, you’re always going to be able to get new students in, because they finish their degree and then they go live wherever they’re going to work or they go back to their hometown or home city.

The Bottom Line

So what I’ll say in summary, when it comes to student rentals, they are a great investment. And sometimes you can get some of the best returns with this area.

Now, you should be careful. There is, like any investment, risk associated with it. But in our business, it’s all about trying to find where that risk is and being able to contain it.

With student rentals, I feel a lot of people look at it and turn away immediately. There’s just this bad connotation that comes with students and housing—and it really doesn’t have to be that way. Even if you really don’t want to manage yourself, there’s always third party management.

That’s another beauty about student rentals: If you have an area, a university/college town that’s booming with students and development, what else is there? There’s usually property management companies that are full service and know how to manage students and do the administration. This is especially great since it can be a little bit more laborious when it comes to students, because there’s a bit more turnover.

Questions? Comments?

Let’s talk below.

Let’s discuss commercial lending, what a lender is looking for in you, and a little bit about types of loans. So without further ado, let’s get into it.

My company and I get a lot of questions about commercial lending and how to move from a residential property into commercial loans or how to finance for commercial real estate. Under the umbrella of commercial would be multifamily apartments, retail, retail plazas, industrial facilities, offices, and the like.

There’s a little bit of nuance, but it’s not as complicated as everyone makes it out to be. You always hear about different types of debt: mezzanine debt, bridge loan, construction financing. I’m going to try to put it all into three simple buckets when it comes to the type of lenders. I think that this will give you an understanding of the type of loans that, generally speaking, are being done on the commercial side.

3 Types of Commercial Lenders

The three lender types are:

• Commercial mortgage-backed securities (CMBS) market
• Regional lenders
• Agency debt

Here’s a little bit more about each.

1. CMBS

The CMBS market is not going to be a large component. It’s basically what the movie The Big Short was predicated on—the great financial crisis. So, CMBS are pools of mortgages. What happens with those is the originators of those mortgages aren’t actually the ones that create the CMBS financial instruments. Think about it this way, it’s mortgages throughout the United States that get pooled, and Wall Street takes it as a financial instrument that pays out a certain return based on its overall risk.

So, the tranches will each have different levels of risk. If there are defaults in the mortgage pool, the people at the top usually won’t get hurt. It’s going to be the first one with the highest risk that feels it, then the second tier, then the third tier, and so on.

The reason I’m getting the discussion of this type of lender out of the way is because, for most people breaking into commercial real estate, you’re not doing this type of loan. You’re probably going to be in the $1 or $2 million value in terms of the debt. If you’re not, if you’re up at $10 or $15 million, congratulations! That’s unreal if that’s your first commercial deal.

Now, let’s focus on the main ones.

Related: How Do You Qualify for a Commercial Real Estate Loan? 10 Investors’ Tips on How to Prepare

2. Regional Debt

Regional debt is going to be the closest thing to if you’ve ever done a residential mortgage. It’s going to be you going to your bank or hiring a mortgage broker to find a loan. A lot of times these are going to be fairly conventional loans. They’re going to be an interest rate that’s not absurd. It’s going to be an amortization of five years or 10 years. Or you might do 20 or 25, it really depends on the market.

And this is just your vanilla debt. They will look at this as recourse debt as opposed to non-recourse debt. So, we don’t really like that, because they can not only take your property, they can also go after you personally. But I mean, everybody has to start somewhere when you’re scaling real estate.

3. Agency Debt

Now, agency debt is going to be your Fannie Mae or Freddie Mac. The reason it’s called agency is because these are effectively government subsidized agencies. In Canada, the equivalent would be what they call the Canada Mortgage Housing Corporation (CMHC), and they will do a very similar thing that Fannie Mae and Freddie Mac do.

With this type of debt, it’s actually very good if you can get it. It’s actually the debt I have on an apartment building just outside of Toronto. It usually comes with a lower interest rate, and they’re usually a little more creative on how you can finance the property. The ability to be creative when pulling money out of the property a couple years down the road is going to be something that you’re going to be able to do with this agency debt.

So, those are the broad types of lenders and types of loans that you can get. But I think what’s more important to the BiggerPockets community is describing what you need to do to get approved. What does the practical process look like?

What You Need to Get Approved for a Commercial Loan

I’ll tell you from experience that you need to come in with a couple things.

1. You have to know what you’re investing in.

So, if you’re looking at a multifamily or if you’re looking at offices, you need to know that and know the markets that you’re actually looking into. When lenders are looking at people who are breaking into commercial real estate, yes, they will focus on the property, the rent roll, the economic feasibility, the area demographics. But a lot of times, they’re going to focus on you.

Related: Confessions of an Ex-Banker: How to Get Your Next Loan Approved, Guaranteed

2. You need to have your finances in order.

So, having your finances in order is absolutely critical. If the financial component is a challenge for you—say you’re not making as much as you would like to make or your credit isn’t as good as you would like it to be—those are just opportunities for you to partner up with somebody else and let them solve that component (maybe you do something more on the operational side). But that’s absolutely something they’re looking for.

They’re going to look at and identify the people. Just as proof of that, a lot of times the loans that people get when they’re moving from residential into the commercial real estate world are going to be the type of loans that you might get approved, but they’ll have conditions.

I’m a perfect example that. What we did for the first apartment building we bought was we needed to actually have third-party property management. It was mandated as a condition of the loan for one year. We also had to have a review of our financial statements on a quarterly basis. It’s kind of like training wheels when it comes to lending.

So, what they basically did was said, “I will give you the loan, but we want you to abide by a couple of conditions.”

I still get the letters today. So, we did get the loan, but we had to abide by specific things. And that’s OK if that’s what it means to take you to the next step of your investing career. Then, hey, you know everybody has to do what they have to do to scale in real estate. It’s a really small price to pay to start getting that credibility to move onto the next level.

3. It’s best to work with a mortgage broker.

Lastly, I just want to say something on mortgage brokers. In the past, the first few properties I started investing in, I would just go to different banks. You call up a bunch of people; you try to figure out how to get financing. I’ve since evolved to now use virtually one guy. Sometimes I use a second one, but for the most part, one individual is the mortgage broker who finances most of my deals. And that’s what’s great.

You present them with a deal, and you say, “Listen, here’s my property, here’s the rent roll (get it off the broker who is listing the property), here’s the area. How much money can you give me?”

I literally do that about once a month. He’s probably sick of me, but you know, hopefully we can make him some money. So, mortgage brokers are great because they have the ability to shop a loan around to a number of different providers. That way, you don’t have to deal with going to 30 different banks and trying to figure that out.

Commercial Loan Resources on BiggerPockets

What BiggerPockets has done is compiled several different loan resources on the site.

CBRE

One of them is CBRE, which is one of the largest commercial real estate companies in the world—if not the largest. They’ve got a huge debt department, so that’s one resource that will help you.

StackSource

StackSource will help you source different lenders and compare them.

Branch Equity

And Branch Equity has a number of different commercial lenders. Again, they will help you source deals.

Key Takeaways: Getting Approved for a Commercial Loan

Alright, just to wrap up here, we talked about three major lenders: the regionals, the agency debt, and the CMBS market. And in addition to that, make sure that when you’re looking for a loan, you know the asset type and you are coming in with your financials in good order or coming in with a partner. That’s going to be the person that they lend on.

Lastly, make sure that you come with a deal. Don’t just call mortgage brokers or go to banks. You don’t have to have it under letter of intent or under contract. You just need something that they can base their opinion on and give you advice about. Because at the end of the day, the first step to getting a loan is actually finding the deal and underwriting it.

Is there anything you’d like me to expand upon when it comes to getting approved for a commercial loan?

Ask me in a comment below.

Let’s talk about risk as it relates to real estate strategies.

There are four strategies investors use when looking at the different asset classes of commercial properties.

Strategies for Investing in Commercial Real Estate

1. Core Assets

This pertains to major markets in downtown areas. This asset is the most conservative of the bunch. It’s consistent. Cash flows aren’t going to be incredible but tenants will.

These assets are usually the best during market downturns; they’re the ones that are giving you consistent returns. And in the long-term, they are your good equity appreciation purchases. These assets are really a buy and hold, consistent strategy.

In terms of leverage, you’re not going to be able to get more than 50 percent of the asset value, and that’s just a function of the fact that you’ve pretty much topped out what you’re going to be able to get for rent.

2. Core Plus

These may be a little bit outside of the downtown area—not Main Street but maybe an historical location. These are very similar to core, but there may be value-add opportunities and the yield may be a bit higher, as well.

You’re going to attract good-credit tenants but not as credit-worthy as core. There may be a little bit more uncertainty with the renewals or potential incomes of those investments.

In terms of leverage, you’re going to be able to add a little bit more debt onto these. But they still are fairly conservative, so you may be topping out around 65 percent of the asset value.

3. Value Add

These are entrepreneurial investors who look at a property and try to find the discounts (i.e., a retail plaza that just lost their anchor tenant). You’re going in with a pre-meditated plan of taking a building from A to Z.

In terms of the leverage of value add, this is where you can start getting a little bit more creative, getting 80 to 85 percent of the asset value.

4. Opportunistic

Some investors refer to this as “distressed”—because it’s exactly that. Other times it’s developers building apartment buildings, condos, office, retail, etc.

This is the most risky but has the potential for the most return. This could be distressed as in foreclosed assets or they could be completely decimated by vacancies (think smaller retail plazas that have lost tenants or C- and D-class apartment buildings in rough areas).

Investors can employ many of the same strategies as value-add investors, but it’s just a matter of doing so on a more tricky property. This usually requires special expertise in a certain market.

When it comes to financing on opportunistic investments, it’s a mixed bag. It can be much harder to get.

In fact, sometimes investors find properties where you cannot put any debt on them in their current state. The debt might come as the strategy is being executed. Hence, you really need to be an expert.

Watch my video above, where I go into more detail about each of these concepts.

Related: 3 Reasons Why Commercial Real Estate Investing Might Be Your Next Step

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