4 reasons not to invest in student properties

investing in student properties

As far as real estate investing goes, except for big commercial projects, investing in student rental properties has long been at the top of the food chain. Renting to students has traditionally been a money maker, the only place I know where the expectation of a 8% return on investment is attainable. But times change. Maybe that was a generation ago. Maybe you should reconsider buying that place for your son or daughter while they are in Waterloo to do their undergrad. Maybe, Mr and Mrs First Time Investor should think again about plunking down $50,000 on a pre-construction, guaranteed income-producing, “luxury student living” place.

As an aside, I know what luxury living is like and I know what student living is like, but what exactly is luxury student living?

It’s oxy-monoric.

It’s marketing.

It’s a $12 gourmet hamburger.

 

What is happening in the student rental market?

Oversupply

A new report suggests the City of Waterloo has more student housing than it needs around its campuses and that surplus is set to grow faster than student enrolment at the city’s two universities.

Part of the problem is that the number of new units coming onto the market is growing faster than enrolment. According to the report, Waterloo has more than 32,000 student housing units available now. This is already 1,200 more than it needs and there are more than 7,000 “new beds” becoming available over the next several years.

At the same time, because of demographics, universities in Canada are expecting smaller cohorts over the next seven or eight years. There have already been layoffs and talks of layoffs at our universities.

The developers have a “build it and they will come” attitude. But I don’t agree with this. I know from working in local real estate and as a real estate investor that there are both lots of dormant off campus dorms and that they aren’t luxurious by my fairly pedestrian standards of luxury.

Price deflation

High condo fees brought on by extensive repairs and/or increasing maintenance costs is to blame for the selling price of units in many near-university condos (both townhouse and high-rise) going down.

There are a couple of notorious buildings close to the university where once a small-time investor could buy, hold and sell and make a profit. Now, I’m not so sure.

There are currently 11 units for sale at 255 Keats Way. The condo fees are on average near $400.00. That is pretty high for a 12 year old building that is currently under repair.

There are six units for sale at 375 King Street North. The condo fees there are over $700/month.

 

Income myths

Guaranteed Income

Some of the big developers are selling student units with the promise of guaranteed income. For two years, they say, they will promise to have the place rented and will remit to you, Mr Investor, a guaranteed amount.

It doesn’t take a genius to see what they are doing. They are overcharging you for the real estate and then giving some of your money back to you over the first two years you own it. What do you think is going to happen when all the buyers come to the end of their two year guaranteed income period. That’s right, they will try to sell.

When the investors all rush to sell, there will be a glut of units on the market and the laws of supply and demand tell us that prices will drop.

Then they will find out that the “rents” they have been receiving are not true market rents. They have been padded by the developer. If it is risk free and too good to be true, there has got to be a catch.

Passive income 

There is nothing passive about renting to students. Longtime landlords will tell you not to give them the key to the garage or come May it will be filled with garbage bags that did not make it to the curb for weekly pick-up.

An investor I know had to do an extensive repair to a ceiling and wall because a problem with a leaky toilet was never reported to him and thus addressed. It just leaked and leaked and leaked until it became an issue for the guy who lived in the bedroom below.

Students don’t care. If you think they are going to take care of your place, they aren’t. They can walk right past recycle bins siting at the curb all week. The dishes get done when they run out of dishes. They are half-formed adults without common sense.Maybe some are different, but I was the same.

Landlords are partly to blame. As they try to squeeze as much money out of their investments as possible, things quickly go from bad to worse. Eventually with the intention to sell, the owners will tart things up and unload the investment on the next guy who has read a book or two on property investment and is ready to jump in.

 

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