If you’ve decided you’d like to begin investing in student housing, congratulations! Student housing is an exciting asset class that has proven to be a recession-resilient and stable investment opportunity, even amidst the coronavirus pandemic and during the last economic recession. One nuance of investing in student housing that’s critical to keep in mind is the importance of investing in a diversified portfolio vs. a single asset. This is (generally) a best practice for any type of investment, but in student housing, it holds particularly true. Here’s why:
Colleges and universities are often the heartbeat of the city in which they reside. While this engaging and vibrant environment provides an excellent ground for education, fresh ideas, and community, it also makes higher education institutions at higher risk for impact as a result of current events. Citywide social unrest incidents may cause a dip in enrollment, or a university’s decision-making in response to the coronavirus pandemic may play into a student’s decision to take a gap year. In short, significant changes to the university’s structure can happen at any time due to current events, and affect the value of an investment.
Additionally, any property may be subject to unforeseen challenges, such as latent construction defects or unexpected structural issues, but the likelihood of all assets in a portfolio being identically affected at once is low. Investing in a diversified portfolio mitigates such risk — even if one property underperforms, the other properties in the portfolio can keep a positive balance on the student housing investment.
More Significant Returns.
Investing in a concentrated, rather than diversified, portfolio, relies on the performance of a single asset to bring returns to an investor’s pocket. In contrast, spreading an investment across several assets creates additional opportunity for positive returns while reducing risk, thus stabilizing overall results. A smart student housing investor could, for example, invest in a few stable properties with reputable operators while also taking a risk on newer properties in high-demand areas. By investing in multiple student housing properties (which as mentioned above, face unpredictable circumstances by nature) the overall investment will balance out, even if one or two assets face hardships.
In summary, spreading out a student housing investment is simply a smart strategy that will ensure investors are seeing desired returns.
When investing in Campus Advantage’s fund, not only is the investment applied to six to ten assets as opposed to just one, but there is the added benefit of promoted interests. In typical student housing investments, investors pay a sponsor (the investing firm) a “promote” (as it’s known in real estate investing — also known as a “carried interest” in other types of investing) which is essentially a portion of the return — resulting in lower overall returns for the initial investor.
However, the Campus Advantage Student Housing Fund is a general partner fund. The fund invests as the sponsor alongside passive investors in a joint venture relationship. In exchange for the expertise and deal flow from the fund, passive investors provide an outsized portion of the investment as certain return hurdles are met. These portions are known as promoted interests. Typically, promoted interest structures such as Campus Advantage’s provide returns of 10-30% more than what was initially provided by the investor to the joint venture — making such opportunities lower risk and higher reward.
The Bottom Line.
If you’re looking to get started investing in student housing, investing in a portfolio rather than a single asset is the way to go. You will experience lessened risk and set yourself up for greater returns, balancing your overall investment and helping you meet your goals. If you are interested in Campus Advantage’s student housing investment fund, click here.