Off Campus Housing as an Investment

An interesting, and highly effective, investment strategy that many students and parents are taking advantage of is purchasing homes to be used as student housing. This concept provides substantial benefits due to increased values of Tucson real estate over the past 15 years. Additionally, current projections show that the university population will double in the next 10 years. With this in mind, student housing offers particularly strong potential for appreciation. There is very little land available for constructing any new residences or apartments. This will cause the prices of homes around the university to continue to increase.

The 10-year growth plan includes the Rio Nuevo project in Downtown Tucson, similar to the River Walk development in San Antonio, Texas, as well as a project that would replicate the Mall of America in Minneapolis, Minnesota and potentially be the largest shopping center in Arizona.

In addition, a theme park has been proposed to be located between Tucson and Phoenix that would service the 12+ million residents within an hour’s drive.

The Tucson Chamber of Commerce and Pima County have an aggressive worldwide business development plan to recruit clean industry to Tucson. History has shown that Tucson is virtually recession-proof due to the presence of Davis Monthan Air Force Base, Raytheon, the University of Arizona, and the federal government’s commitment to enforce border control. All of this provides a solid foundation more advantageous than a long-term investment strategy in the stock market.

The traditional concept of renting homes or apartments provides tenants with certain amenities and services a landlord may offer, including facility maintenance and property management. However, after four years of paying rent, your net equity is $0.00. The alternative of purchasing a residence provides the likelihood of a substantial upside. One popular option is to purchase a four-bedroom home as an investment and rent out three of the bedrooms to other students. It is not uncommon for student rents to be more expensive than non-student rents, so students would pay a premium for the bedroom(s). As an example, one bedroom in a four-bedroom home might rent for $400.00 per month, whereas the same property (rented as a whole) may rent for only $1,000.00 per month in the open market.

This idea may be further explained by a “real-life” situation… A young professional buys a three-bedroom condominium close to the university for $165,000. They use one bedroom as their own and another room as an office, then rent out the last bedroom. The rent from the third bedroom pays the association fees, utilities, insurance taxes, and grocery bills for the owner- who lives virtually free and receives a 6% to 14% investment return from year to year. Four years later, he/she sells the condominium, pays off his bills and college loans, and then buys a new car!

Investment properties also may offer significant tax advantages. It is very possible that the combined benefit of collected rent and tax advantages will create a break-even cash flow. In essence, the owner/student can have a significantly lower out-of-pocket monthly expense if they are collecting rent from roommates. Although this strategy is not for everyone, for the student (or the parent) with entrepreneurial spirit, this type of investment can be a substantial contributor towards paying the cost of (rising) college educations. Ownership of investment properties close to the university will continue to provide win-win situations. However, it is important to analyze if the property will continue to attract students, and/or if the student/parent is up to the task of property management. It may be advisable to hire a professional property manager to collect rent, write leases and provide monthly cash flow statements. Property management is advisable if the owner lives out of the city. The leases on a student rental can be set up for one year.

To evaluate the potential profit of a student housing investment, you must first create a Performa that should include aspects of ownership including: mortgage payments, maintenance, property taxes, insurance and vacancy. Final analysis of the investment should include projected appreciation of the property over the course of four to five years. Looking back historically, a conservative estimate would be 5-6% appreciation annually. With this in mind, a property bought for $250,000 with 6% appreciation annually, would increase in value to $342,000 within five years. To minimize your risk and help you decipher this type of information, it is advisable to work with a real estate professional that has expertise in investment properties.

In addition, one should employ a professional home inspector who will examine the property’s general condition, operating system(s), roof, check for termites, do property verification and title discovery.

Also, one should have a reputable lender that will advise on a mortgage plan that makes sense for this type of investment strategy. When choosing a lender, you should do much more than compare rate quotes. Research fees, closing costs, and all other costs of the escrow companies including up-front lender fees and how much pay the lenders receive. These will impact the interest rate charged by the lender. In today’s lending world, there are unique programs with down payments as low as 5% down or ones that provide 100% financing. In addition, there are unique programs such as the “kiddie condo.” This allows students to qualify for a loan with a co-purchaser.

As a parent investing in student housing- if you currently own one home, your second home can be a 100% write-off from an interest standpoint in many instances, even if both properties are in the same city.

For the conservative investor it may be wise to consider new construction. By purchasing a new home, the owner can expect lower maintenance and an attractive property to rent. It is possible that a new condo, town home or single family home may be located close to the university. However, be aware that there are builder markups on property upgrades and lot premiums that could impact your investment negatively in the long run. Again, it is advisable to hire a real estate professional to represent your best interests in this evaluation.

Student housing as an investment is an alternative for the astute student and/or parent to capitalize on the growth potential of Tucson real estate. There are one million people living in Tucson and its outlying communities. This will increase the attractiveness of the community to major corporations. The ultimate decision as a consumer is -do you rent or purchase? For further information on this unique opportunity, watch for upcoming free seminars that we will offer at the Student Union in 2007. If you are a parent, go back twenty or thirty years when you got out of college. Wouldn’t it have been nice to jumpstart your young career, debt-fee with money in the bank?

We are able to give future homebuyers, students, parents and/or investors huge short, and long, term benefits. The Tucson home price index would reflect the following: Data obtained through the Tucson Multiple Listing Service and Pima County Recorder’s Office shows that Tucson has had two “down” markets in 14 years, but these can scarcely be considered down, and two “boom” markets that at the time were considered Tucson booms. The two up markets were 1994 and 2005 with 2005 exceeding 1994 by an increase of 105%. The down markets were 1995 and 2006, with 2006 exceeding 1995 by an increase of 97%. With this in mind, our last 11 years have shown an overall increase of 91% in property values. In the last five years, we exceeded 15,000 homes sold per year with many years being close to 20,000 homes sold. Our last “down” year of 2006 exceeded 2003 in sales by 9.2% and 2003 was considered one of our best years.

Tucson continues to grow, with one in four homes purchased by a buyer from California. An additional one in four homes are purchased by an out of state buyer from other than California. That adds up to half of the homes sold in Tucson. What that proves is that Tucson's benefits are huge in terms of cost of living, quality of living, and investment performance. 126,573 buyers in 10 years have doubled our growth. Your investment will be secure.

Gregg Maul, Associate Broker

Realty Executives