A Legal Way To Profit From The College Admissions Scandal

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A good investor always looks for opportunity no matter the circumstance. If you can identify and invest in a winning long-term trend, your returns could be quite lucrative over time.

Some long-term trends that have or will likely make investors a lot of money are:

  • Investing in the next Silicon Valley
  • Investing in the aging of our population
  • Investing in artificial intelligence
  • Investing in mobile applications
  • Investing in personal finance sites that have long operating histories
  • Investing in opportunity zones that improve over time

What I realized after the college admissions bribery scandal is that my effort to persuade the public to not spend so much time and money going to college, let alone an incredibly expensive private school is a losing battle.

It is so obvious to me that paying record high tuition for a depreciating asset is not a wise financial move. Give me a $1 million check at age 22 over attending private grade school and university any day.

Further, still spending 4-5 years to get a college degree when learning has become much more efficient thanks to the internet also doesn’t make sense. Two years should be enough to get a degree. Google makes doing research much quicker and easier than going to the library pre-internet days.

Despite the obvious, when you hear about already rich and powerful parents spending hundreds of thousands of dollars to bribe their kid’s way into college, you know demand for college is inelastic no matter how much prices rise and how much the value of the degree depreciates.

Further, the allure of a U.S. college education seems to only be growing in attractiveness to international students. To college chancellors, international students are the golden geese since most pay full price.

Student Housing As An Investment

Given there is an insatiable demand for a U.S. college degree, the easiest way to invest in this demand is through student housing.

The investment thesis is similar to investing in San Francisco Bay Area real estate over the past 20 years based on the growth of major tech giants like Google, Apple, Facebook and the creation of new tech giants like Uber and Airbnb. They’re all paying big bucks and their employees need a place to live.

I was too stupid to get a job at some of today’s most well-known companies. As a result, I just bought their stock and leveraged up and bought as much property as I could in 2003, 2004, 2007 (oops), 2014 and maybe something in 2019 as well.

Overall, my SF real estate investments have returned enough to provide both my wife and me a simple retirement lifestyle. Therefore, perhaps investing in student housing in the face of college degree fever is also a wise move.

Here are some positives of investing in student housing.

1) Relatively recession proof. When the economy turns down, more people go back to school. During the 2008-2010 financial crisis, MBA applications surged 50% for two years in a row. Part of the reason why I decided to get my MBA part-time between 2003-2006 was that I thought I might get fired by my new employer in the wake of the post-dotcom collapse.

2) Stability of cash flow. Whether in a bull market or a bear market, student housing supplies a reliable cash flow stream so long as the university is in good standing. We’re talking 99% occupancy rates when school is in session.

Student Housing As An Investment: A Steady Grower

3) Enrollment continues to increase. Enrollment in postsecondary institutions is expected to increase 14% to 23 million by 2024, according to the National Center for Educational Statistics. As a result, rental rates are estimated to grow by about 2% a year according to Axiometrics.

The Negatives Of Student Housing

There are of course no guarantees when it comes to investing in student housing. We’ve all seen Animal House and know there can be some headaches when it comes to managing college students.

Here are some potential negatives:

1) First-time renters with unestablished credit. Student renters are almost always first-time renters. Although you can hope they will be responsible tenants who will pay on time and take care of your property, you just don’t know for sure what they will do. Having a parent co-sign the lease is an absolute must. You’ve also got to properly vet the student’s parents. Hopefully, they’re really rich like all the parents who got caught in the bribing scandal.

Related: Example Of A Good Rental Lease Agreement

2) More wear and tear on your property. Students drink and party, which results in excessive wear and tear on units. Sometimes they bash into walls when drunk. Sometimes they overflow the washing machine and cause the ground to flood. The more wear and tear, the more time and money it takes to maintain the unit.

3) Higher liability. Given students are considered more high-risk tenants, your rental insurance costs may be higher due to potentially higher risk activity. Sometimes college students like to throw bonfires on the balcony and accidentally burn your unit to a crisp. You just never know what newly free young adults will do away from their parents. I remember having a jolly good time when I was in college.

The Best Way To Invest In Student Housing

One of the easiest ways to invest in student housing is to buy a publicly traded REITs that has some exposure to student housing. The two REITs that I’m aware of are:

1) American Campus Communities (Ticker: ACC, NYSE) – ACC is the most established student housing REIT with a ~$6.5 billion market cap. They pay a ~3.8% yield and have done well over the past 12 months.

2) EdR – Was acquired in 2018 by Greystar Student Housing Growth And Income Fund for $4.6 billion, so that’s out.

The other way to invest in student housing is through a private student housing REIT. I found one run by Rich Uncles founded in 2014. You don’t have to be an accredited investor and can invest as little as $5 on their platform.

Their Student Housing REIT (BRIX REIT) only buys student housing within a one-mile walking distance of major NCAA Division I universities that have at least 15,000 enrolled students.

This seems like a prudent precaution as some smaller, less well-known universities are facing lower enrollment figures and are at risk of shutting down.

All properties purchased in the Student Housing REIT must have a minimum capacity of 150 beds, feature 90%+ rental occupancy rates; and represent a broad spectrum of geographic locations.

What I like about the Rich Uncles REIT is that there is no broker/dealer fee that public REITs charge and they have a good performance fee structure.

The first 6.5% of any profit is paid out to shareholders with no fees. All profits after 6.5% are split 40% to Rich Uncles and 60% to you. This performance alignment with shareholders is my favorite type of fee structure.

Unfortunately, as of April 16, 2019, Rich Uncles told me they’ve closed their BRIX REIT (private student housing REIT) to new investors because they’ve had too much demand.

As an alternative, RealtyMogul, founded in 2012, has some good student housing real estate opportunities that appear on its platform from time to time. I’ve met the founder and CEO, and like that she’s focused on a long-term, sustainable business with high quality control.

Of course, no investment offers guaranteed returns, so please do your own research before investing.

Don’t Physically Own Student Housing

The long-term demographic trend towards more people going to college is a nice tailwind for the student housing sector. As a parent now, I realize parents are willing to do anything for their children to get ahead. Spending big money on education seems to be the solution if you can’t spend time educating your children yourself.

The growth of international student demand is positive as well. They won’t discover until decades from now that a college degree from an American university isn’t worth what it used to be.

International Student Enrollment By Degree In America

Although student housing seems like a wise long-term investment, I wouldn’t want to actually physically own and manage the student housing. Turnover and maintenance would be major headaches.

The only way I would invest in student housing is through a public or private REIT. Let the professional managers deal with rowdy students and let us earn income passively.

Readers, what are your thoughts on investing in student housing as a long term investment? What hiccups do you foresee? Any other publicly traded student housing REITs you are aware of? What other ideas do you have for profiting from the college admissions scandal? For those who have investments in ACC or Rich Uncles, I’m curious to hear your thoughts, especially negative ones.

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