Two adjacent 8-plexes near a regional state school, enrollment is down 9% in four years

I've got two 8-unit buildings under contract as a package, six blocks from a regional public university in the upper midwest. 16 units, mostly 3 bed, leased by the unit rather than by the bed because that's how the current owner has always done it. $1,850 a unit, so $355k gross at full occupancy, and he's been running about 93%.

Ask is $2.45m. Taxes and insurance and the rest get me to about $198k NOI on my numbers, call it 8.1% going in, which for this market is fine and not spectacular.

Here's what's eating at me. I pulled the school's common data set going back eight years. Total enrollment peaked at just under 11,400 and is now a little over 10,300. That's about 9% off, and it happened before the birth cohort decline even reaches college age. This is a school that admits most applicants and draws from three counties that are themselves losing population.

The seller's answer is that the university has been cutting dorm capacity, so off-campus demand held even while enrollment fell. I checked and he's partly right, they mothballed two halls. But that's a one-time offset, and there are only so many halls to mothball.

My two options as I see them. Convert to by-the-bed as leases roll, which on 3 beds at maybe $700 gets me to $2,100 a unit and more turnover cost and more management. Or underwrite it as ordinary workforce housing that happens to have students in it now, price the exit accordingly, and see whether the number still works at a 9 cap exit.

Running it as workforce housing, my rent comp set gets thinner fast. The non-student rentals in that six block radius are older and rent for $1,400ish. That's a 24% haircut and it kills the deal.

What I can't resolve is whether the by-the-bed conversion is a real value add here or whether I'd just be adding operational drag to an asset whose demand base is shrinking regardless.

Answer

3renee_dubois Get yours

@rigging isn't wrong, that spread is the deal. I'd push on something else though, @thicket.

You're comparing your student units to older non-student stock and calling it a 24% haircut. Are they actually comparable buildings? If the $1,400 comps are 1970s walkups with no in-unit laundry and yours are in better shape, some of that gap is condition, not student premium. Worth getting inside two or three of them before you write the whole spread off as enrollment risk.

On by-the-bed. I did a small version of this on a 6 unit near a community college, converted four of the units to individual leases. Gross went up about 11%. My turnover cost went up more than that in year one because I was furnishing common areas and eating a lot of half-vacant summer months where I had two of three beds filled and couldn't fill the third. It settled down in year two but it was not free money and it was a lot more phone calls.

The part I'd sit with longest is the mothballed halls. That's the seller telling you demand held for a reason that already happened. Ask the university facilities office what their five year housing plan is. Some of them will just tell you. If the answer is that they're consolidating further, you get another offset. If they're planning to renovate and reopen a hall, your 93% has a ceiling coming.

2 replies

1megan_doyle15 Get yours

Dumb question maybe, but if the non-student rentals nearby only get $1,400 and yours get $1,850, isn't that $450 gap the whole thesis? Like the entire deal is a bet the students keep showing up. Once I say it that way it sounds worse than the 8.1 made it sound.