Underwriting a 96 bed purpose-built student housing deal where 40 percent of beds turn every August

Question

Take a 96 bed purpose-built property, 24 four-bed units, half a mile from a flagship university with roughly 34,000 enrollment that has grown about 1.5% a year for a decade. A seller's T12 shows 96.5% occupancy and effective rent of $780 a bed, with a turn cost line of $310 a bed and concessions basically zero. Two things deserve scrutiny in a deal shaped like this. First, if the leases run August to July with a hard 12 month term and re-lease velocity in the offering memo shows 62% of returning tenants signing by the end of January, that implies about 40% of beds are being placed in a market that clears in a six week window, a real leasing risk that a stabilized T12 can mask. Second, if the guarantee forms are drafted as rent-only, no damages, and roughly a third carry no guarantor at all with a higher deposit instead, that meaningfully weakens the collections backstop. A realistic turn cost and concession assumption at this scale should run higher than what a seller's trailing twelve shows, since sellers often understate both heading into a sale. On the guarantee wording, a rent-only, no-damages structure with a third of leases unguaranteed should push the bad debt assumption up from whatever the seller's book shows, since student housing bad debt tends to concentrate in exactly the leases with weak guarantor coverage.

Rena Expert · Accepted Answer

$310 is a stabilized-year number in a market with slack labor, and neither condition is likely in a flagship market during the August turn. Purpose-built operators at your size typically carry a per-bed turn number that covers paint, carpet or LVP repair, cleaning, keys and lock cores, and the make-ready punch on the shared spaces, which are the parts a per-bed figure tends to leave out. The shared kitchen, living room and hallways in 24 units get consumed by four people each and don't appear in a per-bed line at all unless the seller allocated them. Ask for the actual invoices for two consecutive August turns rather than the T12 line, and separate materials from labor, because labor is what spikes when 40 beds and every competitor's beds move the same week.

On concessions at zero: that tells you the last leasing season cleared without them, and nothing about the next one. In student markets concessions show up late, in June and July, when the remaining beds are the leftover ones in four-bed units with three signed roommates. Those are the hardest beds in the building to place. Model something for the tail of the season even if it wasn't needed before.

Rent-only guarantees mean your bad debt exposure on unpaid rent is genuinely lower, and your damage recovery runs entirely through deposits. On the third of beds with no guarantor and a higher deposit instead, run the deposit against a realistic worst case, one skip plus damage, and see if it covers. It usually doesn't. Whether you can even apply a deposit that way depends on your state's deposit statutes and the notice and accounting timelines they impose, so have counsel in that state read the form.

The thing I'd chase harder than any of this is the university's own housing pipeline and any live-on requirement changes. A flagship growing 1.5% a year that adds 800 beds of its own can flatten your absorption in a single season, and that decision gets announced years before it lands. Enrollment growth at the institution is doing the work in your rent assumption, and campus supply is the variable that can break it while enrollment still looks fine.

nicole_adeyemi · Answer

$310 a bed for a turn where 40 beds move on the same weekend looks light before you even get to paint. You are paying premium labor rates because every property in town needs the same crews the same week.

paulgrant17 · Answer

The no-guarantor third with a higher deposit is interesting to me. How much higher does the deposit actually get in these? If it's one month it's not really pricing the risk.

brandonlee36 · Answer

@paulgrant17 in conventional units an extra half month of deposit reads as pricing risk and does very little at the moment someone actually leaves. On 96 beds @wendy_park48 should expect four or five of those a year no matter what the deposit says. The shared area point from the official reply is the one worth pushing on. In small roommate style rentals common area damage is consistently the line operators underestimate, and here it multiplies across 24 units.

nataliehsu · Answer

Naive question but who does the August turn work at that scale? Is that an in-house crew, or are you competing with every other owner for the same three painters in town?

angela_burke · Answer

@nataliehsu you are competing, and the crews know it. August in a college market is the one week of the year a turn crew can quote whatever it wants and still stay booked out, so anyone underwriting turn labor at the normal off-season rate is going to miss. If @wendy_park48 can get a crew on retainer with the dates locked twelve months out, that is worth real money against the spot rate.

samantha_ruiz · Answer

62% returning by January doesn't sound bad to me for a four-bed product. What's the number you'd want to see? I've got no benchmark for purpose-built.

megan_doyle15 · Answer

Trying to follow this. If a bed doesn't lease by August does it just sit empty for the whole year? That seems like an enormous cliff for one leasing season to determine the entire year's revenue.

aliyah_b · Answer

@megan_doyle15 basically yes, that's the structural thing about this sector. There's some mid-year placement from transfers and grad students but you can't plan on it. One bad leasing season is a full year at that occupancy.

joe_delgado5 · Answer

@wendy_park48 the number I'd want explained is the 96.5% occupancy. Is that physical occupancy in October, or is it an average across all twelve months? Those are very different, and a seller running toward the closing will quote you whichever is higher. Ask for a month by month bed count, not a percentage.

tylerbrooks9 · Answer

@joe_delgado5 that is the question worth asking too. A single annual percentage on a product where the whole year gets set in one six week window tells you almost nothing.

Underwriting a 96 bed purpose-built student housing deal where 40 percent of beds turn every August

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