The 5 Factors I Look for Before Endorsing a Student Rental Condo
The Canada Pension Plan just invested another $1.4B into student housing, this after already investing $2.8B a few months ago in 2015. Student housing is clearly a growth segment of the market, and new projects are popping up all the time in Ontario, but how do you know which projects are the safest to invest in? Andrew la Fleur breaks down his 5 factors that he looks for before endorsing a student rental project to his investor clients.
Andrew la Fleur: Hello, and welcome back to the show. Once again, Andrew la Fleur here, happy that you’re listening in. Thank you very much for supporting this podcast, we are growing every week. More and more listeners are coming, and you may have noticed that we missed a week. That’s right, last week we did not have a new episode. I apologize for that. My wife actually just gave birth to our third child. That’s right. We just had our third child and we’re very excited about that, but obviously that has thrown a little bit of a wrench in the schedule for the past week or so, as you can imagine. Have a very cute and a small wrench you could say, but we’re very happy to have our new son.
His name is Joshua, and mom and baby are doing very well, and we’re not sleeping as much as we used to, but as such is life and we’re very, very excited and very happy to welcome the newest member to our family. We’re back here again. Happy to be back again this week with the podcast bringing you new episode. I wanted to talk today, again, about a topic we seem to be coming back again and again, and as I’ve mentioned many times, it’s because it’s a growing trend in the condominium world and that is student rental condos.
A lot of information and things happening in the news regarding student rental condos, it seems these days. The big news, which you might have missed, because it happened just after new year’s when everybody was probably still lounging around in their PJs and not quite back to work yet and lot of people just off and didn’t really make much of a splash in the headlines, but once again, the Canada Pension Plan, and I’ll include a link to this, of course, in the show notes for this episode which you can always get at truecondos.com/podcast for the show notes on this episode and every episode.
Once again, the Canada pension plan, Canada investment board has purchased and made a major, major investment into student housing. As we talked about before on this podcast and on the blog, trueCondos.com, the Canada pension plan had put 2.8 billion dollars of investment into high-end student housing in the past year in the UK. Now they are spending this time another 1.4 billion, so that brings it up to … What is that 2.8 plus 1.4 that’s 4.2 billion, sorry. Again, not getting too much sleep lately. My math is a little bit slow, but 4.2 billion dollars now and just in the past year, less than a year that the Canada pension plan has put into high-end student housing.
Again, very interesting to see that Canada’s biggest investor continues to, in a sense, double-down on student housing. I’d love to get somebody from the pension plan on the podcast. If anybody is out there listening, from the pension plan or if anyone out there knows any contacts at the investment board of the CPP, would love to speak to somebody about that, so feel free to reach out to me regarding that. Anyways, very interesting, this time they’re buying into a large portfolio housing in the US, and a lot of big question that people keep asking is “why isn’t the Canadian pension plan investing in student housing here in Canada?”
My answer is quite simple. I’d love to speak to them about it, but I think it’s pretty clear the reason they don’t because there’s nothing to buy. A student housing industry in Canada, as I’ve said many times, is very far behind the rest of the world particularly the US and the UK. There really are no large landlords that you can go to and if you got billions of dollars to spend like the Canada pension plan does, I mean Canada pension plan doesn’t go out shopping for 6-plexes and a 20-unit apartments and they’re not looking to spend 5 million dollars. They’re looking to spend billions of dollars, so there’s only certain markets that they can even look at, so Canada is just a … it’s not possible to do so something like that.
They’re not in the business of building student housing that’s for sure. Canada pension plan is not a developer, so they’re not going to go out and start building student housing. Again, all these to say that the biggest investor in Canada is understanding that student housing, particularly high-end student housing, is a major trend. They’re getting on board this trend and they are ready to ride this way in the coming years ahead. As investors, condominium investors presents a very interesting point for us to look at and for us to follow. A very savvy sophisticated, the largest investor in fact in Canada is doing something that we can also participate in as well by getting into student rentals.
We’ve talked a lot on the podcast lately about projects like university studious in Oshawa which is done very, very well and is now sold out. We have capital hall, of course, in Ottawa which is done very, very well, and is also on the way to selling it, but there are still units available there if you’re interested in capital hall, university suits in Kingston. We talked a lot about a year ago at this time, academy condos and the list is growing and growing. Now, I wanted to talk today on the podcast about a few things that I look for before I personally endorse a student rental project, and so I’ve made a list.
There’s 5 things. 5 things that I look for before endorsing or backing getting behind recommending a project to my investor clients because, again, I get developers and marketing companies and sales people contacting me every single day just about, asking me to promote this or sell that or … Why? Because obviously I have a very large number of investors that purchase real estate and purchase condos. I get contacted regularly by people who have condos to sell and different opportunities that they want me to look at. 95% of them, I turned down and 95% of the projects that come across my desk, I do not endorse and I do not recommend to my clients for investment. I’m very selective, obviously, looking for only the best of the best.
Looking for only projects that I personally invest in or that I would invest in, and that goes the same for student rental condos. Here are the 5 things that I look for before I endorse a student rental condo project. Number 1 is the developer. This is obviously the most important factor that I look at, is who is the developer and do they have a proven track record. It’s fairly simple evaluation there. There’s a lot of 2nd and 3rd tier kind of guys now that I find entering the space in Canada as student rental condos are sort of a new frontier. Within the industry, a lot of the established players that the big, big builders that have been around for a long time, they’re not really getting into the space.
They are sticking to their bread and butter, they’re sticking to what they know best. Just not necessarily student rental condos, and so like any other industry, you have these smaller upstarts who tend to be filling up the space and recognizing the need and recognizing the opportunity in jumping on it. Unfortunately, of course, when you have a lot of these 2nd and 3rd tier guys coming in, a lot of them obviously do not have a track record and obviously what you get in the end or don’t get in the end is often very different from what you’re promised when you’re buying from one of these developers without a track record.
It shrinks the list down significantly from projects that I would recommend, but again that’s the way it is. This are your hard-earned investment dollars. You don’t want to be just throwing them behind any project just because it’s there. Using university studious as an example, Podium Developments, they have a long and proven track record of building student housing. They have been a student housing developer for over 10 years, and so they’ve got over 20 buildings that they have built. You can clearly see that these guys have a track record. They know what they’re doing.
Using another example, Capital Hall, Ashcroft Homes based out of Ottawa, they’re basically Ottawa’s top 1, top 2, top 3 developer and they have built thousands of properties and thousands of homes in the Ottawa market. When you’re buying at capital hall, you’re buying from a proven team there who knows that city inside and out and the city knows them inside and out. Some of the other projects that have come across my desk that I have not endorsed, they don’t share those same characteristics. They’re 2nd and 3rd tier kind of guys. They’re, quite frankly, just people who have no track record at all.
They might have built some other buildings or they might have partners that have built other buildings or they might have patched here and there in different aspects of real state, but have they built condos? Have they built multi-residential buildings before? A lot of them, if you start looking in to the background, and you find they have not. It’s a very big risk as an investor to get into bed, so to speak, with that type of developer. That’s just some things that I look for and things that I evaluate before recommending one of these projects and that is the first and foremost, the most important thing that I look for, that’s number 1.
Number 2 is the property management. You might even say this is 1A is developer, 1B is property management, but really these 2 are the foremost aspects of the top 5 here as if there was nothing else in you. You really want to focus on these 2, developer and property management. What I find with a lot of the projects that are out there on the property management side, a lot of these guys are putting up these student rental condos … I shouldn’t say a lot of them. Some of them are putting out the student rental condos and they’re also starting their own.
They’re managing the building themselves, so they never built anything, they’ve never managed anything and suddenly they’re a builder and a property manager. Not just a property manager, but a student property manager, a very specialized form property management. You have seen these cases where they’re just snapping their fingers and boom, creating a property management company out of thin air that is going to manage this building, that is not built yet. It just seems to me a very risky thing to do as an investor going to that, knowing that you’re asset is being managed by a property manager that has zero experience in property management and zero experience in student property management. Seems like a very risky thing to do.
I’d much rather see 1 of 2 things in the property management side. Number 1 is that the developer themselves has a proven track record as a manager or that they have a property management company with a proven track record or management, or number 2 is that the developer behind the project is hiring a 3rd party property management company who has an established, respected manager in the industry. 1 of those 2 things. I’d prefer to be on the developer side themselves because I find when the developer is, for the simpler reason, I want the developers building the building as well as they are managing the building, they have a lot more at stake. They have a lot more … Their entire reputation is on the line.
Not just from building the thing and then it’s done, but actually once the building is done, they are sticking around and managing it and their fingerprints are on it and their entire brand is at stake by how that building is run and managed and rented out after the fact. When you look at varsity properties for example who are managing the Podium projects in Oshawa and in Kingston, varsity properties is a proven, long standing, high-end student rental property manager, and they’ve been managing thousands of units, thousands of beds for many, many years They have an established reputation in the industry and they know the business inside and out.
They know students, they know working with student parents and they know that market inside and out, so it gives you a lot of peace of mind as an investor to know that that who is going to be managing your asset, after the fact. If you look, another example, you look at Capital Hall, another project that I do endorse. Capital hall is being managed by Envie which is the property management arm of the developer. It’s sort of a sister company of the developer, Ashcroft Homes. Again, you look at Ashcroft Homes, they have a proven track record for management and they have managed many buildings in the Ottawa area already as well as being a developer.
Again, you’re buying into experience, you’re investing with experience. We have other buildings where such as Academy Condos, for example, who are hiring a 3rd party manager, Brookfield, I believe it was, I have to go back and check. It’s been a little bit since that project was sold, but I believe they’re hiring Brookfield Residential Services there again to be the management. Again, you’re dealing with a very experienced property manager there, 3rd party in that case, which is also okay.
On the management point, one final thing on the management point is that, if you look at the Canada pension plan and what they’re doing when they’re buying these assets in the UK and in the US, what they’re buying in ever case, it seems to me, when you read these news releases and press releases, they’re buying or they’re maintaining or retaining the management as well. Again, they the CPP also understands it’s not just the asset itself, it’s not just owning the building, it’s the management. It’s the management which is really the key to the whole thing when it comes to these student rentals. You really have to have the people in place who are experts in this type of asset.
The CPP, again in the UK and in the US, they’re buying these assets but they’re also buying the management. The management who has built up these assets and who’s made them so valuable, they stick around, the management team and the people, to run it and to continue to make sure that is a high quality, high-performing asset with great yields, and that basically everything is running smoothly on the ground with the property itself. That everything is maintained and kept up. That the value is preserved and hopefully increased over time.
Okay, so that’s sort of 1A, 1B or the first two points. Number 3 in the things that I look for before endorsing a rental project is the local market. You got to look at the local market. Obviously, it has to have a certain size and has to have a certain amount of growth. Local market in terms of the student population, the potential pool of tenants that you got there, and the growth. You want to make sure that the universities and the college campuses there are growing. The beauty of this type of asset is there are many, many, many markets across Canada, pretty much all of them are experiencing a huge amount of growth.
As I always say, high education is a booming business. More and more people are going to school and they’re going to school for longer and longer periods of time. This is a very attractive market to be in as an investor for the long term.
Number 4 is the location itself. The location of the property. My rule of thumb here is that you don’t want to buy something that’s more than 10 minutes from door-to-door, from the property itself to the campus, ideally to the heart of the campus as supposed just to just to the edge of the campus, because some of these campuses can be rather large, of course. You might say, “well, I’m 10 minutes to campus,” but then you’re another 20 minutes or something walking into campus to get to where the classes are actually held. Students, again, are very, very sensitive to time and distance. You can see dramatic distances in rental rates and rental demand in student markets like this, if you’re on one side of the street or another, in some cases.
Anything more than 10 minutes to a student is often, that’s just too far in many cases. Under 10 minutes door-to-door, so it does not have to be by foot though. We should clarify. Does not have to be 10 minutes walking, it just has to be 10 minutes of time to get from door to door. For example, with Capital Hall, you couldn’t walk from Capital Hall to campus in 10 minutes. It would take you probably about half an hour, but of course with Capital Hall, you’re right beside the O-train, the subway line, and the subway stop. You get on the subway right beside your building and then it stops right in the heart of the Carleton Campus.
I’ve done it myself, of course, you can see the video on truecondos.com where I do a full tour and walk you through the actual experience of going from campus, on the train to the building. I’ve done, in time, the whole thing, it’s about 6 to 10 minutes, depending on how fast you’re walking, but it’s about 6 to 10 minutes door to door from Capital Hall to the heart of the campus because you are hopping on the O-train. The nice thing about that market is the O-train is free for Carleton students. It’s mandatory that the transit pass is included in your tuition, so you’re not paying any extra for that and you’re using it in any ways. That certainly hits the criteria there, under 10 minutes.
University Studios in Oshawa, for example, is you’re literally 5 seconds from the campus. You’re adjacent to the campus, you’re walking across the property line and you are on campus, so no problems there in Oshawa. That’s location.
The number 5 of the things I look for before endorsing a student rental project is the ROI. Of course the return on investment. Return on investment, I look at it from a several different angles when I’m doing financial analysis, but at the most basic level, you want to make sure that the return that you’re getting is higher than what you might get on a typical Toronto condo. What I mean by that, is that if you’re investing in the student market, which quite frankly, it is a little bit more labor intensive in the long run, a little bit more involved than renting it to professional tenants. Not in every case but in many cases, a little more hands-on, obviously. Depending on if you have professional managers or not, but in general, if you’re buying a student rental condo, you want to make sure that the ROI is higher than the average Toronto condo.
Partly, to compensate you for your time, that is slightly more intensive, but also because you”re buying in markets outside of Toronto where appreciation rates are not going to be as high as Toronto appreciation rates over the long run. Again, you’re buying these assets primarily as cash flowing assets that are giving you money every single month, that are great for long term holds. Just very easy to rent out, going to give you great cash flow for a very long period of time. If you’re getting appreciation, great, that’s icing on the cake, but you don’t want to be counting on appreciation as much as you certainly might if you’re buying, for example, in downtown Toronto, where appreciation rates in downtown Toronto are going to be an average higher than appreciation rates in a university town somewhere else in Ontario.
That’s just facts that we know from long term averages of real estate pricing. There you go, those are the 5 things that I look for before endorsing a student rental project. Hope you enjoyed this episode. Once again, for the show notes on today’s show and all the podcast, just head on over to truecondos.com/podcast. Thanks very much for listening, and until next week. You have a great week and we’ll talk to you soon.
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