Building a Billion Dollar Business Renting to College Students - Dan Bernstein

Renting to college students. Now some clients of mine, they run away from that.

We're not looking to be the highest rent or the have the most amenities. It's not an arms race when clients

are in the high school stage with their kids and they're looking for the next rental property. I'll say one of your best renters is yourself. Welcome everybody, to another interview here on Main Street America. I'm here with a mogul in the real estate industry in campus housing. We're here with Dan Bernstein. For all of you budding real estate investors, you're going to love this interview. Dan, thanks for being with us.

Mark My pleasure. Thank you for having me.

Do you get called mogul very often? Is that kind of.

No, I was about to say was, I was thinking makes me feel a little uncomfortable. But I appreciate the context. And our company is a mogul within.

There you go. There you go. Well, Dan is the president and chief investment officer of campus apartments, a $2 billion business in the space of campus housing. I know you're, you're leading in the industry and it's an honor for us to have you here with us because all of us little, little real estate investors want to learn what you Learned through your 30 year trek through this space from the very beginning. So again, thank you for sharing your wit and wisdom with us.

We really appreciate and looking forward to it.

Okay. Now if I'm correct, you started out in Philadelphia with the company when it was just, you said, a row house of just some basic apartments and a vision. Tell me how this whole thing got started and how some people can actually dream and go, maybe I could do that or at least something like it or part of it. How did it all start?

Well, it's a great side. I'll back up by saying the way the company was started was and I'm sure hopefully the listeners will appreciate this. Our founder years and years ago was literally driving to down the street with his mother and saw a line out the door and they inquired. They had owned some real estate in another area in Philadelphia and they found out that it was people waiting in line to lease apartments. And it was one of those aha moments. So they started one, literally one property back in 1958 and to the next property, to the next property and built a very substantial footprint at the University of Pennsylvania. And, and I mean an amazing portfolio. So he really did start that way. And I started in a similar way, not from the investment side, but I happened to see that same line out the door. I was A sophomore, second semester sophomore at the University of Pennsylvania.

So you were in the line?

Well, actually, I was coming to pay my rent, truth be told. And I made friends with the people in the front office. And I always laugh and say I made the mistake of asking if they needed any help. And here I am today. So by the time I was a senior, I was working almost 30 hours. I was working. I was the Saturday guy. I was doing all types of jobs from leasing apartments to accounting. And I really wasn't planning on being in the real estate business. But my partner, our CEO, David Adelman, came aboard, and he's a very, very ambitious guy and had a plan to try to. Or at least an idea to want to grow the company and thought that we had something that was scalable. And. And I thought so, too. And that's. We were all kind of off and running.

Wow. Okay. And so now just fast forward. We got a lot to unpack there. But how many college students are you providing? Do you know the number, like, today? I mean, not doors, but like actual students. Are you providing housing for this fall or. I guess we're in the spring here, but coming up, maybe on the next school year. You're already signing leases, but what.

Well, the number vacillates, but we're approximately 24,000. We call them beds, which are truly heads or pillows. So that's the amount. That's the amount of students that it would equate to, which is pretty, you know, a pretty awesome responsibility.

That is. Okay. So renting to college students now, some clients of mine, they run away from that. They're like, oh, there's too much work. You know, I'm gonna. My duplex is too valuable. I don't want college students in their partying or whatever. And we want to talk about administrative strategies here, too, but just from a risk factor, then I have clients that just rush to it. They're like, I can put two kids per room. There's more revenue. I can put in the right parameters. I mean, do you see it as a risky market? Have you tried to eliminate all the risk? And how do you deal with a college student tenant in that space that seems riskier?

You know, it's funny, we always got that as before the space really became institutionalized, which it took a while to do. People, whether it was the investment community, bankers, the capital markets, or just most folks kind of equated student housing with animal house. And they probably thought about how they lived or some of the group living and all the wear and tear and they're not wrong in many cases. But as the years went on and you find true vertically integrated companies like ours who specialize in operations, there are, you know, ways that you can kind of curb some of that. I mean, for instance, we do quarterly inspections. So you know, if folks are going home for a break and we've done an inspection, they might be sitting with mom and dad and you know, there's a, there's a notice that something may have been broken or whatever the case is, and they have to replenish the security deposits, so forth and so on. But really at this point, we've actually tried to offer students a better community and a more, I mean, what you could almost say like an upscale and upscale is probably the wrong word, but more of a community that they want to be proud of and they want to take care of as well. And student housing has really evolved that way. So they become more, you know, especially in the purpose built student housing, which is kind of. When I was going to school, there was no purpose built student housing, meaning like it was, it was old row homes or you know, small format apartment buildings. And now these buildings are really tailored to student. They have either bed, bath parity or something close to it. They have a, you know, very intricate or expansive amenity footprint, which is great. I mean, so these.

You're so, you're so politically correct because what you're saying is, Mark, we're not a slum landlord, we're doing bougie college housing. That's.

Well, but we're so in some cases. But really, actually it depends on the market. So we often buy class C or class B minus properties that might be proximate to campus, you know, at a various location. And we're not looking to be the highest rent or the have the most amenities. It's not an arms race because we saw in that particular investment community, we study the, the demographic, the psychographic. Is there a high out of state population, which sometimes means maybe there's a bigger draw or a little bit more affluence. But we really study that demographic and we'll say, okay, we don't need to develop a brand new, highly monetized project. We can buy something close and proximate, add some capital, certainly professionally manage it, but some type of value add and maybe take it from a lower part in the, from a rental price to, you know, the next level, but not trying to be the highest price. And that's where the depth of the pool is in that particular market. So our holdings are very, very I guess diverse for lack of a better term. So we have the purpose built high rises, brand new, highly amenitized, high rents. And we have 1985 garden style, two story, you know, apartments that will redo the kitchens and the bathrooms. And so it really has to. Our investments really have to fit the marketplace.

Wow. Okay, now if there's anybody I can ask this question and it's not Sports Illustrated, which is the biggest party school. I mean, you've got to know with all of your students out there, come on.

Yeah, well, you know, it's. I can give you my own rankings, but I would say lsu, we have a pretty large footprint at LSU and they enjoy themselves. University of Georgia, but you know, Michigan, you know, we've got two properties at the University of Michigan. We've got the University of Tennessee. I would, I would maybe give it to the SEC schools, maybe that follows some of the football. But it's so. Yeah, it's. But I also wouldn't snooze on some of the smaller schools as well. You know, we've got stuff at Emory University and they enjoy themselves.

I love it. I've got some more, you know, inside info we need here in a minute. But okay, so let's say, I mean, you've had to have learned so much. I mean, it's just like you can't go to school and learn how to be a landlord to college students. I mean, it's just that you learned so much over the years. So let's say, I mean, we could be here for days, but let's say there's a new real estate investor out there that's like, hey, I'm going to pick up this little fourplex, it's near a university. I'm going to put two beds per room. I'm going to go women on this one, men on this one. We're going to come back to that. But I mean, just they find it. You are so automated now and institutionalized for efficiency that maybe a new investor can't, you know, afford to go there. But what would be if you could, two or three tips that just come to mind. Like, man, if I would have known this freaking 30 years ago, I would have done this better or this better. When you're just kind of trying to get that figured out, what comes to mind.

So certainly operations and the maintenance side of it and also really just making sure that you'll keep the property leased and it all goes back to being able to pay your mortgage, which I think as a small investor you want to make sure that you've got the reserves just in case for some reason it didn't lease the next cycle or you know, one of your properties or one of your, you know, can you weather that storm? Or if something goes in the property, whether it's from damage, which again, hopefully through, you know, some proper administration or good property management, you can, you can curb that. But you know, if a, you know, H vac system goes or there's a roof issue. So always make sure.

So have good reserves.

Yeah, have good reserves because, you know, you never know and, and make sure you have enough in reserve to, you know, be able to keep the mortgage payment going for a couple of months if you have a vacancy or a turnover or some unexpected. And then as you build a portfolio more and more, then there's more cash flow and, and it makes it a little easier there. But don't get over your skis, I think is probably the main.

Don't get over your skis more reserves. I love it. What, what about, what hits me every time I talk to a client about this too is do they do lease agreements per semester? Do they do the year, do we let them sell their lease agreements? What do you, what are general policies that. I'm sure you have them all of all, everything in between, but what do you like?

So student housing. And again, if you're a small investor with a duplex, you, you may have a bit more flexibility. But the way that the industry has gone is, you know, at least in our holdings, we're exclusively 12 month leases. We may do some short term leases for folks that we know we can rent in another semester or we allow people to sublet, but by and large the 12 month lease is the way to go. And also a bit of a trick of the trade is, you know, in student housing, it is more operationally intensive than that of multifamily or some other sectors. And it's like for example, for example, higher leasing costs and it's also cyclical. So your turn costs, students turn, you know, you might be able to get them for two years, sometimes three years, but maybe one year. And so you're turning that more than, you know, a multifamily resident that's a little stickier maybe will be a few, a few months.

So you got to paint again, you got to go in and fix again and right.

So that's, I mean to me those are the, you know, the things that you have to look out for. But, but you also need to create a small gap to be able to turn that apartment. So we rent in what's called, you know, it's their 12 month leases, but they're really 12 installment leases and it's 11 and a half months that they live there. And if you talk about, and this is, you know, talk about a daunting task, we, we turn the majority, the super majority of our entire portfolio in two weeks all across the.

Holy smokes.

So preparation ahead of time for that is really crucial. And that's why student housing operations is different from others. But again, going back to maybe some of your investors that might be listening to the podcast or. But you can take, you know, little nuggets from that and you know, make sure that you're preparing yourself in the same way. And then of course, if it's on a larger scale, it's, it's just on a larger scale.

Well, and it's, and it's the cost benefit. You're like, hey, there's some costs in here. You got to turn it, you got to do it quick. You got to do all these things. But per square foot, you might double the rent because you've got two beds per room. You're getting a, so a normal duplex.

So, so when you're, when, you know, again, I guess maybe another tip might be that while increasing density always increases the cash flow and is helpful, you just need to make sure ahead of time before you make that investment. That, that's the type I, you know, referenced before certain demographic or psychographic. You know, because markets are nuanced and student bodies are nuanced. You know, are they used to living in, you know, double occupancy rooms? Is that what that school generally offers? A lot of times in urban environments, you do see that a ton. So that may be a way to increase cash flow and you know, and create additional density. There might be other markets where that's not, they can go and find another apartment based on the supply where for a relatively similar price they have a live alone option or maybe even their own bathroom. So there's a lot of homework that needs to be done. Even at a small investment size, I mean, you might not be able to, you know, theoretically you can lease out, you know, a smaller unit a little easier than like a very large apartment building. So maybe it de. Risks it a bit. But I would still be very careful and make sure you do your homework and understand that that tenant base and what they're used to, what the references are.

Okay. And I've got a couple really insightful questions. I, I think this is insightful you might find it inside. Hack. Okay, now, I mean if we have to cut this out of the interview, I get it, but would you rather rent to a girl college student or a boy college student?

You would be completely surprised about this. And I would tell you that the girls can be just as sloppy, just as dirty as the guys are. And it's. The guys get a bad rap. And I'm not sticking up for male rentals just because I'm a male renter.

But.

But I remember being on a diligence trip at Syracuse University and it was a scattered site portfolio that we had bought, by the way. They also enjoy themselves and like to have a good time. I'd throw them up there in the ranks.

Throw them a bone.

Right, exactly. But the. Yeah, so I said sec, but Big ten too. But the. On this diligence trip, we walked into a one building that was all females. It just happened to be that way. It wasn't rented in that fashion. And I will tell you that the one room after the next was more disgusting than the others. The kitchen, the things. I was absolutely shocked. So I don't think it. Clothes all over the floor, but dirty dishes and you know, doesn't look like it's been vacuumed, so it's really tough to say. I would say on the whole though, probably I'd lean female, but it's not really a clear cut.

It's not.

I've seen. I've seen some things, Mark.

I bet you have some good stories. I bet back in the day when the police would call you at 2 in the morning, now you got people for that.

Yeah, well, it did happen, but you learn from that too. So.

Wow. Okay. So kind of a bigger question. In fact, this is really something I'm sure you as chief investment officer are doing. But even again, for the small mom and pop looking in their geographical area, there might be some colleges around. Which college have you looked? And I don't know if this is bad to ask, but what college town or college have you looked at and said, yeah, we don't want rentals around there. It doesn't work. There's too much college provided housing or there's something. Is there as an example, one place you went and then decided to not

invest or there are. You know, we have. We're incredibly data driven, so. And I think that's our secret sauce. So we have a way of taking third party information and porting it into a proprietary system that allows us to sift through, you know, various data points and create what we're looking to do at the end of the day is create transparency like you know, in these markets and understand no surprises. Yeah, Supply, demand and you know, top line data can oftentimes be misleading. So you know, there are, we rank our markets, you know, like in a.

Okay, hold it. Before you tell us which market, which, which data line do you like the most? Like that's the one where I like. I'd love to see that number. There's one probably you love.

I'll tell you the. Oh, I'll tell you some of the ones that you make up that I enjoy. But I like the output which is, is it going to be a red flag market, a yellow flag market or a green flag market? Like almost, you know, this, the stoplights about what we want to do. So you kind of read left to right and that's how we kind of come up with our, our decision about, you know, do we think that this is an investable market from afar and then of course we will hit the ground and go there. But we like to look at obviously supply demand fundamentals, the amount of on campus housing and off campus housing and then what type of off campus housing is available. We get so granular. We look at, we're reading universities, you know, 50 year plans, 100 year. I mean these folks think in, you know, in large blocks. So oftentimes they telegraph, you know, what they're trying to do or where they want to be program. But we love a large, I would say if we had to pick one, I oftentimes like the, a high percentage of out of state students and what that can tell certainly at, you know, at some schools it's not a, it's not a fail safe, but that there might be a higher level of, you know, disposable income at play because they're paying the full rate as opposed to an in state student. That's not. So you start to give to your student potentially, you know, or they really want to be there for certain. And it, it kind of speaks about, you know, the value proposition of that particular school. You know, whether it's, you know, something that it's because of the programs or because of the lifestyle. You know, oftentimes, you know, a lot of we joke but a lot of investors look at, you know, football rankings, which is it's not the be all end all about how kids are making their decisions about where to go school, but oftentimes that rah rah and that sports program and how it's done, you know, you get a bump At Texas A and M from, for instance, when Johnny Manziel went through, there was a big, you know, enrollment bump, you know, the next year and, and the like, and Clemson wins, where we have property, a national championship. And you can see interest growing in it and, and it draws a lot of out of state students who are again, paying the full amount. And I'm sure, you know, it doesn't mean that the school doesn't have great programs, but there's some other factors in play there. So. So we like to see a high percentage of out of state students because, you know, that's typically a good sign that people want to be at that school. It's not just an in state cost thing.

I love it. I love it. So what you're saying is you're rooting for the schools where you have apartments. Cause you're like, I want them at the top. So Nebraska, their fall from grace is terrible for you.

Well, we're not in Tuscaloosa. We've looked there often, you know, and there's a lot of off campus student housing. There's, it's a, it's a renters market there and the, it's gone up and down a lot of, you know, sometimes places get overbuilt and then they come, you know, enrollment grows and they grow into it. But we are absolutely rooting for the schools that we are. And I have a lot of split allegiances too, so.

Wow. Very, very interesting. Wow. Where do you, what do you see? Do you see universities building more on campus housing or are they trying to get away from that? The capital intensity of that. They'd rather see hedge funds and companies like you come in and say, take care of our housing. We don't want to deal with it.

You know, it really does vary, but there certainly is a trend. I think on average schools house somewhere between 25 and 30% of their students or they have enough beds for them. That changes at urban schools where, you know, that's a barrier to entry sometimes for kids to go to school in like New York or Boston and because of the high rent, so they have a, you know, an inordinate amount of on campus housing. So, but, so again, it does fluctuate, but most schools don't have the capital or the desire to house all of their students. So they let the market be efficient and you know, and you know, have the ability to offer for whether it's sophomores, juniors, seniors or some collection thereof. So it really, you know, it kind of depends, I guess.

Do you see a distinction between married housing and single student housing. Or is it, does that play into your buy box?

It does. You know, we're, it depends again on the school and the nuances there. And to get back to the question I was answering a moment ago, because that's a good one. So you see trends sometimes where a school will say I need to offer more graduate housing, but it's expensive, but they're trying to push or grow their graduate programs. And sometimes it doesn't need to be, I should say, at the cost of the undergraduate. So they look to the private markets. You can do public private partnerships, which we've done, where we're either using our own balance sheet to erect the improvements or we're floating tax exempt bonds and, and the school or related foundation will own it. So you're seeing a trend there. And when you say like married housing or non traditional housing or graduate housing, again, they'll reach out oftentimes to the private sector to help them with that. And again, really depends on the programs the school is trying to highlight and those needs. So for instance, right now we are planning pretty large graduate housing program at the University of Maryland and they've made a decision where they need more on campus graduate housing, you know, in an affordable and professional format. And so they've reached out to us and our partner and we're in the planning stages of that. But again, they're, they're focused on their graduate students right now and they have enough on campus undergraduate, and they're still certainly enough off campus housing there to, you know, to fill the market.

Wow. Wow. Okay, now maybe one other inside question here. Have you rented to your own kids when they gone to college or said no?

Mark, I think my biggest failure, as you know, in the student housing space is that I could not convince two of my three college age kids to go to a school that I actually had property at. And it's, it's amazing. You know, the whites and we, they looked and they looked, but they chose differently. So one's at the University of Vermont, the others at Northeastern, and unfortunately we don't have properties there. But I actually did see something come on the market at Vermont, so I'll take a look.

You're not paying rent to someone else? I don't know. What are your thoughts on that? Any tips? I mean, I guess you're kind of looking at Vermont now, even kind of.

So there were, there were a lot of, there was a trend where even for a while the term or the concept of kiddie condos came up. Where parents would buy or people would offer and sometimes converting traditional apartments into condos, a place for them to buy. And whether they had their kid in there for the time that they were allowed to live off campus and then maybe held it if it was at a school, school where they were, you know, supportive alum, you know, alums and wanted to go to various sporting events or cultural events. But that kind of phased out a little bit and, and I actually think it's a, it's a great idea. But what you really have to be cognizant of is who is your buyer at the end of the day. So you might be able to, after your kids have gone, you may be able to fill that rental. But if you're looking to, to harvest that asset at some particular point, is there another small kind of smaller format investor that would just buy a single property or the like? And so you really have to think about sometimes the exit there. And I think a lot of folks got caught where they were buying condos and then if the condo market was in a particular slump at that particular point, or even the real estate market at large and they weren't planning on keeping it for an extended period of time, they kind of got caught and weren't thinking about that. So know your plan ahead of time, I guess is the, is the advice.

I love it. I love it. Wow. Just insightful info. Dan. This has been wonderful. I thank you for letting us have a little fun here too and talk about such an interesting topic. Anything that's new and cutting what's, what's on your plate. Now in summary, that's just kind of exciting or interesting that you'd be like, you guys don't even know, you know, a little something. I don't know.

Sure. Yeah, well, I would say that. And it's really a plug for the space and your investors that are looking to get in because the underlying fundamentals in student housing have never been stronger. I mean in the 30 plus years I've been, you know, investigating and investing and just, just kind of looking at the space. It's, it's absolutely incredible. Occupancies are at their all time highs in the, you know, mid to upper 90s. The, and our portfolio sits in the same, you know, same space. We've got incredible rent growth that we've achieved over the last few years coming off the pandemic and even through the pandemic. So record levels where you've got double digit rent growth were. We had a portfolio of five assets that we had out on the market in the fall. And the combined rent growth with those five assets was over 16%. One of them was 22.6% and the facility leased up in a week. So you're just seeing so again and supply is down. So we've had the, I guess the fewest starts in the last couple of years and it's, it's, you know, planned that it'll be that way probably for another couple of years at least. So obviously that's good from an ownership side if you're on the development side like we do as well for some of our investments. It can be challenging, but it's great just in terms of how tight the space is and your ability to, you know, maintain high levels of occupancy, see and get great rent growth. So, you know, that's, that's really what I'd love to tell people. Student housing, right, it's having a day. But even when the macro economy or other real estate sectors are not having a great day, the best thing about student housing is that it is recession resistant. A lot of people used to say recession. Nothing's recession proof, but it is recession resistant. We saw it hold up incredibly well during the great Recession and we saw it hold up, I mean if there's something better than incredibly well during the pandemic and coming out of the pandemic. So you know, we, we believe that from a real estate class it offers incredible risk adjusted returns and you know, and it's again, it's just, it's countercyclical in many ways. Again when you're measuring against the macro economy and you know, even when things are down, more and more kids want to enroll in school. So just a, just a, you know, a good period. And we see that continuing on.

Wow, thanks for that industry outlook. Mr. Dan Bernstein man, president of Campus Apartments and there'll be another fund soon. So if people are interested in what Dan's doing, get over to campusapartments.com and start following them. They've got several social media platforms so you can see what's on their plate. And coming up, Dan, thank you again. Really appreciate it. It's been fun.

Mark, it was a, it was a pleasure. I enjoyed talking with you and hope to talk again with you.