I love investing near major universities. It was a fundamental lesson I learned from one of my real estate mentors and this strategy alone helped me to not just survive but thrive throughout the recession. People go back to school during recessions and financial aid is not going anywhere which is a great source of rent. I currently own approximately 70 units as well as a property management firm near the University of Oregon and am in the process of expanding to other college markets. This article is my research on the different markets surrounding all of the PAC 12 universities and my ranking of each market as an investor.
The national housing market has been steadily improving, with the most recent data showing that home values have risen by 6.5% over the previous year (or as much as 7.7%, depending on who you ask), the fastest growth since August of 2006. This marks over four years of uninterrupted annual growth, and strong fundamentals (including increased borrower strength and decreased unemployment) signal that these growth rates won’t be slowing any time soon.
The national housing market is a simple and easy to understand indicator, but it’s really made up of several individual markets that are all performing differently, and there are better opportunities in some markets than others. We’re looking for the best we can find and, because we love investing near universities as well as PAC 12 schools, we’re starting with cities that contain a PAC 12 university.
The list we’ll begin with is sorted by which market is the hottest, starting at the top. We’re measuring the hottest markets by the median days on the market, which is how long a house will sit before someone buys it. If one house sits on the market for a long time, there might be something wrong with the house while the market is still healthy, but if the median house sits on the market for a long time, then there might be something wrong with the market. On the other hand, lower isn’t always better; sometimes a market can get too hot. We’d like something in the middle, but this is just a starting point.
From there, we’re using two metrics to evaluate how pricey the market is. For an absolute value, we have the median listing price, which is how much you can expect to pay for an average property in that area. For a relative value, we have the price-to-rent ratio. When looking at an investment property, the easiest way to understand the price-to-rent ratio is to think of it as: “If I buy this asset with cash and only count its rental income, how many years will it take to repay my initial investment?” As a general guide for the price-to-rent ratio, anything above 21 is usually considered too high to buy, while anything at 15 or below is considered attractive. This assumes we can’t find a way to raise the rent.
The other two factors we’re looking at are the for-sale inventory and the sale-to-list price ratio. The for-sale inventory number tells us roughly how big the market is. The sale-to-list price ratio gives us an idea of how healthy the market is. If the ratio is 100%, then sellers are getting exactly what they’re asking. This could mean that the market is overheated. The closer to 100%, the hotter the market – if that number is low, then it could mean one of of few things. Either there are great deals to be had, the market could be in a correction period, or the market could be chronically unhealthy. One thing we’re leaving out is income. We’re looking for places where students will rent, and their income numbers are often misleading because they’re usually receiving extra money from student loans or parents.
The good news is that almost all of these cities have a healthy real estate market. The sellers are getting close to what they’re asking, and they’re doing that much better than the national average. They also don’t have to wait too long to sell their properties.
As real estate investors, we can see five cities near the very attractive price-to-rent ratio of 15 (Tempe, Salt Lake City, Corvallis, Eugene, and Tucson). It’s useful to remember that half of the properties in a given market are below the median, so these markets are more likely to have attractive options, and these numbers assume that we don’t make any improvements to the property.
The major outliers in this group are Palo Alto, Berkeley, and Pullman. Palo Alto and Berkeley are small, with just over 50 available properties each, expensive, with median properties selling for more than a million, and on fire, with median days on the market of around two weeks. Pullman’s market, on the other hand, is small but more balanced, with less than 100 properties and a median time on the market that reaches nearly four months. These numbers give us clues about each market’s suitability, but they don’t tell us everything about the market’s future. We’ll take a closer look at each city later on.
What we’re targeting is a city (or neighborhood) that has a stable source of rental demand secured by a university. This can be anywhere you find a university, whether it’s a college town or a major city, but we believe that it’s better to look for the college towns because there won’t be as much competition from other buyers that have access to high wage employment.
So, as a proxy for the university’s influence on its city, let’s compare the size of these cities to the size of their major PAC 12 universities. Hopefully this will give you an idea of how big the university’s influence is on each city’s housing market.
The results are a little strange because some students count as part of the student population but not as part of the city, and we’re dealing with a few massive metro areas: Palo Alto and Berkeley are part of the Bay Area that includes San Francisco. Los Angeles is part of the second largest metro area in the country. Tempe is so close to Arizona’s capital, Phoenix, that it’s almost the same city. Seattle also has a major metro area, and a tech scene that is second only to the Bay Area’s. Salt Lake City and Tucson are a little smaller, but they still sit within metro areas of about one million people. These cities are part of urban centers that are so large that we can’t fully count their markets as traditional college towns, even when the university is a major source of the city’s culture. Bigger cities have more high-earning buyers to compete with and are more likely to be rent-controlled—both negatives for real estate investors.
There will be some disagreement when it comes to the culture of a city but, based on population and the size of the surrounding urban area, the most traditional college towns on the list are Corvallis, Boulder, Eugene, and Pullman. Pullman is on the extreme end, even when it comes to college towns; not all of the students are residents of the town, but it’s obvious that the university overwhelms everything else.
However, whether the city is a major metro area or just a college town, there may still be opportunities for choosing the right neighborhood within a large city, and there may be problems with choosing the wrong neighborhood in a college town. That’s why it’s useful to examine the market conditions a little closer.
We have three questions that will help us find the right market:
The first question we’ll need to answer is: “Can we find the students?” Most major cities have strong commuting infrastructure that allows the student population to spread out and live away from the university, while traditional college towns have a concentrated area that is populated mostly by students. In either case, the fastest way to get this information is by asking the students where they live.
The second question we need to look at is whether or not the real estate market is healthy enough and attractively priced for an investment. The housing market trends and price-to-rent ratio are good indicators for this question.
The third question involves the future of the local market and the competition for housing. If a university is expanding one of their programs or their enrollment, they will bring in more students, and that’s good for the local market. If a university is building new residence halls, that’s new competition with the potential to drive down rental rates. The biggest real estate markets also attract competition from large developers. It is also worthwhile to look at the general growth of the city surrounding the university. If it is growing, then this can act as a multiplier in a tight housing market. If it is shrinking, then it can have the opposite effect.
So, keeping in mind our general analysis from above and our three important questions, let’s quickly run through each PAC 12 city and see which ones are the best for real estate investors.
We’ll start with the Bay Area cities.
PAC 12 Bay Area Cities
Palo Alto, CA, home of Stanford, and Berkeley, CA, which houses the UC Berkeley campus, are the two PAC 12 cities that rest inside the Bay Area, a metro that often makes headlines for having exceptionally high rental prices.
For Stanford, over 90% of the undergraduate students live on campus, so it’s unlikely to be a suitable target for investors seeking student housing. Berkeley is a little more attractive, with just 27% of the student population living on campus, but with many Berkeley students commuting from Oakland where housing is cheaper.
Both Stanford and Berkley share the Bay Area’s hot real estate market, with the median home selling about two weeks after listing. It’s also an expensive market with median listings of $2.5 million (Palo Alto) and $1 million (Berkeley) that are only going up—the average home seller in these two cities is getting 5% more than they asked for in Palo Alto, and 15% more in Berkeley.
The Palo Alto market is just too hot, and doesn’t contain enough students to be worthwhile.
Berkeley is a little more intriguing, but has a similar sensitivity to the rest of the Bay Area, and the university is currently building a new residence hall for 775 students.
Berkeley is more affordable, but the entire Bay Area market is just too hot right now, and it’s saturated with big tech money. Both of these markets are overheated with prices driven by tech money and speculators rather than the economic fundamentals of the asset. There are better investment options in the PAC 12.
Los Angeles, CA
Los Angeles is probably most famous for its influence on the film industry and as the home of Hollywood. L.A. is home to two PAC 12 schools—USC, near downtown, and UCLA, closer to Beverly Hills.
Let’s start with USC.
The neighborhood that encompasses USC—known as University Park—has a reputation for excessive crime. Students are often warned to consider living downtown or somewhere next to a freeway or a metro line. This makes it difficult to pinpoint a student housing market, though L.A. zip code 90007, which includes the area surrounding the university, is a good place to start.
USC already performed an exhaustive analysis of the surrounding area, publishing a 180 page report titled “USC State of the Neighborhood Report 2015.” What they found was that the median rent near the university was $895, compared to $1,156 for the rest of the city. But, with 82% of the properties surrounding the USC campus being rent controlled, there is very little opportunity for development. In response to overcrowding, the university recently began constructing new residence halls that will hold 2,700 students and that are expected to be finished sometime in 2017.
Given the unfavorable investment environment and the new construction underway, USC student rentals don’t appear to be worth chasing at this time.
So what about UCLA’s neighborhoods?
UCLA is difficult to evaluate for the same reasons as USC; there are many easy opportunities for students to commute to the campus, including L.A. suburbs such as Santa Monica and Culver City.
Here’s a quick look at Westwood, the neighborhood immediately surrounding UCLA:
- Median sale price: $943,000
- For-sale inventory: 114
- Median days on market: 27
This is a market that is almost as pricey and almost as hot the ones we saw in the Bay Area. West Los Angeles (median sale price of $1.2 million), the neighborhood right next to Westwood, and Santa Monica (median sale price of $1.5 million), aren’t much different.
Potential student housing in this area would be most appropriate for major projects from large investors, but prices throughout the city are less attractive than the other options on our list.
Tempe, AZ
Tempe is the city surrounding Arizona State University (ASU), a college that routinely tops the list for total enrollment at a public university campus. The student population from ASU makes up nearly half of the city, though not all of the students live in the city—many ASU students commute from the nearby Phoenix area.
Tempe contains a relatively normal housing market, with a median listing price of $275,000, and a number of median days on the market that is close to the national average. It’s also a big market, with 486 units in the for-sale inventory, and is attractively priced for investors with a price-to-rent ratio of just under 15.
This sounds promising, so let’s pull up the trends:
The housing inventory has fluctuated and doesn’t show a clear trend, but home prices have steadily increased, and the price-to-rent ratio remains steady near an attractive level.
However, the city has significant new developments that are targeting the student population. The university is constructing a student residence hall that will accommodate 1,600 students and should be finished in the fall of this year, as well as a new development within two miles of the campus which is expected to add up to 688 apartments in the next two years. If the university is growing or the surrounding city is seeing a large population increase, then this could be a good fit for investing and may warrant a trip to investigate the market in person.
Seattle, WA
Seattle gets a lot of attention thanks to its professional football team, its world-renowned coffee, and its vibrant tech scene (Amazon and Microsoft headquarters are both within the Seattle metro area), but there’s actually a PAC 12 university there too.
The University of Washington is predominantly a commuter school, and Seattle’s commuting infrastructure makes it just as difficult to evaluate as Los Angeles. There are, however, lots of options for students who want to live close to campus.
Seattle’s housing market is famously expensive (the average home listing price is $585,000, not far below L.A.), and the city’s price-to-rent ratio of 19.7 means that there won’t be many good deals available for investors. That said, let’s take a look at Seattle’s housing market trends.
While Seattle’s inventory has remained steady, home sale prices have climbed dramatically over the past five years and at a speed much faster than rent. This is a market that will become more attractive when the price-to-rent ratio drops back to a more normal range. Although the university is currently planning to add 400 additional beds in an upcoming renovation next year, at a university of this size it will likely make very little impact.
For now it’s best to wait.
Salt Lake City, UT
Salt Lake City is probably best known as the headquarters of the Mormon Church, and for hosting the 2002 Winter Olympics. It’s also the capital of Utah and home to the University of Utah.
Salt Lake City is the smallest metro area on our list so far with about one million residents. While big and busy, university is not as much of a commuter college. Although 87% of the students live off-campus, the neighborhood surrounding campus is quite popular and has a high concentration of students.
The housing market in Salt Lake City is comparable to the national market, and it carries an attractive price-to-rent ratio of just under 15. Here’s how that number has changed over the past five years:
Price/rent ratio is still at an attractive level, but the recent trend upwards is quite clear—this market may become unattractively priced by the time a new investment can be made.
Competition for development in the area is also increasing. Utah is now the fastest growing state, with the media labelling Salt Lake City “Silicon Slopes” thanks to the number of tech startups popping up. Salt Lake City is also booming with major new developments along the edges of the city.
There may be room for some attention to the student population, as most of the news we can see about Salt Lake City involves major new developments that are unrelated to student housing. With an attractive price/rent ratio and a tech boom taking off, this is a very worthy place to investigate.
Corvallis, OR
Corvallis is a traditional college town- Oregon State University students make up over half of the population, and it’s about ten miles from the nearest interstate.
The housing market in Corvallis is small,with 178 units of for-sale inventory,but stable and attractively priced. There isn’t much activity on the development front, so let’s take a look at the current trends:
Corvallis may be a small college town, but its housing market has been slowly heating up over the past five years. Overall inventory has been gradually declining with average number of days on the market shrinking and home sale prices rising dramatically. At the same time, the price/rent ratio has stayed within a very attractive range.
With a median listing price of $349,000, the Corvallis market is definitely worth pursuing by a real estate investors.
Boulder, CO
Boulder, the Rocky Mountain city just outside Denver, is a popular tourist destination but it’s also more of a traditional college town, with the University of Colorado accounting for roughly one third of the city’s residents.
Boulder’s price/rent ratio is just above the “too high” cut-off line of 21, and the city has seen housing prices rise dramatically in the past five years, now boasting a median listing price of $730,000.
A likely reason for the recent jump in prices has to do with the city’s numerous building restrictions. For example, building heights are capped, expansion near the mountains is effectively banned, and the city places limits on where student housing can be built. Investors looking in this area would likely be betting on further price appreciation because the housing prices have outstripped the rental rates over the past four years. Unless you really like skiing and tax deductible trips to watch the Buffs play ball, this should be a pass.
Eugene, OR
Eugene, another traditional college town, is centered around the University of Oregon. Because we’re headquartered in Eugene, we’re extremely familiar with the market.
Eugene’s market is affordable and healthy, with a price-to-rent ratio of just over 15, and it’s about to become even more attractive. The city’s future will be pushed by a catalyst that won’t show up in the historical data—last year, Phil Knight pledged $500 million to the University of Oregon to build a new science complex, the largest ever donation to a public university.
The donation is expected to add another 30 researchers and 550 students, as well as over 2,000 jobs between construction and support of the new building. More jobs means more economic activity, and that’s good news for real estate in the area.
Eugene appears to be one of the more attractive options on our list. The state of Oregon is also one of the fastest growing in the country, which makes both Corvallis and Eugene highly appealing. The Eugene airport is 20 minutes from the the University of Oregon and 40 minutes from Oregon State, making research on the two markets a two for one deal when it comes to site visits.
Tucson, AZ
Tucson, part of a metropolis containing roughly one million people, is a popular destination for “snowbirds” who retreat to their secondary southern homes in winter. It has a vibrant technology economy based on optics, and holds the University of Arizona and the Davis–Monthan Air Force Base. The university is a very small part of the city with 80% of its students living off-campus.
Tucson has the lowest median listing price of any city on our list, at $179,000, and the lowest price/rent ratio, just below 13. However, major developers in the area are now targeting the university. A 104-unit student housing complex was just built near campus, and another student housing tower is rumored to be in the planning stages.
There may be competition in this market for real estate investors, but it’s still attractively priced. This market warrants investigation and potential investment.
Pullman, WA
Pullman is unlike any other city on our list. The town’s university, Washington State University, is pretty much the entire town. It’s only nine square miles and it’s really far away from everything.
The phrase that best describes Pullman is “no data,” but if we can uncover some housing trends, then this one might be a hidden gem.
This looks like a market that is slowly becoming healthier, but doesn’t have much room to move. Inventory is dropping while the median days on the market (although unusually high) is also steady. Home prices haven’t changed much over the past three years.
The latest reliable rental data we can find, from 2013, lists the median rent at $452. This leads to a price/rent ratio of over 40. That’s too high for a town that shows no signs of growth, but that’s data from 2013, and rents were on their way up—the only way to be sure about the current market conditions would be to visit the area.
How They Stack Up
Now that we’ve examined each city in more detail, let’s re-rank our list by which cities present the best opportunities for real estate investments targeting college students.
As you can see, traditional college towns aren’t universally better places to invest, but they do make it easier to find potential real estate investments. It’s also true that the cheapest isn’t necessarily the best. What we’re looking for is a city that is priced to do well right now, but that also has a promising future.