Venture Capital Investing: The Student Housing Market

When moving an object, the most effort is exerted to overcome the energy barrier of the object. In business, funds are gathered to begin the operations (movement) of the business. Gathering and managing how these funds are used in the initial stages of business development is important to the overall success of the business venture. With each business venture is an objective. While some objectives aim to be non-profit, most others operate under the objective of achieving the maximum profit possible. With the general objective of profit, a financing plan to raise capital for a new venture can be developed. Financing plans consider questions such as “Where will funds be acquired and how will they be used?” and “What are past and current techniques used by businesses that can be utilized or discontinued in future practice?”, as well as other questions. The business venture that will be assessed takes place in the student housing industry. There are several characteristics to the industry that make it highly suitable for investment. As a college education is becoming increasingly necessary, the housing market recovers from a severe recession and financial institutions continuously looking for limited risk investment opportunities, the student housing industry presents great opportunity to meet the objectives of all parties involved. This paper prepares a financing plan to raise capital to enter the student housing market using the major course concepts covered in the Venture Capital Investing textbook (Gladstone, 2004). There are several reasons leading up to the financial opportunity presenting itself today as an investment in success.

The United States has been a leading innovator in development since the industrial revolution. After WWI and WWII, veterans returned from home and procreated the generation known as the “Baby Boomers”. Housing developments on the outskirts of cities were rapidly developed to match the unprecedented need for housing in the United States at the time, with the leading company being Levitt and Sons (SMOP, 2003). There were many big players in the housing industry that made homes affordable to millions of families looking to settle. From this, the “American Dream” was born. A major difference between the United States population back then and today is the rate of attending college after high school. Statistics gathered from the national center for education statistics show the rate of high school students going on to college in 1960 was 45.1% (NCES, 1999). This proportion has grown to about 70% according to the most recent census survey. With the rapid advancement of technology and outsourcing of labor-intensive jobs, a college education has greatly increased in demand. With the increased demand in higher education, the rising demand for student housing increases as well, as they are complementary goods (Pindyck, 2005). As complementary goods, a change in price or quantity demanded of one goodwill directly affect the price and/or quantity demanded of the other. There are distinct features of the student housing industry that make it different than the housing industry as a whole. 

There are features to the student housing that make it different than the housing industry that need to be considered, some as benefits and others as costs. One feature of the student housing industry is the continuous shifting of tenants from one semester to another. Students typically sign leases for a year at a time and choose to sign for another year or look for another place. A new class of freshman substitutes the graduates and the cycle continues. This differs from the housing industry as a whole in that families that rent or buy tend to settle in these homes for long periods of time.  This can be looked at as a positive gain in that there are opportunities between each move to upkeep and maintain the property at optimal value. It can also be looked at as a cost in that new tenants need to be sought each year. However, with proper marketing techniques and simply displaying the listing where it will be seen, it is almost certain the housing will be sought by a group of 3-5 students in a university town of thousands. 

Another difference between the student housing market and the housing industry as a whole is the pricing techniques that can be used in each. Students typically face the option of renting by the semester or renting by the month, depending on the area. A semester rent could range from $2100-$3200, depending on the place and area. A monthly rent could range between $400-$800 a month, depending on the place and the area. The student housing market differs in that rent is collected from each student, as opposed to one family or unit as a whole. Assuming rent is paid by all tenants, the owner of the property looks at revenue between $12,600 – $28,800 a year depending on the rent and tenants per house. A house may be a limited venture in that it can only contain a limited amount of people. To increase the profitability, generally the objective of the venture, a housing complex should be taken into consideration. A housing complex differs from a property acquisition venture in that it concentrates the efforts that would be made on a single home into a group of homes all connected together. An advantage to a housing complex is the feature of uniformity, in that all units are typically the same in features, costs, etc. A 6 unit housing complex that can house 24 students, 3 to each unit, at a rate of $2400 a semester, $4800 a year, generates revenue of $115,200 per year. A 6 unit-housing complex is about the size of a large $800,000 house, makes possible the timely repayment of the financing. 

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If there is profit to be made in one housing unit, there is 6 times the profit to be made in a 6 housing unit complex. Not only that, but this includes owning the property from thereon. It should be noted these numbers are also hypothetical. Buying land in a rural university town is different than a city university area. Financing for this plan can be done using several methods. Start-up capital can be acquired through personal funds, interested investors, etc., but the most common way is through a financial institution like a bank. Once a business account and relationship have been established with the bank, the venture can be presented to a loan officer. The plan is typically straight forward in that it can it involves the purchasing of a property, existing or built new, for X-amount of dollars. The amount is presented and the property is acquired and set up for operations, along with tenants acquired. Finally, rent is collected each period for the expected revenue, which is paid back to the bank. A 6 unit housing complex divided equally generates the expected revenue of $115,200 a year. The cost of the property could range anywhere from $500,000 to $850,000, making the repayment possible within a period of 5-8 years. The property value varies depending on whether the school is urban or suburban, in high demand or low demand and the quality of the property. Then, with the property fully belonging to the venture owner, revenue made minus cost generates a tremendous amount of profit annually. 

There are several characteristics to this financing plan that fulfill the risk for each party as well as minimizing the risks. First, the collateral existing for the bank is the property itself. The property ultimately belongs to the bank until it is fully repaid in 5-8 years depending on the venture. If the deal falls, they own the property, if it is completed and with interest, they fulfilled their goal of profit. The students looking for housing find convenient housing for their college venture and expect to pay rent each month; it is a primary cost. Their conduct during their stay on the property is clearly defined through a contract known as a lease. With the binding agreement of the lease, the property owner is generally guaranteed their income and expects minimal damage to incur on the property. The income received can immediately be forwarded to the bank either in whole or in portion to repay the loan and the financing operation is completed with all parties meeting their objectives of a successful partnership.

This financing plan looks to capitalize on the housing market that has recently undergone a recession, along with the rest of the global economy. In her book titled Beyond the Great Recession: What Happened and How to Prosper, Kimberly Amadeo explains causes for the 2008 recession are assessed. The primary cause explained were people buying houses they could not afford (Amadeo, 2012). The recession has lowered interest rates, lowering the cost of the business venture. In this case, no one is buying to property to live in for himself or herself based on their income. Instead, the owner is developing and collecting rent from each tenant to pay the bank directly. Only tenants that are able to pay the rent will live in the complex. The only risk is not accumulating enough tenants, but that depends on the location and marketing efforts of the property owners; all of which should be prepared in the business plan ahead of time. The money is used to establish a property that will house a certain amount of people proportional to the size of the property. The amount of money raised varies with the size of the property or housing complex, along with strategies used to organize and minimize the costs. Financing can be acquired through a variety of sources, but typically it will come from a financial institution like a bank. The property serves as a collateral for itself and increases the probability of financing acquisition. Risks are sufficiently minimized through contracts every step of the way, from financer, to construction, to ultimate consumer. The consumer attends school and pays rent each month or semester to the venture capitalist, who forwards the money directly to the bank of financing institution. The financer achieves their objective of loaning money at an interest rate, the student achieves their objective of attending higher education for a cost and the venture capitalist achieves their objective of developing a business cycle that generates profit along with the rights to an entire property.

A financing plan geared towards the rapidly growing industry of student housing best meets the objectives of all parties involved. The objective of business is generally profit, while the student’s objective is comfortable housing for their academic venture. A venture capitalist seeks to manipulate the resources around them to meet their objectives. Any financing plan involves planning how money acquired will be used (spent) to create a way for the parties involved to make profit. Banks make profit by lending money, making them suitable for lending money to housing development projects. Student housing development projects are specifically rising in demand due to the recent economic downturn and outsourcing of manual labor jobs. With the increase in demand is the opportunity for the venture capitalist to achieve their objectives of profit, along with property acquisition. Contracts and agreements such as leases help control the risks and factors associated with the housing business. The only real variables that lie are with the size and location of the property, all of which can be controlled by the venture capitalist when deciding where to set up operations. With this financing plan, the goals of each party are met and the gains for the venture capitalist. The clear identification of financing and income sources make this business venture appealing to any investor. 

References

Amadeo, K. (2012). Beyond the Great Recession: What Happened and How to Prosper. Boston: World Money Watch.

Census. (2010). Higher Education:  Institutions and Enrollment - The 2012 Statistical Abstract - U.S. Census Bureau. Census Bureau Homepage. Retrieved August 4, 2013, from http://www.census.gov/compendia/statab/cats/education/higher_education_institutions_and_enrollment.html

Gladstone, D., & Gladstone, L. (2004). Venture capital investing: the complete handbook for investing in new businesses. Upper Saddle River, N.J.: FT Prentice-Hall.

NCES. (1999). College enrollment rates of high school graduates, by sex: 1960 to 1998. National Center for Education Statistics (NCES) Home Page, a part of the U.S. Department of Education. Retrieved August 4, 2013, from http://nces.ed.gov/programs/digest/d99/d99t187.asp

Pindyck, R. S., & Rubinfeld, D. L. (2005). Microeconomics (6th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.

SMOP. (2003). Levittown, Pa. | Building the Suburban Dream. Welcome to The State Museum of Pennsylvania. Retrieved August 4, 2013, from http://www.statemuseumpa.org/levittown/one/b.html