Paying x3 above market..Looking for explanation

[David London]

Recently came across two articles in the local newspaper of one of my focus markets about 2 separate student housing portfolio sales...the first in 2018 of 70 houses which sold for 30M and another one this year of 45 houses sold for 21M...the houses in both sales are all 4-5 BR SFH walking distance to campus...and majority 100 years old or more. That make average house for 1st sale 420K and second sale 475K.

I follow this market very closely...got 1 house and now in contract for another...median house prices near the university is about 150K.

So I am quite puzzled what is the rational behind buying these portfolios for 3 times the value of the houses themselves...there is obviously an advantage to buying an established portfolio with built in economies of scale...and I assume a company who is capable of getting this kind of portfolio know what they do...but 3 times more?

Please explain.

[Bob Langworthy]

Your answer probably has to do with NOI and cap rates. The buyers were looking to park their money some place and get a decent return. Possibly a syndication.

To put it another way, you are buying single family houses and they are buying commercial real estate. 

Definitely a good sign that you are in the right asset class in the right market. You will probably need to start looking for off market deals to get the kind of prices you are looking for.

Hope this helps,