As the supply of student housing tightens and demand grows, the sector is drawing astute investors. In December 2007, Kayne Anderson Real Estate Partners launched a $136 million fund to buy off-campus student housing near large public universities. As a show of faith, the 20-year-old private equity firm based in Armonk, N.Y. invested $30 million of its own money into the venture, according to Frank Duemmler, managing partner.

Duemmler oversees the firm's real estate investments and asset management. Today, Kayne Anderson owns 12 student housing properties, totaling 1,874 total units and 3,641 beds in six states, including Arizona, California, Illinois, Kansas, Missouri and Virginia. Duemmler recently spoke with NREI about Kayne Anderson's student housing fund and what investors should know before placing their cash in this property niche.

NREI: What returns do you expect on your student housing investments?

Duemmler: We typically expect an internal rate of return over a five-year period of 20% to 25%. In the particular cases of the 12 properties in which we are currently invested, we're well within that range with respect to performance, and we've already made distributions to our investors with cash from the operations of those properties.

NREI: How much can you leverage the $136 million fund?

Duemmler: If you're looking at putting 25% to 30% equity into a transaction, you're looking at $500 million to $600 million in total [leveraged] deals. We currently have 12 properties in our portfolio, with three more moving toward closing, which will put us at approximately 40% to 50% of our fund invested.

NREI: Who are your investors and what attracted them to your fund?

Duemmler: We have a mix of institutional investors as well as high-net worth [individuals] and family offices. Investors were very intrigued by what we were doing for two reasons. One, there was a personal connection. Most people had experienced living at universities or have children at universities, so they understood the nature of the business from a demand perspective. They also grasp the recession-resistant characteristics of growing student enrollment.

NREI: With little supply overall, how are you finding opportunities?

Duemmler: When we look at a deal or transaction, we're quick to respond in a very thorough fashion. We follow through on our commitments. That has enabled us to build a strong network in the industry of people who know when opportunities arise — not listed opportunities, but off-market opportunities.

NREI: Do you lease and manage your student housing properties?

Duemmler: We have three property management firms with which we work. And we have a very active asset management group that is on top of the properties on a daily basis and has weekly calls with our property managers.

NREI: What should investors know about student housing?

Duemmler: Understand the university, the marketplace, the growth trend of the university. Just as importantly, when you own a student housing asset you have to understand the challenges of student housing assets, the demographics of the people you're serving, the timing cycle of pre-leasing and turnover.