If your image of the average student household is the vandalised hovel inhabited by the Young Ones, think again. Students today have higher expectations, but in return they can prove a profitable market.
And it’s a market that is set to grow. The government’s rather ambitious aim to have 50 per cent of 18-30 year olds in higher education by 2010 has already left institutions struggling to house them.
This, of course, means opportunities for the investor. But, as with any property venture, caveat emptor.
1. Why Students Can Make Good Tenants
1. You can fit more in a house: A two-bed terraced with two reception rooms can yield a much higher rent when let out to students as a three bed with one reception, than to professionals as a two-bed.
2. Students are not as fussy: Students will put up with living in locations shunned by professionals (as long as they are accessible by bus), and flowery carpets and dated bathroom fittings hold no fear for them.
3. Rent in advance: They (or their parents) will often pay three months’ rent in advance, and are more likely to move out at the end of their tenancy.
4. They're bright: Students, says Catherine Bancroft-Rimmer, author of The Landlord’s Guide to Student Letting, and student accommodation manager at Sussex University, are, on the whole, an intelligent lot, which comes in very handy.
"You do get exceptions," says Catherine, "but once you’ve explained why you need them to do something they are usually quite willing to go along with it."
2. Why student properties can make financial sense
Durham: ©iStockphoto.com/Peter Ingvorsen
According to a study by Landlord Mortgages the student rental sector achieved an average yield of 6.59 per cent for the second quarter of 2007, compared to a 5.42 per cent average for non-student yields.
But potential student landlords should note that there is wide variety in the profitability of different areas. Top of the tables is Durham, with a high of 9.12 per cent, closely followed by Nottingham at 9.05 per cent.
That said, 20 of the 59 towns cited in the study underperformed the non-student rental sector, with Crewe returning a measly 3.4 per cent. So you need to do your homework.
On the capital growth front (though remember, house prices are currently levelling in many areas) student towns do well.
According to a Halifax report this summer, the top 20 ranked university towns trade at a premium of 37 per cent to the average UK house prices, and seven university towns have seen rises of 50 per cent or more over the past three years.
For detailed information on how to calculate yields and assess a property's investment potential scroll
down to numbers 7and 8 below. See also table at end of page.
3. The downsides - some things to keep in mind
While the numbers can stack up, it’s not all jam – so remember:
• Drop Out Rates: Before investing always find out the drop out rates for local institutions. Some universities experience rates of up to 30 per cent, while others are as low as four per cent.
• Competition: Universities and private developers are now constructing purpose-built halls of residences. If a swanky new apartments on the doorstep of the university are easily available, you may struggle to let a less up-to-date property a bus ride away.
• HMO Rules: If you are letting to two or more students who are not in the same family and they are sharing amenities, you will be operating an HMO (House in Multiple Occupation) and will need to comply with the HMO regulations.
The requirements range from keeping your contact details displayed in the property to five-yearly electrical inspections.
Let to five or more tenants and your property is over three floors bear in mind that you will be liable for an HMO licensing fee that can cost up to £2,000 for five years.
• Damage: However careful your tenants may be, having more people using a house will result in more wear and tear. Kitchens and bathrooms may only last three to five years, and carpets may need replacing every two to three years, so it is advised to set aside ten per cent of your yearly rental income for maintenance.
• Baby-sitting: Some students will never have changed a light bulb before, let alone run a home, so you may need to keep a close eye on the property to prevent a dripping overflow pipe or a blocked gutter from damaging your investment. The good news, however, is that maintenance and repairs can be set against your tax liability.
• Voids: Although there is great demand for student property, you are not immune to the problem of voids. Students sometimes drop out, and you could face the headache of an empty property for half the year.
4. Before you buy: the area
Lewes Rd, Brighton
• Talk to local experts: If you don't know the town, spend time talking to local estate agents and, more importantly, university accommodation officers before making any decisions.
• Wait a year: If you are a parent buying somewhere for your offspring to live during their studies it might be worth putting off your decision until their second year. By then they will be able to tell you exactly where they would like to live.
• Popular locations: Properties near the campus, followed by town-centre houses, are likely to be most popular, followed by properties on bus routes between the two.
• Cheap vs cheerful: Students will often happily live in less salubrious locations, but don’t just pick an area because it’s cheap. Catherine Bancroft-Rimmer says that the busier and safer an area feels, the more likely it is to appeal.
5. Before you buy: the property
Headingley Lane, Leeds
Students tend to form groups of four or five, and investment expert Ajay Ahuja believes that the safest bet is the three-bed house which can be used as a four bed property once the living or dining room is converted into a bedroom.
If you do choose a bigger property, make sure you have at least one bathroom for every five students and sufficient cooking and food storage space.
Catherine Bancroft-Rimmer says that after a year in the comparative luxury of halls, most students will happily settle for a modest bedroom, a shared bathroom, a kitchen and one communal area.
"After location, the main thing they want is to be with their friends in a property that looks clean and well cared for."
But don’t think that having a fantastic property precludes you from the student market. "They’re incurring a lot of debt already, so many students won’t mind paying a bit extra for somewhere special. In Brighton they would pay £70-75 for somewhere average, but they may go up to £80-85 for somewhere particularly nice."
6. When to buy?
And lastly, make sure that you time your purchase right so you’re ready to let it from mid to late September.
Start your property search in around April, aiming to complete the transaction in August.
This should give you just enough time to give it a lick of paint before you greet your first tenants, cross your fingers, and hope they have never seen the Young Ones.
1. Figure out the rental income: Before you buy, you need to ascertain a realistic figure for rental in your chosen area. According to Accommodationforstudents.com, the average weekly student rent in the UK is now £60.58.
But in London the average is £102.33 per week, and the whole of the south carries a premium for students, with Cambridge, Guildford, Oxford, Exeter and Brighton all 20%, or more, costlier than the UK norm.
At the other end of the scale students in Liverpool will be expecting to pay around £47 a month, while in the least profitable town, Crewe, average rents are also the lowest at £37.
2. Check the asking price against the potential rental income: Next, figure out if the rental income you can generate will be enough to cover the asking price. Property millionaire and author Ajay Ahuja uses a very simple formula for calculating how much he will pay for a house that he calls ‘the rule of ten’.
To calculate how much you can afford to pay work out the annual rental potential and times it by ten.
So, if you are in an area where rooms rent for £60 a week, and you see a three-bed, two-reception house, the calculation is
£60 x 4 x 52 x 10 = £124,800.
3. Don't forget void periods: By this reckoning, if you need to pay more than £124,800 for the property, it’s not a good deal.
If you find a property, and the maths seems to work out, first check whether you will realistically be able to rent out the room for full price 52 weeks a year.
Many student houses are empty for the summer months, with tenants paying a 50 per cent retainer. Whether or not you will have to do this depends on the local demand for accommodation, but, if this is likely, it should be taken into account when calculating income.
Some landlords also deliberately keep the property empty and charge no rent for a month of the summer so that they can carry out repairs, so, again, this should be factored in.
8. Number crunching: calculating yields
Finally, to work out the percentage yield a property would make, you need to take the annual rent and minus all expenses, to find to your profit.
Next, divide the profit by the current value of the property, plus purchase costs and your expenses in getting it ready for letting, times this by 100, and you should end up with a the percentage yield. If this is over six per cent you may have found a viable investment.
Catherine Bancroft-Rimmer gives the example of a house with a current value of £150,000 (inc. purchase costs).
Estimated annual rent: £13,200
Less
Interest on loan £5,000
Rates, insurance, bills etc £400
Repairs, maintenance £550
Replacements (at ten per cent of rental) £1,320
Profit £5,930
£5,930
_____ x 100 = 3.9 per cent yield
£150,000
Nikki Sheehan
Student Towns: Landlord Mortgages, 2007
