The Pros and Cons of Buying a Student Property
Property expert Kate Faulkner explores the benefits and drawbacks to buying student property
September is the time of year when students look for accommodation for the upcoming year. Property expert Kate Faulkner explores the reasons for and against buying student property.
Is it worth buying student accommodation for your kids?
It’s no surprise you might consider buy to let as a better way to fund kids through college. It can be considered a good way to save for a pension, or a good way to spend an endowment or pension pay-off, and student accommodation can attract up to tens of thousands of pounds in rents.
And for some it may work well. Here are some examples:
- A two-bedroom flat in London with a 30-minute commute to London School of Economics, Kings College or UCL would cost around £360,000 to buy and approximately £1,000 a month in running costs*. In contrast, renting the property would cost around £1,500.
- In Durham, buying a two-bedroom house would cost roughly £70,000 to buy and £350 monthly to run while renting would be £550 per month.
- Over in Cardiff a property could cost £150,000 to buy and £440 to run versus renting at £575 per month.
So looking at averages, and using an average of today’s buy to let mortgage rates of 3.5%, buying seems to attract much cheaper running costs than renting. And if property prices increase, this can mean you can make money from student property, rather than just give that cash to another landlord.
However, buying a property to let isn’t easy. For starters, investing in buy to let gives the best returns over a 15-20 year period. So if you are thinking of just investing for a three-year period, then this is high risk as prices and rents could fall while your costs can literally go through the roof! So to know if it’s right for you, you have to compare far more than just the current rent versus buying costs.
What are the downsides to know about?
Problems arise with property investment when the market doesn’t perform at its ‘average’. For example, 2007 to 2009 saw prices drop UK-wide by 15-20% and in some areas even more. So the timing of a potentially short-term investment is key.
Following the crash, even the London property market took four years before it began to revive. Once it did, the market picked up well, but a minimum investment of five years was needed for decent capital growth returns even in the Capital.
However, it’s not just prices that fall. In 2008, rents also dropped dramatically country-wide, making it tough for many landlords. London rents fell by 5% and elsewhere by up to 20%. If you’re trapped in a situation with stagnant or falling capital growth and declining rents, this can severely squeeze your finances. You’d then need to keep the property for some years to recover financially, leaving you vulnerable to the vagaries of unreliable tenants or, worse, no tenant at all – landing you with all the running costs but no income.
For instance, insurance premiums and the cover provided could vary considerably for properties that are let to students or unoccupied for an extended period of time. So it is important to understand these differences when choosing the most suitable product for you.
Mortgage rates can change too, so that your costs, albeit currently low, could increase almost overnight. Of the example properties highlighted above, monthly costs in London could leap from £1,000 to £1,250 if mortgage rates return to their long run average of 5%. This is a big jump and it would make the running costs not so far off the £1,500 a monthly rental cost. And of course to buy, you’d need around £100,000 for the deposit and buying costs in the first place and to be able to leave that invested for many years to see a good return.
Depending on the condition of the property and how long you intend to own it for, it is likely that you will need to spend money on maintenance. These costs could increase if you are not local and don’t have the skills to do the work yourself. Another cost to consider is if the property is empty at anytime, you are unlikely to have rent coming in, but will still incur costs.
Finally, the student rental market can be volatile. Demand and supply means years where there’s oversupply, others where demand is greater; and, of course, student tenants tend to rent for short terms, hence less weeks to secure income compared to renting all year round.
What are the upsides to purchasing?
Despite any downsides, you can do well in a short time frame if your timing is well-judged and you invest in an area with good capital growth prospects. Alternatively, if you do invest for the long-term and hope to generate income later in life, via a house let to multiple tenants, then you could save on paying rent for your own children in the short term and secure income returns over the long term.
For example, a two-bedroom flat in Acton, 30 minutes from most London universities, would cost around £360,000. With a 25% deposit, this would cost you approximately £1,000 a month at a 3.5% mortgage rate. Over three years, with ‘average’ price increases of 7% per year, the property could reach over £440,000; so factoring in buying and selling costs, the property when sold would net you around £56,000, with other tenants having contributed to running costs.
Alternatively, with a property which delivers a net 5%+ annual income return after costs, it could earn you good income returns rather than it costing you anything, so might be worth it, even if you don’t secure great capital gains overtime. You also have the reassurance that your loved ones live in well-maintained accommodation, and won’t end up having to move or accept poor living accommodation after rowing with a former friend and co-tenant.
So student rentals have downsides and upsides. It’s vital to do your calculations thoroughly, and include all costs as well as potential rental income. You then need to test your finances for robustness against periods of no tenancy, and substantial maintenance pay-outs such as new kitchens, bathrooms, a boiler or roofs. And finally make sure you plan for a long-term hold, don’t just cross your fingers that all the variables work in your favour on a short-term investment.
To help you with this, it’s worth downloading and using the new Mobile Landlord App which allows you to keep all your information to hand, track income, expenses and calculate your returns as well as set important reminders such as when to secure your safety certificates. To find out more about the free app, click here.
*All house and rental prices from Rightmove