A parents' guide to buy-to-let student property
Before the new academic year gets under way, it's time to make a move, advises Chiara Cavaglieri
Sunday 06 June 2010
As university students in the UK get exams out of the way, some will have at least half an eye on their accommodation for next year. Many will be turning to mum and dad for a helping hand: but for parents who can, investing in property for your child may be the best bet. However, with only a few months until the new academic year gets under way, now is the time to make a move.
"As young adults move away to university or enter their second year, many parents use the opportunity to purchase a second property, safe in the knowledge that they have tenants lined up to pay the rent. For those who can afford it, it is a way potentially to profit from an otherwise expensive experience," says Simon Thompson, co-founder and director of Accommodation for Students (Accommodationforstudents.com).
Student housing is a fairly resilient venture and there are considerable benefits over other forms of property investment. Universities across the UK are at, or near, capacity and need to find accommodation. Moreover, many professional landlords are hesitant to rent to students, which can mean that in some areas there is a shortage of student properties. Recent figures show that this lack of supply has caused rents for student property to increase by 19 per cent over the past five years.
In high-demand areas such as Cambridge and Oxford, you can expect higher rental incomes all year round, although some student lets may be empty during the summer months.
The latest figures from Accommodation for Students show London is the priciest place for students, with an average weekly rent of £104.13. Guildford is the more surprising entry in second place at £87.86 per week, while less fashionable towns such as Stoke-on-Trent, Hull, Middlesbrough, Crewe, Pontypridd and Stockton have average weekly rents of under £50.
"All the rules of a good buy-to-let property apply; centrally located with good transport links, access to green space and close to local amenities such as shops, bars and restaurants," says George Franks, sales director of estate agents Douglas & Gordon.
Financing a purchase of this nature, however, may not prove to be so simple. During the recession we saw lenders pulling out of the buy-to-let market, and the number of deals plummeted. Another potential barrier is that although buy-to-let properties are not usually regulated by the Financial Services Authority (FSA), when a property is let to an immediate family member it becomes a regulated buy-to-let mortgage.
"This narrows your options quite quickly because some lenders simply will not consider a regulated buy-to-let," says David Hollingworth, from broker London & Country.
In an already difficult market, parents without an impressive deposit may find they have few options. Principality Building Society currently offers a two-year tracker for buy-to-lets of this nature at 3.14 per cent above base rate, with a 3.50 per cent fee, and available up to 60 per cent loan-to-value (LTV). For those with only a 25 per cent deposit, NatWest offers a two-year tracker at 4.49 per cent above base rate up to 75 per cent LTV, with a £1,999 fee. Lenders will also insist that your rental income can cover the mortgage, and then some.
On top of financing obstacles, there are significant tax and legal implications when renting a property to students. First, landlords will have to pay income tax on the revenue generated from rent, minus any relevant expenses. You may also be taxed on any profits made when it comes to selling the property. Capital gains tax (CGT) is widely expected to be increased to the level of income tax, up to 40 or 50 per cent for higher tax payers, in the coalition government's emergency Budget on 22 June. However, experts say that few parents will be deterred by the proposed increase.
But there are a multitude of more practical requirements that can quickly add up, including gas and electricity safety certificates, landlords' insurance, and the houses in multiple occupation licence, which is compulsory for properties at least three storeys high and with at least five tenants. Also, if you don't want the trouble of chasing rent, and the general maintenance of the property, you may have to fork out for a management company to do this for you, which will take a large chunk of your income.
But, despite the headaches, there are significant tax breaks if you're willing to put the property in your child's name and they plan on living in the property throughout university.
This way, it becomes your child's principal private residence, so there is no CGT to pay, and it may not be included as part of your estate for inheritance tax (IHT) purposes. As an added benefit, the rent-a-room scheme allows your child to rent out a room and earn up to £4,250 per year tax-free, as long as communal spaces such as kitchen and bathroom are shared.
You may need to act as a guarantor to the loan and, again, finding more than a handful of willing lenders may prove hard. You'll also have to prove you're able to cover both the mortgage you're guaranteeing as well as your own. Bath Building Society offers a deal aimed at this market called the "Buy for Uni" mortgage, allowing for up to 100 per cent of the purchase price to be advanced, subject to a maximum of £250,000, though a collateral charge is required against the parents' house for anything above 80 per cent LTV.
"The mortgage is in the child's name and the lending is based on the rental income, although they may be able to take parental income into account as well if there is a shortfall. The pay rate is at standard variable rate [SVR], which is currently 5.10 per cent, and there would be a 0.5 per cent fee," says Mr Hollingworth.
EXPERT VIEW: David Hollingworth, London & Country
"You should take a long-term view of a proposed student let – property doesn't work as a short-term investment, as it costs a lot to get in and then to get out. So it's good to buy with your kids at uni in mind. But remember, once the three years are up, you have an ongoing investment on your hands that will need renting out and maintaining, and students can be quite hard on rental property."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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