Testing times? Let students pay you rent
Where there's a university, there's an opportunity. It may be time to buy to let, says Alessia Horwich
Sunday 10 May 2009
During a three-year university career, the bank of mum and dad can fork out an average £13,500 on rent for their child. At the moment, with property prices falling and student populations at an all-time high, investing in a house at university for your child is an appealing alternative. But with the end of the university calendar fast approaching, and prime student house-hunting season just months away, if you're going to take the plunge the time to get in may be now.
As property investments go, student lets are one of the less risky options. This is mainly because there is high demand for student accommodation across the UK. Collette Murphy, director of Braemore Property Management, says: "There's a traditional shortage of student flats as many landlords are unwilling to rent to students due to their preconceptions about student behaviour. However, the reality is students are some of the best tenants you can get.
"Their parents will act as guarantors, they are willing to sign up to leases for the entire year, and they are willing to pay a fair price for a good property in a good area." The shortage of decent accommodation means that tenants like to reserve the property several months before they actually move in, guaranteeing you income (and piece of mind) for the coming year.
There is also little chance of demand drying up. As long as the university continues to exist, so will the annual influx of students to the area, thus making it easier to fill rooms. The recession is keeping students at university longer and forcing graduates to return in order to get new skills and brush up on old ones. All this means increased demand and more tenants to fill your property.
When choosing a location to buy in, the key is research. University accommodation services will be able to tell you whether or not there is demand for accommodation, the average rent charged in the area and what requirements you need to fulfil to feature on their accommodation lists. They will also be able to give you the relevant information about transport that will be key to picking the location in which you should buy. Additionally, they may have information on the construction of any new student accommodation by large-scale developers which could flood the local market and drive down rents.
Some student lets are only nine months, leaving the property vacant for the summer. However, choosing an area of high demand, such as Cambridge, Oxford or London, will bring in not only higher rental incomes, but also guarantee longer rental periods. John Socha, vice-chairman of the National Landlords Association, says: "The length of the let depends on market conditions. In high-demand areas you will pay full rent all year round, no question." The extra income from the summer months can be considerable and the guarantee of it will be helpful when applying for a mortgage.
With the credit crunch and the recession, lenders are not generally taking chances with buy-to-let investments. These are considered more risky, and reluctance to lend means fewer deals are available. According to a survey by the price-comparison website moneysupermarket.com, the number of buy-to-let home-loan products has fallen by 95 per cent in the past two years.
Those deals that do exist offer low rates but the fees can be significant, as much as 3.5 per cent of the amount borrowed. You will also be expected to put down at least 25 per cent of the purchase price as a deposit.
There is also considerable emphasis on the amount of rental income you can make on the property. Melanie Bien, director at mortgage broker Savills Private Finance, says: "Lenders will want to see that the income of the property will cover the mortgage properly. They usually require the rent to cover 130 per cent of the mortgage. So for a £600-per-month mortgage they will want the monthly rental income to be at least £780."
One of the reasons lenders insist on rental income covering the mortgage repayments and then some is that, as on any other earnings, you will also have to pay income tax on the revenue you generate. The other tax you need to consider when buying to let to students is capital gains.
Chas Roy-Chowdhury, the head of taxation for the Association of Chartered Certified Accountants (ACCA), says: "Unless you sell the property, capitals gains tax is not going to be an issue at all. However, when you do come to sell, you will have to pay 20 per cent on all gains after your annual exempt amount of £10,100."
If you are buying a property for your child to live in as well as to rent to other students, tax-wise it makes more sense to give your child the finances to buy it, rather than purchasing it yourself. This is because once the property becomes the principal private residence of the occupant, all the rules change. You do not have to pay capital gains on a property which is your principal private residence. This means that if your child's name is on the deeds you can side-step any capital gains tax for the entirety of their university career, provided they live in the property. Also, as the owner of the property, your child can take advantage of the tax relief given by the Rent a Room scheme. This allows a tax-free rental income of £4,250 per year if you rent a room in your principal private residence and share communal spaces such as the kitchen and living room.
Giving your child the finances to buy a property is also a good way to soften the blow of inheritance tax. As long as the gift is given at least seven years before your death it will not be considered part of the inheritance package, so it is an effective way of spreading out your estate.
"Generally speaking," Mr Roy-Chowdhury says, "enabling your child to buy is a good way to get all the relief you can: hitting a number of birds with one stone in terms of the tax."
Although buying a property to let to students offers some attractive tax-relief, it will incur other costs. The main deterrent for landlords is the cost of the Houses in Multiple Occupation licence. This is mandatory for properties of three stories or more, or five tenants or more. This five-year licence can be free from some councils, whereas others will charge up to £1,100. It's a significant cost, but being caught without it comes with a £20,000 fine. For smaller properties you are not obliged to have one, however the university accommodation service will often require a similar accreditation. You also need the standard landlord requirements, including landlords' insurance, gas and electricity safety certificates and energy performance certificate – and the costs of these all add up.
Renting to students can also be quite labour-intensive. If you do not wish to play the landlord, rent collection, home repairs and administrative tasks can all be taken care of by a management company, allowing you to buy outside your own residential area. But this service doesn't come cheap. You will be expected to pay a commission of between 10 and 15 per cent of the monthly rental income and on top of this you have to pay a flat fee when you sign up for the service as well as a remarketing fee for each time the property is let out to a new tenant. However, while it is a high-maintenance investment, if researched carefully the tax exemptions and rental income make buying to let to students potentially a lucrative one.
As Mr Socha says, "It's a good steady market, with the next few years while the recession is on there should be a good pool of tenants. It's a regular income but you have to be prepared for dealing with students, they do not behave in quite the same way as everyone else. Levels of customer service just have to be higher."
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