Read property at university: your tutorial starts today

Buy a house for your child to live in at university and you could make a first-class profit, says David Prosser
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The Independent Online

For A-level students who made the grade on Thursday, as well as those changing their higher-education plans, one challenge remains: finding somewhere to live at university.

The number of parents buying property for children in higher education is rising. Research published this month by the insurer Direct Line says parents now own 83,000 homes that are lived in by their student offspring - up 26 per cent since 2000.

You can see why. Rather than pay rent for a room in a hall of residence or a landlord's property, your money buys a tangible asset with investment potential.

As the table shows, property in university towns over the past five years has soared in value. In some towns, prices have more than doubled. In all the locations shown, profits made easily covered buying and selling costs.

Colin Kemp, of Halifax Estate Agents, says university towns often turn out to be property hotspots. "Housing in towns and cities that have the best-performing universities trades at a premium," he says. "The best performers have generated house-price growth well above the UK average."

Even so, Malcolm Harrison, of the Association of Residential Letting Agents, (Arla) advises against short-term purchases. "Invest on the basis that you will keep the property well beyond the time your child leaves college," he advises. "Otherwise, there's a danger that the costs of buying and selling will wipe out any capital appreciation."

If you intend to let the property out to your child and his friends, there are legal and financial hurdles to be cleared and there will be day-to-day issues such as maintenance and cleaning. But many parents think these issues are worth battling with.

The first challenge is to find a property. The best option is a location near the campus with good access to public transport.

Avoid buying too large a property. Regulations that came into force earlier this year put onerous conditions on landlords with Houses of Multiple Occupancy (HMOs) (five or more tenants sharing facilities). In addition to licence fees costing up to £950 in some parts of the UK, there are much stricter rules on issues such as health and safety.

Lee Tilcock, of the personal finance data provider Moneyfacts, warns: "HMO licences are not transferable, so when you sell, the new proprietor will need their own if he wants to let."

Financing your purchase depends partly on whose name will be on the deeds - it may not be best to own the house yourself.

The big downside to buying in your own name is that the money you make on the sale of your own home is tax-free, but profits on the sale of second homes are not. If the profit exceeds your capital gains tax allowance (£8,800 in this tax year), you'll have to pay tax on the excess at 40 per cent.

Your child could buy the property, says David Hollingworth, of the independent mortgage broker London & Country. "Most students won't have the income, but many lenders offer guarantor products, where parents can underwrite the repayments," he says. "The parents must have the income to service their mortgage, plus the loan they're guaranteeing."

Several lenders offer specialist products . Bath Building Society, for example, offers a guarantor mortgage where students can borrow up to 100 per cent of the cost of the property if parents put their own homes up as security.

If you prefer to hold the property in your own name and have sufficient equity in an existing home, you could remortgage. But if you need to borrow against the value of the student accommodation, you will need a buy-to-let mortgage.

Most buy-to-let lenders will expect you to have a deposit of at least 10 to 15 per cent. What you can borrow will depend on the rental income the property is likely to generate, rather than your earnings.

Using a mortgage broker to find the right loan is a good idea. "Some lenders refuse mortgages if you are planning on letting to students," says Melanie Bien, of Savills Private Finance. "This is because they are concerned about property in multiple occupation because the landlord may have difficulty obtaining vacant possession if it all goes wrong."

Lenders are also particularly nervous about investors who want to rent property to relatives, since this area of the market is more tightly regulated. Off the record, many brokers suggest parents don't mention this to lenders, but be prepared for your choice of mortgage providers to be more limited if you do declare that one tenant will be a child.

With the finance in place, you can complete and prepare for the new term. First, the house will need furnishing, but you must comply with fire and furnishings regulations.

Pay particular attention to appliances. By law, all landlords must have gas appliances inspected once a year by a Corgi-registered professional.

Finally, don't assume that because the tenants are your child and his mates you don't need any legal work done. "You must treat this as a business for both your own sake and for the protection of your tenants," Harrison says. "That means getting all the tenants to give you a deposit - one month's rent is standard - and to sign a tenancy agreement."

Bien adds: "Insist on one tenancy agreement for the household rather than one for each tenant - this ensures they are 'joint and severally liable', so if one of them moves out, the others are responsible for finding someone and covering the rent."

Arla has standard tenancy agreements and details of health and safety regulations for landlords on its website at www.arla.gov.uk. Also see www.communties.gov.uk, for official advice on your rights and responsibilities as a landlord.

'This will be a contribution towards the cost of Ben's education'

Martin Doolan has just bought a three-bedroom house in Crookes, a popular student neighbourhood in Sheffield. Next month, his son, Ben, a second-year student at Sheffield University, will move into the property with two friends.

To finance the purchase of the £159,000 home, Martin borrowed £145,000 from Yorkshire Building Society, secured against his home.

"Ben spent his first year in university accommodation so he could make friends," he says. "But then we were looking at paying £50 to £60 a week to a landlord."

Martin bought a small property, so complying with safety regulations will not be particularly arduous. He also expects all three of his tenants, Ben included, to sign a properly drafted tenancy agreement.

"He's got two more years, and I've got another son who might end up at Sheffield," he says. "If not, there would be no problem keeping the place: there's huge demand for student accommodation in Sheffield."

But the purchase has been a practical exercise rather than an investment.

"Hopefully this will be a contribution towards the cost of Ben's education," he says.

'Buying a home proved the right thing to do'

Louise Hope, a 22-year-old nurse at Sheffield Children's Hospital, still lives in the house she bought with her parents two years ago while she was still studying at college.

With a mortgage secured on their existing property from the Skipton Building Society, the Hopes bought a one-bedroom house for Louise when she was halfway through a course at Sheffield Hallam.

"The house was in all three of our names," explains Louise. "While I was doing my course, Mum and Dad paid the mortgage, but I graduated this year and got a job locally, so now I've taken on the payments myself."

The idea was always that Louise's parents would hand over the property once their daughter was in a position to make the mortgage repayments herself, but the purchase has proved a particularly good investment because Sheffield's property market has performed so strongly.

The Hopes were never certain where Louise would end up working once she graduated, but had she moved away, they would have tried to rent out the property rather than selling, so the purchase was always going to be a long-term investment.

"Initially, it was hard for Mum and Dad, with the cost of repayments on this property on top of their own mortgage. But it has proved the right thing to do," says Louise.

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