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Student Property investment versus traditional Residential Buy to Let

by Sajid Kazmi -

We help investors find both residential buy-to-let property and purpose-built student accommodation. The first question we are often asked which is better?

This isn’t an easy question as these are the two highest performing asset types in our portfolio.

Across our residential portfolio we are seeing an annual increase of 5.5% in property values and average rental yields of 6.2%. With mortgage lenders currently offering low interest rates – a relatively small amount of capital can generate large returns. Changes to stamp duty and mortgage tax relief have slightly dampened the market. However, renting in the UK is increasing, and home ownership is declining which means the market for residential buy to let is strong.

Our student property sales to date have achieved 8.6% yields for investors and our resales over the last 5 years show that they deliver a profit in capital values of above 3% per year. Student accommodation doesn’t incur stamp duty and for some buyers it is also exempt from capital gain tax. The long assured rentals and long tenancies as well as the low purchase prices make it a very predictable, secure, low entry investment.

If you are also choosing between these investment types; the answer will depend entirely on your personal situation.

We hope that the five questions below will help you to identify which is right for you. Please feel free to call us to talk about this, or to hear about opportunities in either asset class.

Are you a cash buyer?

While large Purpose-built student properties can be mortgaged, typically they are purchased with cash. There is no stamp duty to pay and furniture is included; so, for cash buyers it is a great straightforward option with few upfront costs and no mortgage overhead. With residential property there is an opportunity to use lending which may favour some buyers, however there is stamp duty, and mortgage arrangement fees so upfront costs are higher.

How much do you have to invest?

In England there are major cities in the North West (Manchester, Liverpool, Preston), The Midlands (Birmingham, Leicester, Nottingham), The North East (Sheffield, Leeds, Newcastle) where, outside the city centre, you can pick up cheap property (under £100k). However, our buyers typically want apartments that are continually occupied with good professional tenants and therefore the best city centre properties start at around £110,000. You can however get good student properties in city centre locations, close to universities for as little as £50,000 with no stamp duty or furniture costs. So as a rule of thumb if it’s a cash purchase under £100k student opportunities are worth looking at.

What is more important to you capital growth or income?

UK residential property in prime city centre locations increases in value for several reasons. These include increased rental income, improvements to schools, transport links, employment and supply and demand. We help buyers identify the areas that these will be happening so they can see significant gains in value in a short period of time. Student property is bought for its consistent, high income. As such, there is only one factor affecting the price; which is increases to the rental income that it generates. The good news is that rents go up consistently above inflation. So, the rule of thumb is if you want a higher more consistent income and you are happy for your property to grow with inflation then its student property. If you are happy to opt for a lower income for the potential of your property price increasing due to outside factors, then residential property might be for you.

When do you want to sell?

This is similar to the above point but it’s important to address. Many people are buying property to give them a retirement income, but its still tempting to be overly focused on asset growth. Our advice is that if you aren’t planning to sell then don’t make resale your main focus. All of our properties will maintain their value, so take the higher income.

How reliant are you on the income?

Our extensive research on residential property and careful selection helps buyers to find the most reliable residential investment properties. It is however impossible to rule out some gaps in income. Good professional tenants will move out to buy a property of their own. A person may not pay the rent. You may even have to go through a high court eviction, properties will also need refurbishing. This means there will be gaps in income and which will be combined with increased expenses. For people investing for pension income or those using mortgages it is essential to be able to go without income for at least a few months. If that isn’t possible then student property comes with a 5-year rental guarantee. Thereafter, students pay a year’s rent upfront and occupancy levels are usually between 99% and 100%. There are no evictions necessary as tenancies are non-residential. All of this means income is more consistent and voids are much rarer.

Putting this all together..

Residential Property Student Property
Higher growth Inflation linked growth
Lower Income Higher Income
Mortgageable Cash Purchase
Some gaps in income Consistent Income
Investments from £100k Investments from £50k

 

There are differences beyond this in terms of taxation and further benefits relating to purchase within a limited company. There are also options which sit between these two asset classes, such as serviced apartments. We’d encourage you to visit our Residential page and Student page or call us on 0800 088 2656 for a consultation.

 


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