Students can make good tenants & here’s why.
1. You can fit more of them into a house. A 3 bed house will frequently accommodate 4 sharers – and that’s without letting the cupboard! This is more intensive than a let to a single tenant or even a house of professional sharers which can have a potential benefit on the yields. (see the next section on potential returns.)
2. Students aren’t quite as fussy. Students particularly undergraduates have tended not to be as fussy as professional tenants. They are more prepared to put up with slightly outdated kitchens and colourful bathroom suites than design conscious professional tenants. However, landlords shouldn’t be complacent; with the advent of more and more private halls accommodation standards are rising.
3. Rent in advance. Some tenants or more accurately their parents will often pay upfront for each semester or term. This is handy for a landlord as they have the rent in advance with which to pay any mortgage or other costs.
4. Student tenants are bright. This in theory makes dealing with them and sorting out problems easier. Catherine Bancroft-Rimmer, author of The Landlord’s Guide to Student Letting comments “You do get exceptions,” “but once you’ve explained why you need them to do something they are usually quite willing to go along with it.” From my experience there is nothing worse than trying to resolve a problem with a thick tenant. The phrase “like pulling teeth” comes to mind.
Where do student landlords go for their landlord insurance?
The potential returns for renting to students are good. This is for several reasons. Landlords receive returns on their buy to let investments in two ways. Income from rent and from the capital appreciation of the underlying asset value of the property.
Renting to students can potentially generate a much higher yield than letting a property to a single tenant. The current average according to Paragon is just over 6% nationally although there are significant variations across the country. Student rentals have the potential to significantly out perform this and multi lets for professional tenants for several reasons:
Students are not as fussy. This means that they are prepared to live in areas not suitable for professional tenants and where capital values of properties are much lower. This potentially generates a much higher rental yield for landlords.
It is possible to let out more rooms in a student house generally thereby increasing the potential rent. For instance many student landlords who let a 3 bed house will let the lounge as a bedroom as well as increasing potential rent levels by 25%.
The latest research from mortgage lender Paragon shows gross rental yields for the market as a whole averaging 6.3 per cent.
John Heron of Paragon says its figures suggest student properties typically enjoy a yield premium of around 27 per cent over the market average, putting student rental yields at around 8 per cent.
"There is a definite premium over renting to a family, as more sharers means higher rental density," he says. "Student properties are also often in more modest parts of town."
Research carried out by Landlord Mortgages in 2007 suggested that it was possible to obtain gross yields of over 9% in some parts of the country.
Yields if anything are rising. This is because as capital values fall, rents are still climbing as can be seen from the recent survey by Accommodation For Students on rent levels.
Research by the Halifax in the summer of 07 suggested that University towns have outperformed other towns in terms of house price growth.
The top 20 university towns also trade, on average, at a premium of £73,005 (or 37%) to the average UK house price. On average, university towns trade at a premium of £3,745 (or 2%) to the average house price in their county, with an average premium of £39,417 (or 20%) to the average UK house price.
If this out performance continues then there is some potential for an investment in a University town doing better than the UK average. However, Property Hawk would caution landlords of drawing to strong a conclusion from these figures. It’s more important to concentrate on the characteristics of the individual property and the immediate area in order to generate good future growth prospects.
Type of property to go for
Students generally prefer to go into Halls for the first year after which they then look for accommodation in groups of 4 or 5. Our research shows that different student groups have varying accommodation requirements. Post graduates for instance frequently prioritise a peaceful working environment and their demands are very similar to that of professional renters. Undergraduates are more likely to request accommodation located close to entertainment facilities and town centres and are more willing to live in larger shared properties.
Location is often a key factor. Students like to be near each other. Chris Horne Editor of expert landlord website Property Hawk says:
“If you can find out where the ‘cool’ bars and places to hang out are; then a property close by will definitely have a marketing advantage. Essential is that your property has good access by public transport to the University campuses as well as the night life and basic shops and services. Not all students have cars!”
A three bedroom property is probably ideal. This is because with a little bit of work, it should be possible to convert one of the ground floor rooms to an additional bedroom thereby allowing you as the landlord to accommodate 4 students. If you provide accommodation for 5 or more students, then you will very likely have to obtain a licence for your property as a House In Multiple Occupation (HMO). This in itself is not a disaster in that it will probably only cost a couple of hundred pounds from the local authority. However, what could be more difficult is that in order to obtain the licence the Local Authority may insist on certain minimum standards in the property. Examples of this are sinks in every bedroom along with other expensive fire safety measures. These works will not only be costly but potentially they will detract from the attraction of your property to the owner occupation market when you come to sell. To avoid this most student landlords are best advised at looking to keep the maximum number of student renters to 4. The exception to this might be where a landlord was looking at making it into a more involved commercial undertaking in which case buying an already licensed HMO would probably be cheaper and make more sense.
Victorian terraced properties often provide ideal student accommodation because of the generous room sizes. Large spacious rooms are particularly appealing to students as these are often more than just a place to sleep. In theory they will be places of study and also their private space to retreat to when all the partying and communal living gets too much! Landlords should therefore look for properties with 3 generous double rooms and one living room that can be converted to this.
Financing and insuring your buy-to-let investment
One of the biggest challenges that landlords face when looking to rent out to students is that they very often require a mortgage that covers HMO (house of multiple occupancy) status. This type of mortgage is required for any house where there are three or more tenants who form two or more households, and in order to realise the greatest profit from their property most student landlords rent houses to more than three tenants. The difficulty with finding a mortgage which allows a landlord to rent out a HMO is that currently less than ten of 150 mortgage providers allow for this criteria. Furthermore, lenders often request that further criteria should be adhered to, for example some HMO mortgage lenders will insist that a landlord must demonstrate a certain amount of Buy to Let experience before entering this sector, consequently this is not an area that a novice Buy to Let landlord could easily enter.
Insurance is also an issue. Finding the right landlords insurance is essential as not all insurance companies are keen on student tenants and they may impose higher excesses or charge higher premiums where students are involved. It is absolutely essential to ensure that a landlord’s property insurer is fully aware of the position if you let to students. This is because many insurers consider that the type of tenant to be a “material fact”. This means that if there is a claim and you have not disclosed this, they can quite legitimately seek to repudiate a claim.
There are obviously some pitfalls of renting to students and it is as well to be aware of these before a landlord seriously considers investing.
Competition – renting to students in some areas is a very competitive market. Some areas are already oversupplied according to Simon Thompson Director of Accommodation for Students.
"Leeds is quite overpopulated with student accommodation, as are the Fallowfield and Withington areas of Manchester."
Universities and increasingly private developers are constructing purpose built halls of residences. These aim for the top end of the market but none the less it is worth a landlord talking to the local planners to find out what is in the pipeline.
Damage – some of the nightmare stories of the young ones may be exaggerated about the damage caused by wild student parties however, it is a reality that renting to young people away from parental control for the first time has its risks. One way of avoiding the risk of bearing the costs of damage is to ensure the students have a guarantor.
Voids – students drop out. Although there is a great demand for student rental property, it is not uncommon for students to drop out from their course. The impact on you as a student landlord will vary depending on how the tenancy has been structured. If the tenancy is a joint tenancy then the other student tenants will be responsible for paying any shortfall in individual rent whilst they find an acceptable replacement tenant. However, if each room is let separately with a individual tenancy agreement with each of the tenants, then this means that you the landlord will not receive rent whilst the room remains unoccupied. Clearly a landlord should generally go for a joint tenancy for certainty, whilst the other approach gives both parties more flexibility.
The other aspect about renting to students is that their period of occupation is generally only for the academic year which is only 9 months. The academic year finishes at the end of May and many students will go away for the summer and decide to rent somewhere else on return. Therefore a landlord can only count on rent for 9 months of the year. It may be that student tenants decide to stay for several years. In this case they will continue to pay rent during the Summer break in order to retain the property. Sometimes a landlord will negotiate a reduced rent during the Summer in order to retain the existing tenants. The upshot is that a landlord needs to factor in a void period into their investment calculation.