Investing in new build student lets
Landlords who may be thinking about buying into purpose built student accommodation should stop and think. I noticed other landlord websites are awash with adverts / advertorials promoting purpose built specialist landlord accommodation offering ‘bite size’ buy-to-let that promise near or double digit guaranteed yields. I can only guess that the hefty commissions offered by developers and intermediaries has turned the proprietors of these websites heads and numbed their senses.
Would I invest in purpose built student accommodation?
I’ve never invested in purpose built student accommodation, such as student pods. I can’t think of any experienced landlords that have. Unless, things change here’s why they are not on my property investment hit list:
1. Value for money.
If you go to a supermarket and look at the price of a single apple, then a carton of nicely packaged apples and then compare them with the cost of buying those apples loose, per kg; most people would not be surprised that you get a hell of a lot more apples when you buy them loose.
Unsurprisingly purpose built student accommodation is very similar. It’s neatly packaged. The pictures look great, but how much space do you actually get for your £40 -60 grand?
If you look at something like a student pod costing, say £50,000, like ones currently available in Nottingham; you get just under 21 sqm of accommodation. Less than half the amount of space of a decent 1 bed flat, and nearer to a third of the space you would obtain by investing in a 2 bedroom flat or terrace property. With large amounts of 2 bedroom accommodation being available at between 60 – 80k then most landlords should look at borrowing or saving a little more, to ge a lot more space for their landlord buck.
2. Hidden costs.
Still using the place in Nottingham as an example, the development promises a communal gym. How lovely and thoughtful of the developer and no doubt freeholder. Any prospective purchaser will find out how generous the landlord really is when they start to receive the hefty service charge. If they think that the cost of the gym, swimming pool lift is all for free…think again. Have a look at my recent feature about OM property management the UK’s largest owner of freeholds for a few warning bells.
3. Guaranteed yield?
Well firstly, any property investor knows if the ‘guaranteed’ yield is too good to be true…it is! So when guaranteed yields are quoted, expect that somebody is trying to lure you in with something unsustainable. For a start the rental yield quoted is likely to be a gross yield not the amount you receive in your hand, the net yield. Experience the phenomenon of the incredible reducing yield as your double digit diminishes by several percentage points. To find out the difference between the two have a look at my recent article on rental yields.
Once the guaranteed yield period ends don’t expect to get anything approaching this yield, (this is if you get it at all – developers do go bust).
4. The alternatives
These purpose built blocks of student accommodation might be shiny and new but take it from me; in a couple of years they will no longer have a shiny new lustre. Students are not famed for careful housekeeping. So at this point are they any better than any other buy-to-let shell? Buying a new buy-to-let is a bit like buying a new car. You are guaranteed to lose 10% of its value as soon as you drive it out of the showroom. So think hard about whether this makes good investment sense.
5. Laziness costs
Having looked at the package offered with the Nottingham investment, the developer is luring you in with ‘free’ flat screen TV and furnishing. How much would that cost to buy? Maybe fifteen hundred quid at Ikea and Dixons? How much extra has been factored into the selling price for a new landlords convenience of having a full kitted out rental property. Are you really getting a good investment if you are being charged over the odds for your laziness in not getting a place fitted out yourself.
6. Finance opportunities
Who is going to finance your student investment dream? The chances are that most BTL lenders are going to take a very sceptical look at your proposal and then probably walk away. You may get the odd lender who will be prepared to stump up some money but more likely it’s going to be the one that the developer or agent has found for you (they will off course charge you for this and make on providing the finance to you as well). Finally you should be aware that you aren’t going to get anywhere near the best buy-to-let mortgage rates or deal or anything like it. This will inevitably impact on your rental profits and overall investment returns.
6. Resale opportunities
So you have your lovely shiny student accommodation ‘pod’, ‘flatlet’, whatever the developer is calling it. After a few years you realise that buy-to-let is not for you, or you need to raise some capital in a hurry for another ‘brilliant’ investment opportunity. What do you do to realise your ‘profits’. Who are you going to sell to? Well the only people interested are not lovely homeowners who will pay whatever they can afford to get their hands on their ‘dream home’. Instead the only people you can sell to are hard nosed property investors. These shark like creatures will not over-pay. They will try to screw every last penny out of you before doing the deal. Be prepared for a number of offers to fall through as the sharks play with you, waiting until you can’t take any more before going in for the kill with an absurdly low offer.
So you still want to invest in purpose built student accommodation?
Most Property Hawk regulars will be too savvy to get lured by these bite-sized, quick -fix, shiny property investments but just in case there are some newbie landlords or ambitious landlords who put their common sense on hold, then do your sums very carefully and do your homework. We would never say never buy purpose built student accommodation, just merely ‘caveat emptor’ BUYER BEWARE & good luck!
Have you had experience of financing and buying purpose built student accommodation, please post your comments below.
To see what the Investors Chronicle think about investing in student pods have a read of this recent article.