Student Property - A Guide

Investing specifically in student property may make sense for a buy-to-let investor. For those with children entering or already in higher education, an investment in student property may not only help cut student debt but also reap profitable rewards. This guide reviews your options and the tax situation with regard to student property.

• Why invest in student property?
• What sort of property should we be looking at?
• Will I need an HMO licence?
• What do I need to think about as a landlord?
• What kind of income can I expect to generate?
• Should I be my son / daughter's landlord?
• What's the tax situation if I own the property?
• What's the tax situation if my son / daughter owns the property?
• How do we go about buying a property in our child's name?
• Is there an alternative to buying a property on our own?

Why invest in student property?

Approximately 43% of all 18 to 30 year olds in the UK entered higher education in 2005 /06 (Source: The Department for Children, Schools and Families). The government's professed aim is for that figure to rise to 50% by 2010. Although universities aim to provide at least first-year accommodation, spaces are limited and some will always need to rent student digs within the private rented sector. Even if students do get in to halls of residence in the first year, they typically go on to rent their own homes for the remainder of their course - at least another two years.

So the market for student property is there but what about the investment potential? According to research from Halifax Estate Agents, 20 university towns across the UK recorded an increase in house prices of 20% or more over the year to June 2007, close to double the average national increase over the same period. In fact, the top 20 university towns also trade, on average, at a premium of almost 37% to the average UK house price.

However, the survey also showed that eight of the top 20 ranked universities trade at a discount to the average house price in their county and, thus, potentially offer good value for house buyers.

However, against these figures one must set the prospects for the housing market in the future where gains may well be less exciting. Picking the right rental investment will require getting the balance right between a property that appeals to tenants now and one that will have future demand from owner-occupiers to drive capital value. It's worth knowing that the least expensive university town in the top 20 is Nottingham where average house prices in the summer of 2007 stood at £155,072.

Rental returns on student property look more than reasonable. Yields in university towns can be as high as 9% gross (Source: Daily Mail , 11 April 2008) and, with many students now accustomed to paying rent all year round, void periods during the summer do not have to pose the problem they once did.

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What sort of property should we be looking at?

You may be concerned that any property you let to students may be transformed into a 'Young Ones' style squalid squat. Don't be. Students are no more likely to trash a property than any other tenants and bear in mind you'll probably be generating a higher rental income from students than you would from other tenants.

So what kind of property does it need to be? To state the obvious, your property will need several bedrooms (one for each individual student or couple) but only a single reception area. Multiple bathrooms and multiple lavatories are a necessity in larger houses. However, be wary for the point at which your property becomes a 'house of multiple occupancy' or HMO, as for this you will need a special license. Bear in mind that modern students may also require internet points in every room!

Students by and large do not own furniture so you will need to provide the basics by way of beds, wardrobes, chairs and desks. It would be as well to factor in regular decoration as an ongoing cost. Decorating before the start of each new academic year will make your house appealing to tenants, who will select the best from the many places that are likely to be available.

Maintenance costs are likely to be high. You might need to consider a new kitchen every three to five years and new carpets every two years. However, maintain high standards at your property and you will attract more affluent students, who will be prepared to pay a premium rent and want to keep their home in good order.

To avoid the house turning into a revolving door of students moving in and out, have your tenants sign renewable contracts. This should come in the form of an Assured Shorthold Tenancy Agreement (AST) which can be purchased in any newsagent, or even downloaded from the internet.

Within the Assured Shorthold Tenancy, make sure your students commit to the whole academic year. It should also state that they must give at least one month's notice if they want to leave at the end of this year. You should ask for a deposit of between four and six weeks' rent upfront. You are also within your rights to require that, at the start of each term, the full term's rent is payable.

In April 2007, the government's Tenancy Deposit Scheme came into effect. This requires landlords to hand deposits over to a registered third party for safekeeping. Information on the mandatory Tenancy Deposit Scheme and how it will operate is available online from The Dispute Service, an independent, not-for-profit company established in 2003 to resolve complaints and disputes arising in the private rented sector speedily. As well as running the Tenancy Deposit Scheme, the company deals with complaints against members of The Association of Residential Letting Agents (ARLA).

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Will I need an HMO licence?

In April 2006, the government introduced HMO licences (Houses of Multiple Occupancy) to the private rented sector. The definition of an HMO is somewhat arbitrary and, as a result, there was a great deal of confusion among landlords - many of whom failed to apply for licences. According to the government however, an HMO is 'an entire house or flat that has three or more tenants that form part of two or more separate households'. But there are other definitions too, such as the property has to be built over three floors.

Costs for HMO licences will vary depending on your local authority. In some London boroughs, licences will cost up to £2,000. They expire after five years and are not transferable. However, if your property constitutes an HMO, failing to have a licence for it is now a criminal offence. Buy-to-let lenders may also want to see the licence - or at least evidence that you are going to buy one - upfront.

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What do I need to think about as a landlord?

The University of Surrey offers guidelines to prospective landlords which include the following suggestions:

• A typical student house is a three-bedroom semi-detached with two reception rooms, one of which becomes the fourth bedroom. The size of the smallest bedroom is important, no less than 5.4 square metres (about 70 sq.ft.), because students prefer to study in their own rooms. Larger houses are a possibility but above five bedrooms, or two storeys, there are additional safety requirements as well as HMO considerations.
• Proximity to the university is important. Ideally, houses should be no more than two miles away. Parking should also be a consideration. In houses away from the town centre the availability of parking space for two cars per house, including the road outside, is preferable. And if your property comes with a garden, bear in mind that students are not usually green-fingered!
• Central heating is essential, preferably by gas or off-peak electricity. The operation and maintenance of heating is the most likely problem area in student letting so you should ensure the system and controls are straightforward, work properly and come with written instructions.
• If you have a choice, conventionally designed and constructed houses are probably best. DIY conversions can pose safety problems. Students expect a reasonable level of amenity and decoration but safety and security are the most important requirements.
• Kitchens should have adequate storage and at least one cupboard per student. There should be space for a family-sized fridge-freezer of at least 8cu.ft. Bathrooms should be tiled and have a bath with shower attachment and curtain or screen. Both kitchen and bathroom must have adequate ventilation.

You should also be aware that there is a substantial thicket of regulations surrounding rental property now, including the Housing Act 2004, which means that private landlords face new compliance issues about the size of student rooms and the ratio of toilets to tenants.

Any house occupied by groups of students should also have a mains-linked smoke detector on each floor, a fire door to the kitchen and a fire blanket in the kitchen. The furniture you provide should be fire retardant (BS5872). Electrical appliances should be safety-checked annually. If letting property you are legally required to ensure that wiring and sockets are certified periodically, at least every five years. This can be arranged via industry regulator, the NICEIC (which formerly stood for National Inspection Council for Electrical Installation Contracting). The law also requires that gas appliances are safety-checked and serviced once a year by a Corgi-registered engineer who will provide you with a Landlords' Gas Safety Record.

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What kind of income can I expect to generate?

According to the National Union of Students (NUS) which carries out surveys on the cost of living for students, rental payments for the academic year 2005-06 account for by far the greatest proportion of student spending. For the 39 week academic year, rents are estimated to average £3,085 per annum in London and £2,215 outside London. Rent accounts for 29.4% and 25.1%, respectively, of all expenditure.

Growing pressures on student incomes, including the introduction of tuition fees in 1998 and then of top-up fees in 2004, mean that students are likely to remain price-sensitive to accommodation costs. There will however be those that require, and can afford to pay for, higher quality bespoke student accommodation.

For people looking to develop or fund student accommodation, an important feature of the market is the variation in rent according to type of property. The majority of student accommodation is in the form of basic, single self-catered rooms with shared bathroom and kitchen facilities. In 2005, the average rent for such property was between £68 and £102 a week in London and between £41 and £57 a week in the North West (Source: NUS October 2006).

Most purpose-built new student accommodation is in the form of en-suite rooms. Obviously, this type of stock attracts a rental premium over single rooms - you can probably budget in the region of 25% extra.

The rent you can expect to charge will depend on the standard of the accommodation and its proximity to the university. As a rough guide you can expect approximately £220-240 per bedroom per month. For example, a four bedroom house with rooms let at a rent of £230 per month per room for a tenancy of 11 1/2 months will produce an annual income of £10,580.

Do remember that income from property letting is taxable but that expenses can be offset against this. Allowable expenses include interest on your mortgage repayments, repairs and maintenance and buildings insurance. Capital expenses such as improvements to the property cannot be offset.

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Should I be my son / daughter's landlord?

After tuition fees the biggest item on a student's list of expenses is accommodation. However, rather than rack up debts on rent for three (or more) years, you and your children may want to consider going into the property business.

The most common way to do this is by taking out your own buy-to-let mortgage. This will mean raising a deposit of at least 20% of the property value, which many parents achieve by releasing equity from their residential home. You will also have to prove to a lender that the monthly rental income from your student buy-to-let will amount to between 125-130% of the interest part of your mortgage repayments. Depending on the lender, the rate of interest on which this is calculated could be the advertised rate of the mortgage, an 'assumed' interest rate - which will be higher than that - or even its standard variable rate (SVR) which will probably be higher still.

Especially when venturing into the buy-to-let market for the first time, it is crucial to seek independent financial advice. You will also need to consider a number of factors in advance such as the state of the property market, tax implications and, not least, your likely future relationship with your offspring!

Another option takes the form of an innovative mortgage launched in June 2006 by Bath Building Society. Called 'Buy For Uni', the scheme enables students to purchase the property they live in while at university by taking a mortgage of up to100% of its value. The property must have no more than four bedrooms and must be within 10 miles of the university being attended. As they are not earning, adequate rental income - with watertight tenancy contracts - will need to be proved to the lender. On loans over 80% of the value of the property there will also be a collateral charge over the parents' property.

Either of these routes will entail filling out tax returns, keeping an eye on tenants and drawing up bona fide Assured Shorthold Tenancy Agreements. Unless you pay for a lettings agent to fully manage the property - which will cost in the region of 15% of monthly rental income according to the Association of Rental Lettings Agents (ARLA) - you will have to maintain the property yourself. This may be difficult if it is not locally-based and remember it is also likely to be vacant during the summer months.

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What's the tax situation if I own the property?

As a homeowner you will already be benefiting from main residence relief. It means that any gain in price of your sole or principle private residence (your home) is free of capital gains tax. Unfortunately, the taxman's largesse won't extend to exempting any second property if you purchase it in your name. Do that and any capital gain you see in value when you come to sell it after, say, three or four years will be potentially liable for capital gains tax (CGT), charged at 18% on any gain above the annual exemption limit (2008 / 09).

Of course, if the property is purchased in joint names (your name and that of your partner) each co-owner may use his / her annual CGT exemption (£9,600 for 2008 / 09) to reduce the tax liability.

However, CGT is not the only tax issue you would potentially face. Any income generated will be added to your other income and taxed under Schedule A although allowable expenses can be offset against the rental income to minimise the tax payable. Where a couple jointly own a property, income will usually be deemed to be split 50:50.

If one parent is a non-taxpayer the property could be registered in their name only, to utilise their personal tax allowance. But doing this may then have a knock-on effect on potential inheritance tax liabilities. The value of the property (less any outstanding mortgage) will be included as part of the parent's estate on death. Even in joint names, the addition of a second property to your family estate may leave you wondering how your offspring will cope with a potential inheritance tax bill.

However, you may prefer to put your child's name on the deeds instead.

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What's the tax situation if my son / daughter owns the property?

Although you are likely to be providing the financing for the property it may well make sense for it to be in your son / daughter's name. Do this and you avoid capital gains tax straight away, providing that the student resides in the property as his or her principal private residence.

Income tax will also be less of a problem. If the gross rent received from those sharing the house does not exceed £4,250 (in the tax year 2008 / 2009), the student will enjoy the rent tax-free, under the government's Rent a Room scheme, unless he / she elects to the contrary. In effect, the student would benefit from a sizeable tax-free allowance of £10,285, being the combination of the Rent a Room allowance and the personal allowance, which in the current tax year (2008 / 09) is £6,035. Bear in mind that no tax deductible expenses are allowed under the Rent a Room scheme.

Alternatively, rental income may be added to any other income the student may have and taxed under Schedule A after the deduction of any allowable expenses. Your offspring will need to think carefully which is the most tax advantageous position - and this will depend on their circumstances.

Any deposit you pay as part of the purchase will count as a gift to the student for inheritance tax purposes. All or part of the gift may be exempt under the £3,000 annual exemption and any part of the £3,000 annual exemption carried forward from the previous tax year. The excess will be a potentially exempt transfer and is taxable if the donor dies within seven years.

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How do we go about buying a property in our child's name?

If you decide to put the property in your offspring's name, while acting as guarantors on the mortgage, you may find that you can borrow more at a lower cost than you would be able to through a conventional buy-to-let mortgage, which would be likely to be at a higher rate of interest.

Consider a capital appreciation loan. The property is purchased by your child and it is his / her name that appears on the title deeds. This means that they will qualify for principal private residence exemption because the owner is living in the property. Your contribution is a loan secured against the property structured in such a way that you will share in any capital appreciation. Charge your child no interest on the loan and you'll pay no income tax and because it is a primary debt between you and your child, you won't have to pay CGT on the increase in value.

Such a financial arrangement also protects you from your child selling the property and doing a bunk with the money (perish the thought). If a further mortgage is needed on the property itself, again, it would be in their name.

In broad terms it is probably not a good idea to give the house as an outright gift to the child. Your child could die, have to give the house as part of a divorce settlement, or even become bankrupt (more and more common among cash-strapped students). Look instead at a form of trust for the house, which can help with tax issues. This is a good route for parents who wish to retain some control over the property and perhaps use it as part of their retirement fund.

The property could be acquired and held under the terms of an appropriately worded trust deed with the parents both the trustees and beneficiaries of the trust alongside the student. Do take independent financial advice on such a trust arrangement before entering into it.

Depending on where your child goes to university you may find yourself pleasantly surprised when it comes to the stamp duty bill on the property purchase. Buying a property in a government-designated disadvantaged area means students could save up to £1,500 in Stamp Duty Land Tax if the property costs less than £150,000. These disadvantaged districts are defined by electoral wards and are often inner city areas close to universities, such as Lenton in Nottingham. However, it is important to check that the location still falls under the government's 'disadvantaged areas relief' as the list is constantly evolving.

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Is there an alternative to buying a property on our own?

After learning of its complexities, you may understandably prefer to avoid the landlord business. There may be many reasons for this - not least because students have been known to change their minds, drop out, and move to Goa! Equally important: how many good plumbers do you know 300 miles away? Add to that the fact that your Individual Savings Accounts don't need new roofs, new tenants, or risk getting broken into during the Christmas holidays!

But there are easier options available for parents; for example, you may buy into one of a growing number of developer student accommodation schemes such as those being created by the likes of Bournston ( www.bournston.co.uk/Student ) and Unite ( www.unite-group.co.uk ) in university towns around the UK.

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YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

There is no guarantee that you will make a profit on your investment. Very few buy-to-let mortgages are regulated by the Financial Services Authority. This means that you may not be able to take complaints about this type of mortgage to the Financial Ombudsman Service. You are also unlikely to be able to seek redress from the Financial Services Compensation Scheme if the firm against which you have a complaint becomes insolvent.

18 June 2008 © Moneyextra.com

MoneyExtra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.