Top 10 Student Property Investment Misconceptions
So you’ve done some research, saved up some money, and decided you finally want to take that exciting first step in buying a property strictly for investment purposes. You’ve reminded yourself that this is not a decision made using your heart, but rather using your head. And you decided student property is the way to go, because let’s face it… who isn’t looking for more bang for their buck these days?
Like any one of us, you’ve probably started your search on Google; maybe you even browsed through Rightmove or Zoopla and the plethora of property portals available online. Feeling overwhelmed you suddenly realise how many questions pop up and that dream becomes a little more blurry.
We’ve been in the property market a long while now and have come to recognize patterns in investors. So before you enter your details and begin to receive the onslaught of calls and emails, here are the top 10 student property investment misconceptions we’ve found to be the most common. The good and the bad, it’s all there for you.
1. I can get Finance! Or wait… can I?
We’ll cover this one first as this is probably one of our most asked questions and something people assume they can get easily.
Yup, its true folks, this will be a cash investment only. Student property falls under commercial licensing, which ultimately means you can’t get finance for it. The main reasons for this are because most banks won’t offer finance due to the typical size of student property units and also due to the property not yet being fully built yet.
At present, to get a mortgage in the UK a property has to be over 300 square feet (or just over 30 square meters), some banks ask for a separate bedroom too, so you need to check.
Also, you need to have residential licensing in place. Most student properties are 12-24 square meters with commercial licenses, meaning for banks it just won’t cut it. Most banks will consider finance only 3 months before or after completion. Some help to buy schemes might even push it to 6 months.
Lastly, the bank also wants to be able to take ownership and place their own tenants if needed. Good student properties are fully managed to maintain standards and higher yields for investors, so this isn’t a possibility either. In a nut shell, it means banks couldn’t get anyone else to rent, except students. And as we all know banks don’t easily like to relinquish control.
2. I’ll benefit from capital appreciation in time too, no doubt.
Well… as much as we can’t say that you won’t benefit from capital appreciation we can’t really say that there will be much of it either.
Even though it has now been around for a while, student property is still a relatively new form of accommodation and property investment. Our advice, looking back historically, is there hasn’t really been a lot of uplift to date. But like any property market, no one can predict the future, not even us.
Student property is an investment based on rental yields and this is something to always keep at the forefront of your mind. Don’t let too many factors cloud your judgement and try to balance a portfolio. Have properties that have strong capital growth and have properties that have a strong rental yield. A healthy portfolio mix is a happy one!
3. Commercial licensing… surely that is the same as residential licensing.
Now this is where new investors usually get a bit more caught out. Many people don’t realise there are differences in licensing and how they work, or really what they even mean!
While some real gems in student investment offer a development that can and will cater to both, the reality is that most student properties are strictly student properties. This means commercial licensing will most likely be in place. What this means in short is that only students can live in it. So no matter how you want to twist it, no one else but a student can live in the property. So if you do find a gem that can house both… go for it!
4. It’s mine! I can live in there if I want to!
It may be your party and you can cry if you want to… but no, you can’t live there too, not even for a week. Otherwise this really would be too good to be true!
Sadly because of the commercial licensing it means you can’t have your cake and eat the whole thing too. Even if you bought the property and owned it 100%, you can’t live in there yourself. It’s a shame in our opinion as well as looking at some of these places they are more luxurious than most Hilton Hotel Penthouses!
But there IS a wonderfully gorgeous and generous silver lining. Especially for all of you that want to save on those hideous rental costs that come with sending your little one off to University. In the event that you bought the property for your own children to go and study, then by all means, they can live in there for the entire duration of their studies! Which will undoubtedly save you money in the long run and leave you with an investment to boot. So you might not be able to have the whole cake all to yourself, but your offspring can help you enjoy the taste of it.
5. The yield is guaranteed, ah what bliss.
Ok, this is something we are particularly wary about. A guaranteed yield really needs to be called “Assured”.
We personally tell all our clients to steer clear from companies that use the word guaranteed, or in fact if they tell you that anything is guaranteed.
Due to legalities in the UK and the Financial Ombudsman one can’t use the word guarantee. This doesn’t however mean that if a company uses the word that it might not be true. All good student properties will have a “guarantee”, or as they should be called, an “assured” yield for an X amount of years. This is completely safe and fine, and is something we would recommend any investor to look for. If the company isn’t offering a yield of some kind for at least 2-3 years then it’s best to let that one slip through your fingers.
Most student developments have been meticulously designed, located, and researched. When the developer has decided to build, they are confident they can gain a certain amount from rents due to the huge demand and the research gone behind pre-building. With any good student investment, you should feel reasonably assured.
6. I’ll resell in a few years, the property market is huge, and it won’t be hard.
You’re absolutely right in thinking the property market is huge! The one thing we can say is as long as there are people looking to rent and buy, then it will always be huge. But is the student property sector the same? Well… not entirely.
The student property market is still relatively young, and because of this it is hard for anyone to know what the market will be like in the future. Not even we can predict that for you. While it’s entirely possible to resell, we can’t say which way the market will go and what the definitive future of it will be. For now all we can say is it’s good and the demand for more purpose built student accommodation is certainly still there.
7. It’s smaller so it should be cheaper!
While we fully understand the reasoning behind this, student property doesn’t quite work the same way. If you are used to measuring prices by square footage then you are in for a little bit of a surprise. A unit in a student investment can be pricey, and if it is good it shouldn’t be a cheap deal.
Although Student Properties can be cheaper than your usual buy-to-let in London one has to remember that student property can’t be measured the same way as a residential property. Prices for square meter will be higher, but so are the rewards. Student properties are geared towards high yields. Their locations are sometimes freakishly amazing, and let’s not forget they are kitted out to the max these days! They might be smaller, but remember that age old saying “Good things come in small packages”? It’s all about the yield, not the size.
8. Developer buy-backs, Yay or Nay?
This is something that is a bit trickier to explain as it can be good and bad. What we would first like to say is that you shouldn’t buy something just because it can be bought back. Be careful with these and do your own research. Sometimes it’s worth not having a buy-back option at all as you can actually get greater rewards by selling it off yourself.
However, it can be a small blessing in disguise to the more hesitant investor. For those of you just stepping into the market and not wanting to be scalded, a buy-back can bring on a little sigh of relief.
Our tip for you? Just bear in mind that you might have got a better deal elsewhere if you know what your doing, but if you’re not quite seasoned yet you can feel cushy knowing that the options there.
9. After 5 years I can exit
We slightly covered this already in point 6, but it’s still worth delving into a bit more. As student investments are a relatively new type of investment an exit could be difficult. It’s not the most liquid of markets.
Why you ask? Because you can’t sell them to just anybody. You still need to be able to find a cash rich person like yourself to buy off of you. This all comes back to student property essentially being a commercial property, and banks won’t lend due to the typical size of units.
Five years down the road the building should already be built and running for a time, but remember that most banks require a minimum size of 300 square feet or about 30 square meters for them to consider lending. Also as it’s under a commercial license it will be harder for them to find potential new tenants if ever needed. Will this ever change? Who knows. But it’s worth keeping in mind!
10. Off-plan – so I’m basically funding the development…
Off-plan by definition means the building is not completed yet, and in fact probably hasn’t even started. The only things you can view are the plans available. In the best case scenario a marketing unit can be viewed, which demonstrates the overall look of the unit.
In this sense your cash is undeniably used to fund the project. But you should be aware of what exactly goes on. Many people think that the property developer will receive all funds in one lump sum. This might be the case for some projects, but we highly suggest never going forward with one of those. A good developer will never ask for the full amount to be paid up front. Most are done with a pre-agreed payment system in place.
In most cases all investors’ money is pooled and goes into a lawyers’ account, where after (and only after) the development has reached a certain stage will more funds be released to the developer. In essence payments to the developer are made in arrears. Only when certain steps have been completed, agreed on, and signed off by an architect can more funds be released to the developer.
The good news is that most reputable developer’s offer investor’s interest on the money invested while construction is underway. Meaning even when the building isn’t complete, you still make money off of it.
The other obvious, but often forgotten, positive side is because the investment is off-plan it means you save money by buying something that isn’t already complete. Once a building is complete it appreciates in value and a current market value mark-up is applied to any further purchases. It has now become safer and the price has risen, welcome to the property investment world.
Investment is always a risk no matter what market you entre or avenue you decide to go down. The same applies to buying off-plan. The risk is higher, but the rewards are also higher than an average investment. It is only by doing your own research and finding the right company with the right options that you will be able to minimise the risks involved and enjoy the growth your investments will produce. The UK student property market provides higher than average yields and with the right hat on you can go far. And always remember, investments are just that; they carry risks, which is why the rewards are high. Use your head, not your heart.
If you enjoyed learning something new today from our top 10 misconceptions, then you might enjoy reading about what to look out for when investing in student property as well.