Since we started to get involved in the niche student buy-to-let sector of student room investments in 2011, we have been involved in and witnessed many types of developments that have been offered to UK and international investors alike. It would be fair to say that we have seen the most diverse range of student room investments with a significant percentage of the products just not being good enough. In some instances, we can’t fathom why or who would buy into the rooms and if the ‘investors’ are just novices who don’t know any better or have been duped by some slick marketing and sales talk(!)
This article addresses something that has caused a bit of division amongst the staff at Aston Eaves: Are student rooms that are priced over £50,000 a good investment? Let’s split it up into two camps – the ‘No’ camp and the ‘Yes – depending on…’ camp.
The ‘No’ camp – Don’t invest in student buy-to-let pods priced over £50,000
Why would you even consider buying a room that is priced at £50,000 and over? Realistically, excluding the very best of luxury student investments, the most you can currently charge students in towns such as Liverpool, Manchester, Bradford or Newcastle is in the region of £125 per week. Assuming that you get a 48 week tenancy (which is very generous), that means a gross rental income of £6000. On a £50,000, that is a gross yield of 12%. Sounds great, right? From that figure, minus whatever needs to be subtracted and you get a clearer picture.
- Ground Rent ~ £300
- Service Charges ~ £800
- Rent collection/management ~£600
This equates to £1700 before you pay your income tax on the rental income. You are left with £4300 which is a net yield before taxes of 8.6%. This is assuming no void periods at all, which is extremely unlikely just ridiculous. Take your guaranteed 9% or 10% net yields with a massive pinch of salt.
Other questions you might ask include:
- Who pays for any damaged chairs or desks?
- Who replaces the bed / mattress if it breaks? Does it come out of the service charge?
- What about contents insurance? Do I need it? The freeholder needs to pay for buildings insurance, but what if any insurance can I buy to protect my investment?
- What about the running costs of the building i.e. security, cleaning, porter – is that all included and can I get it in writing?
- The exit strategy offered – have you ever run another investment opportunity, whether it is in student room investments or any other similar project where an exit strategy has been offered and implemented? Can I see the accounts?
I’m sure you can think of many more probing lines of enquiry – we’ve been asked a variety of questions in the last few years. the key thing to stress is that for £50,000 you can almost purchase a student buy-to-let investment in a reasonable popular student town. OK, maybe not quite – you’d probably need to spend in the £75,000+ bracket mark for a decent house in a lettable area, but the point still stands.
The ‘Yes’ camp – Investing in student pods over £50,000 can be worth it
It all depends on where you are looking to invest in student pods as student buy-to-let property. The only place we would consider spending so much for a single room is in absolute prime real estate places in major city centres. That is to say, not 10 or 15 minutes walk from the city centre, or 10 minutes walk from a very affluent part of town, but in the dead centre of it. The land values have got to be very high already and should have seen stable and continuous growth over the last 15 years – even during the recession. Only then can I justify a low yield if the real estate price is high and at £50,000 PER ROOM, it is high. If you are looking at price per square meter, it’s easy to work it out. An average student room investment or student studio investment in a regular development is approximately 17m2 on average – which is a healthy and sizeable room. This is approximately 200 sq. ft. At £50,000 per room, you are paying £250 per sq. ft. It’s your job to measure that against asking prices per sq. ft. in the town and city you’re investing in. As a hint and precursor, we can tell you now: There are very few spots in the UK where such prices come into play.
The only other place where we would consider paying anything above £50,000 per room is in London. If it’s in zones 1 to 2, then we’d be happy to pay up to £100,000 per room. In zone 3, upto £85,000 per room and in zones 4 or 5, approximately £75,000 per room. The reason? Land values. In central parts of zone 2 London, you can see sales of residential apartments averaging at £600 per sq. ft. At the prices stated above and basing it on the same size room (17m2 or 200 sq. ft.), you are going to pay £500/sq.ft., £425/sq. ft. and £375/sq. ft. respectively.
The other thing to consider, away from the pricing issue, is the fact that a number of local councils are making use of planning laws to restrict the permission of property being used as a student buy-to-let house i.e. in Sheffield, the council is very strict on allowing houses to be used as student residence in key residential areas. The primary driver for this is to reclaim former residential areas which had become a hotbed of student investment (with the idea that local long term residents pay more local taxes and put more back into the local community… and to possibly drive down house prices). So in effect, this external factor means that in some cases, depending on the location, it does become worth it to pay £50,000+ for a student pod instead of going down the traditional route of student buy-to-let houses.
So, there you have it in a nutshell: The two opposing arguments for clients to consider when sizing up whether to buy a student buy-to-let investment i.e. a house versus a student room investment for £50,000. If in doubt, get in touch with us and we’ll run the rule over the small details – even if the investment being offered isn’t from us. We promise to be as impartial as legitimately possible!