Student pod mortgages – do such things exist?
One of the big questions we get asked is can we offer financing or student pod mortgages on student pods? Since most of our student room investments are within the price bracket of £15,000 to £33,000, the usual answer is no. However, the prospective client can and does arrange commercial finance or private lender finance. Some even borrow using bridging facilities, personal loans or borrowing against their credit cards. We are not FSA regulated and we are not giving you advice on what to do to raise finance, but you should think creatively on how to raise finance if you don’t have the actual cash to make the acquisition.
However, in short, we would rather you have direct access to the capital required rather than over exerting yourself and stretching beyond your limits. Since most of our student room investments are priced within the £15,000-£33,000 price bracket, we feel that most investors should be able to make this commitment.
What about student pods that are priced over £33,000?
Via developers and agents, We have been offered the opportunity to work in partnership and offer our clients their student pods in Liverpool, Bolton and Leicester which are priced from £49,000 to £65,000 per bed space or pod. Whilst we have not discounted the idea of marketing these student pod investments to our client base, after much consideration, we have declined to take developers up on this opportunity. There are two main reasons as to why, and if you look through our website, we have touched on this before:
1. In towns such as Liverpool, Bolton, Leicester and Leeds, an investor can purchase a 2 bed terraced house at a similar price point. OK, we accept that these 2 bed terraces aren’t always going to be in the best part of town, but a) You CAN leverage against them using traditional buy-to-let mortgages and b) The net rental yield is comparable at 8,9 or even 10%.
2. What is the defined exit for student pods priced at £49,000 upwards? When you are comparing asset classes, the only exit is to other investors or to parents who have children at the respective universities. With a terraced house priced at £49,000 upwards, the exit strategies are much more defined and can be sold on to investors, first time buyers and next time buyers. If however, the student pods are priced at say, anything between £10,000 to £30,000, the traditional houses are not competitive alternatives. Well, maybe in the Anfield or Walton parts of Liverpool where you can still pick up severely dilapidated houses for £20k+ (but you’ve got to see these houses to appreciate that considering these houses as an investment is fool hardy!)
So, that is it really. The reasoning why you should not consider student pods at £49,000 upwards is because they fall in line as direct competitors to 2 bed houses which have a lot more going for it. Priced at £10k-£30k, the student pod investment defines its own asset class and has no linkage to houses.
Saying that, we are not saying that we would not consider looking at student pods priced at £49,000 upwards, but they’re going to have to be something special or set in London. Paying £50k for a pod in Liverpool is, in our opinion, restricting your exit strategies from the very outset, unless something changes in the market whereby student pod mortgages become freely available.
Developer finance and staged Payments – Isn’t that an alternative to mortgages?
Possibly, but in most cases that we have seen the staged payments are still cash purchases. For example, for a student pod in Liverpool costing £50k, this will come in the form of 10% down (£5,000), 40% in 6 months during build (£20,000) and then the remaining 50% upon completion (£25,000). We don’t see how this differs from making a cash payment and it just means that you need to keep cash in bank that isn’t working for you for two or three years whilst the student development is being built out.
If the developer is genuinely offering a 5 or 10 year vendor or developer financing at reasonable rates (say 5% or 6 %) on either a repayment or interest only option, then yes, we would say that is pretty good. However, please ask your solicitor to pore over the details to make sure that the terms of the developer financing cannot be suddenly altered to the benefit of the developer.