Investing in student pods – the current theme in the UK
In my inbox this morning, I received six different offers from developers, agents, estate and sub-agents in relation to marketing student investments and student pods for them. SIX!
Out of the six, we deemed only one of them worthwhile (in our humble opinion) due to a number of factors and since 6 is the special number today, we’ll outline six reasons as to our hesitation and things that you should look out for when being offered these high yielding student investments – whether it’s from us or elsewhere:
1. A student pod – what is it exactly?
We’ve had this term bandied about for the last two years and it’s used in tandem with dorm room or student bedroom. That is, in effect, what a pod is unless stated otherwise. So for the price that you’re being offered these student pods or rooms or dorms, you’ll get a certain amount of square metres and possibly a sink or a shower if it’s en-suite. The key point is this: Don’t be duped into thinking it’s a flat or even a studio. A pod is a room – that’s it. The best thing you can possibly compare it to is a bedsit, so bear this in mind when you’re being asked to part with figures of upto £50,000 for a ‘student pod’.
2. Is it a full title? Or is a shared scheme with other parties? Can you sell it?
It is important to see what you are actually buying into and it’s the most crucial question you should ask once you have decided the investment stacks up. At Aston Eaves, we believe that having a thought out exit strategy when buying is something all rental investors should question. It’s all well and rosy when the rent cheque hits the account, but what if you need to sell quick? It’s absolutely crucial, unless there is a legally enforceable exit strategy by the developer, that you own the pod outright and have full title to do as you please. This is a fundamental factor when asking yourself ‘are student pods good investments’ otherwise you could end up being tied into something which you have no control over.
3. Is it mortgageable? Can you secure lending on it?
If the company or agent you’re buying it from answers the question to whether a mortgage is obtainable for student pods with a simple ‘Yes’, then ask for proof or ask to speak to the mortgage broker who can do this. Never part with any cash prior to determining whether it is mortgageable or not. If you are buying the student investment using cash, then that is a different matter somewhat, but this again relates to an exit strategy. If you are buying for cash, then you should still determine whether lending can be secured against it. This is because you need to have as many options available to you as possible when it comes to selling and if it isn’t mortgageable then you’ll be narrowing down your options on who to sell the unit to. This is actually more of a personal opinion more than anything – if you are happy to buy using cash and are a long term buy to hold investor, then it’s not as important.
4. The numbers look good for now, but what about the future?
A lot of these offers seem to have a guaranteed 8% net yield or even 10% net yield for the first year or two. This sounds great, but what about the years beyond that? Obviously, it is asking a lot to provide any long term rental guarantees, but it is important for you to do your due diligence and make sure that there will be a long term demand for student lets in the market you are targeting. Some of the developments we have seen are not good prospects for the long term. In one particular Northern town for example, rental yields of 10% net are being guaranteed for the first year by the agent, but the town itself and the University in particular has seen student number applications decrease in 2011. The University only came into existence under 20 years ago and is not a reputable institution in the UK. When tuition fees increase in 2012, then universities like this will be hit by the even lower number of applicants than this year. In short, beyond the rental guarantees, you should look at the institution the private halls of residence or pods will serve and use this as a yardstick for future rentability.
5. Armchair investing in student pods in the UK – is it for you?
If you are a UK investor and you like to get your hands dirty, then we would advise that student pods won’t be to your taste. In fact, we’ll outline below who these pods or student investments will suit:
- Retired – looking for a hands off investment to supplement your retired lifestyle
- Long distance – If you live in one part of the country and want a passive income from high yielding property
- Overseas – A lot of Malaysian, Singaporean and Chinese investors seem to be keen on student pods and it suits them as it’s fully managed and simple
- Risk averse with cash in the bank – this will suit you as it requires minimum input and will yield better than leaving cash in your bank account.
… and we think it won’t suit you if:
- You like to buy, refurbish and flip on a property – this is for rental purposes and unless you buy at volume, flipping won’t get you far.
- You want to utilise buy-to-let mortgages and leverage your purchases – Again, looking at point 3 above, unless you can get financing, these are not for you.
- You don’t like student lets – then it’s obvious these private halls of residence investments are not for you.
6. There’s 100 rooms in the residence – is it fully occupied at 100%?
If the rental guarantee is for all 100 rooms to 100 different investors as an example, then can the agent or developer guarantee 100% occupancy, thus ensuring all 100 investors get their rent payments every month? Nope, didn’t think so. It is difficult to guarantee 100% occupancy, but if the company can let out 90% of the student accommodation (which is still very good) then you’d think that they’ll make enough money to cover the 10% whose student pods are vacant. Again though, the question is – what happens after the rental guarantee? Will they or their management company favour certain pods over others e.g. if your unit is on the ground floor or next to a busy bathroom, then it’s likely that it will rent out towards the end. What is important here is to get a hold of the floor plans and you should choose which unit you’d like to take and not by leaving it to the company to pick the rooms out for you.