Simply by flicking through the television schedule, you can see what most property investment strategies consist of – moving to the countryside, getting a second home somewhere sunny, creating an architectural masterpiece or buying a ‘doer-upper’.
And although some derive vicarious pleasure from watching the trials and tribulations unfold on our screens, it does often make us think that perhaps property investing isn’t for us.
Not enough money, not enough time, not enough DIY skills.
Investing for profit
If we focus for the moment on property investing for profit, three main strategies come through – buying in an up-and-coming location, buying a property with potential (a doer-upper) or buying in an area where high demand drives up rental income.
These have their downsides.
Firstly, it helps to be a DIY expert; secondly, you must be lucky enough to have a great location on your doorstep – unless, of course, you want to commute to a project, manage it remotely or move.
Overseas investments too can seem like an adventure at first, but managing them from home throws up a whole range of new challenges. Besides, there is no more secure property market than right here in the UK.
Time, of course, is then also a factor.
Even if you have the perfect property just down the road, do you have the time to put in the work required to make the profit worthwhile?
Even if you buy a home that requires no work, there is still a lot of effort required in renting it out, managing it and bringing home a return.
How the average buy-to-let works
Firstly, as the UK government’s Money Advice Service puts it:
“Buy-to-let investment is very different from owning your own home. When you become a landlord, you’re effectively running a small business – one with important legal responsibilities.”
Hear any alarm bells? Here’s how it works.
Buy-to-let property investors will either buy a property for cash or take out a mortgage, with the majority having to settle for the latter.
Mortgages, as most of us are aware, come with a variety of risks:
- No tenant doesn’t mean no repayments – your mortgage won’t go away even if your rental income does
- House prices do go down – if the price of your home drops, which it might for a large number of reasons, you may find yourself making up the difference when you sell – i.e. paying off your mortgage and selling at a loss.
- There are hidden costs everywhere that can bite at any moment – we’ve already touched upon the loss of rental income from an empty property; on top of this, expensive repairs and difficult tenants can increase both your costs and blood pressure
All this because you’re hoping maybe, just maybe, the housing market will do well and you can sell at a profit.
Even more worrying for buy-to-let investors is that the worst is yet to come, with mortgage rates ceasing to be tax-deductible in 2020 – forcing many to pay significantly more tax.
A landlord’s lot is not a happy one
Even when you don’t have any major issues, the amount of work involved is considerable.
- Sourcing tenants – this also involves screening, obtaining references, ensuring good credit etc.
- Collecting rents – you have to make sure that the rent is paid on time each month.
Remember, the bank may not be quite as flexible on your mortgage repayments as you are on your rent.
- Conducting maintenance – even without any major repairs or damage, your property will require ongoing maintenance. Whether it’s a dodgy lock or a temperamental boiler, it all takes time and money.
- Emergency call outs – no amount of experience or planning can remove the requirement for landlords to be on call 24/7. Lost key, leaking window – you will have to be prepared to leap into action at a moment’s notice.
- Legal requirements – gas safety, electrical safety, energy performance certificates, landlords’ insurance, furniture regulations (yes, you even have to worry about the beds, sofas and chairs you buy), tenancy deposit schemes… the list goes on. And on.
Of course, many landlords choose to remove the strain of endless chores by hiring a property management company.
Though this may help to remove some of the burden, it is far from ideal:
- They usually take about 6 weeks rent to source and vet tenants
- They take around 8% of the annual rent each year to manage the property
- Management is limited because they have multiple properties – with various different landlords, keys, furniture etc.
- Many landlords prefer a particular tradesman to carry out all work
This model has built-in costs and built-in disadvantages, which ultimately means that you will still need to authorise work.
Essentially, you let the management company do the lifting whilst the times are good, but as soon as there is a problem you will be called to decide on what to do – and how to spend your money and time to find a solution.
Selling up is often complicated too.
If the housing market is struggling because of irresponsible lending across the pond, global political instability or any other number of variables, you may find yourself taking the hit.
You may have to sell at a loss and, in the worst case, find yourself in debt to your lender.
As anyone who’s ever bought or sold a house will know, there are a number of other stresses and strains before the process can be completed.
These can be costly too, with Goodmove suggesting that one of the most contentious issues when selling a home is an unexpectedly high estate agent’s bill.
Above average stress for below average yields
At the end of all this hard work, if you’re investing in property for profit, yields of 5-6% gross are not going to cut the mustard.
NET yields can also quickly drop below 2% – or even fall below zero – meaning that you might even end up having to top up the mortgage out of your own pocket.
And it’s not getting any easier.
It’s no secret that the UK has a housing shortage, with experts predicting a 1.8 million home shortfall by 2025.
This has led to the government taking steps to limit the number of second home owners, making buy-to-let investing even more complex and even less profitable.
Specifically, this comes in the form of diminished tax relief and higher Stamp Duty.
Additionally, local councils have put up defences against Homes in Multiple Occupation, making the process of attaining a license…you guessed it, more complex and more costly.
This is being done in a bid to open up housing to local families, while actively pushing students into university halls or private Purpose Built Student Accommodation.
And therein lies the solution
Purpose Built Student Accommodation has been the highest yielding UK property sector since 2011 (Knight Frank).
This led to record investment levels in 2014, while 2016 was close behind as the sector’s second best year in terms of overall investment.
At the same time, according to The Daily Telegraph, buy-to-let mortgage offers have had their “largest drop in numerical terms since March 2009” – the time of the banking crisis.
Leading Estate Agents Haart also reported a similar decline, with sales down 64% in November 2016 compared to the same time 12 months earlier.
At Emerging Property we have witnessed this shift ourselves, with a large number of experienced buy-to-let investors approaching us in search of an alternative property investment strategy.
And what’s attracting them?
- NET income of up to 10% fixed for 10 years
- Dedicated incentivised onsite management teams – at no additional cost
- Automatic quarterly payments
Hard to believe, isn’t it? Especially for those of you who have been slaving away for years for less than half that yield.
But it is possible and here’s how.
Fundamental to any good property investment – sustained demand
And undersupply is demand’s greatest ally.
- There are now 2.3 students per available purpose built room on average across the UK (Cushman & Wakefield) – up from 2.1 in 2015.
- UK university intake has hit record levels in each of the last four years, with consistent growth over decades.
- University halls have long been inadequate, with an average of just 26% of students able to access purpose built student rooms (including private developments) across UK university cities.
- The UK government is actively funnelling students away from residential property conversions to free up more housing.
With the UK the second most popular university destination in the world after the US, and a British degree highly regarded worldwide, this demand is only likely to increase further.
Resilience to wider economy
Traditional buy-to-let property investors are at the mercy of the wider economy, as seen in 2008.
Economic downturns can lead to developers going bust, house prices going into freefall and homeowners being unable to sell their properties.
On the plus side, there is historic evidence that such turbulence has zero impact on student numbers – the sole requirement for sustained yields in Purpose Built Student Accommodation.
A tougher job market increases the desire for qualifications, while a weakened pound makes the country more affordable to a larger number of overseas students.
And when you consider Brexit, bear in mind:
- Leaving the EU will have no impact on non-EU overseas students, who already require a visa and make up the bulk of the UK’s overseas student population.
- EU students only make up 5% of the total overseas student numbers.
- Even if EU students have to apply for a visa to study in the UK in the future, it’s just one more form in what is already an extensive application process – it won’t deter anyone.
This resilience provides student property owners with real assurances that demand for their asset, both from tenants and future buyers, will remain high in the long term.
For once, they can feel in control of their capital.
Economies of scale – giving you buying power
You’ll notice two key benefits when it comes to buying Purpose Built Student Accommodation:
- The ability to purchase in prime locations
Quite simply, the cost of prime central locations often make them unsuitable for buy-to-let property investments.
When it comes to residential property, people usually buy in these locations because they want to live there – the potential yields alone aren’t worth the increased spend.
With Purpose Built Student Accommodation, however, the cost of premium plots is split between multiple owners and included in the unit cost.
This enables buyers to own property in highly sought after post codes, without the restrictive price tags.
- The affordability of professional onsite property management.
The cost of managing a standalone house independently or through a management company is considerable.
If you manage independently, you are responsible for trying to source replacement parts, furniture and tradesmen at decent value – no easy task.
On top of this, you have the expense and effort of driving around and managing operations.
Although you can, of course, choose to hire a management company, with just a single property – or even two to three properties – this can be prohibitively expensive.
The story is different, however, when it comes to Purpose Built Student Accommodation.
With 100+ units typically in each development – often far more – the management company can afford to place a dedicated, incentivised team onsite – which is both more efficient and more cost effective than parachuting them in.
The cost of replacement furniture and spare parts is dramatically reduced by bulk buying, while long term relationships can be established with tradesmen – better service, better prices.
Being onsite also enables minor problems to be addressed quickly, while also creating the opportunity for ongoing preventative maintenance.
This means fixing problems before they get expensive.
And the management service is included?
Yes, it’s built into the investment model.
By handpicking excellent locations, developing purpose built properties that students love and ensuring quality throughout – from the developer to the management team – our properties are able to generate high gross yields from which our partners take their profits.
This means your NET income is true; it is unaffected by anything else and there will be no further charges during the 10-year contract period.
This means that if the incentivised management company fails to fill your room, they lose out.
If the management company attempts a quick fix on a boiler and then it breaks completely, they’re the ones out of pocket.
In short, if the service isn’t good, it is not you, the buyer, who suffers.
And this explains why the property management standards are so high – they know how to ensure occupancy, drive up rents, conduct quality and efficient maintenance, and nurture the reputation and yield generating capacity of our properties – and it shows.
But how does this work for the developer?
Our partner developer knows the UK student sector inside out; they have already filled 15 student properties, with another two now under construction.
They know what’s possible when you select the right location, build the right property and install the right management team.
They have seen the demand and witnessed rental incomes consistently continue along a steep upwards trajectory.
As a result of this, they don’t want to simply build, sell and run – as many of our competitors do.
Rather, they want to build, sell and profit from the sustained success of their development.
This is why they sign 10-year fixed NET income contracts.
This means that you, the buyer, benefit from high income from day one, while they, the developer, can build their income by ensuring the property goes from strength to strength.
The developer has been able to ensure their profits by forging a strong relationship with a leading student property management company, who are then incentivised to:
- Drive up demand
- Increase rents, and
- Provide an exceptional onsite property management service
This, of course, also benefits you
Though your income is fixed for 10 years, this incentivised property management model also means that you can be assured that your property is in good hands.
You won’t have to worry about letting, rent collection or maintenance – that will all be done automatically for you.
This not only makes your life a whole lot easier, but also ensures that:
- The resale appeal of your property is maintained in the long term
- Your income is likely to increase after year 10 – when a new fixed income contract is signed
All interests are aligned
It all boils down to this:
- You, the buyer, receive effortless and predetermined high NET income – with the date of your first payment cemented into your contract.
- The developer is able to sell units fast and profit from consistent rental income growth.
- The management company can reduce its costs and create an efficient system to maximise profit.
- The students have a secure and convenient place to live – close-to-campus, private facilities, appealing common areas.
- The universities can attract the best students in an increasingly competitive environment.
- Local councils can free up housing for families, make more in council tax and limit the impact of a large transient population.
- The UK government sees Purpose Built Student Accommodation as a key component of its strategy to combat the nationwide housing shortage.
And I can really just sit back and wait for my income?
Absolutely. Your payments are automatically transferred to your chosen bank account each quarter in arrears.
In the case of new builds, the date of your first payment is set in stone. This means that any unforeseen delays in the construction will have zero impact on your income.
The onsite management team are responsible for all operational aspects of the property:
- Sourcing tenants
- Collecting rents
- Paying utility bills
- Conducting repairs and maintenance
- Replacing damaged furniture
- Responding to complaints, concerns and emergencies.
This means that you avoid all the day to day trials and tribulations of traditional buy-to-let landlordship; indeed, once you’ve signed the contract, there’s no need for you ever to lift a finger for the next 10 years.
It means that your high NET income will be completely, totally, utterly effortless.