Download our free Starter Guide
Discover Emerging Property’s approach to property investing
  • Why choose Emerging Property?
  • Sector high yields
  • 10-year fixed income periods
  • Fully managed – every detail, every day
  • Our properties
Beginner's guide to UK property investing
Click to view Emerging Property's Privacy Policy

Buy-to-let vs purpose built: UK student property investment head to head

May 30, 2017

Everybody understands the basic principles of student buy to let ownership; buy a house, do it up, let it out and eventually sell it on at a healthy profit. It sounds easy enough, and has been quite the money-spinner for many years.

But, when it comes to purpose built student accommodation (PBSA), some investors regard this relatively new kid in Propertyville with suspicion. High fixed NET student accommodation yields and a truly hands-off passive income – it just sounds too good to be true. Well, maybe in some cases it is.

The fact remains that both options seem to be easily accessible to the average investor, so we thought we’d take a side-by-side look at them and highlight some of the pluses and minuses.

 

What to buy, and where?

Your budget is the first significant factor. If you’re going to be buying a residential property, you’ll be competing with other buyers who are looking for somewhere to live themselves and are therefore often willing to up the ante.

Unless you’re looking for a below market value ‘doer-upper’, initial purchase prices can be quite steep – there aren’t many bargains around in UK residential.

And if this is your second (or more) residential property, remember the Stamp Duty Land Tax – between £125,000 and £250,000, you’ll be paying 2%, plus a 3% surcharge.

Location is important too. If you’re lucky and find somewhere just round the corner from you, then fair enough. But the chances are you’ll have to look further afield, so you’ll have to put in the hours of research and who knows how much mileage before you find somewhere suitable.

And then, unless you’re happy to share your rental income with a local managing agent, you’ll need to be prepared to make the round trip every time the property, or its tenants, requires your attention.

why purpose built student accommodation is better than BTL None of this applies to PBSA

They are sold purely as investments; if you buy one, only a genuine student can live in it, so there’s no competition from other would-be occupier purchasers.

They’re also classified as commercial property; this means that up to £150,000, there’ll be no Stamp Duty to pay at all. This threshold is way above the average sector purchase price.

As for location, any reputable developer will already have done the detailed research and due diligence to ensure that the property will always be in demand. Better still, because most developments are upwards of 100 units, economies of scale should dictate that your property will be in a far more desirable postcode than the average individual investor could realistically afford.

And since all quality student accommodation is professionally managed on the owners’ behalf, landlord accessibility is never an issue.

Landlord accessibility

Pre-tenancy outlay

Once you’ve found a residential property that you think suits your purposes, you’ll need to pay a surveyor to give it a clean bill of structural health. If you found it through an estate agency, you’ll be paying them 1-3% of the purchase price, plus VAT.

Taking out a mortgage to buy it? Don’t forget the arrangement fee, which could be upwards of £2,000.

When researching your buy-to-let purchase, you will hopefully have ascertained your local authority’s attitude to Homes in Multiple Occupation (HMO). Assuming they’re in favour (and don’t take it for granted), you will have to submit your conversion plans for approval and then apply and pay for an HMO licence.

Unless you’re very handy with a tool belt, you’ll need to pay for initial repairs – currently the UK average comes in at around £5,750. After that comes the conversion and refurbishment, which is obviously dependent on how ambitious your plans are.

Then you’ll have to make sure that everything on the property is safety compliant – furniture, fixtures, fittings, gas and electricity, smoke alarms, fire doors, fire escapes and so on.

When everything is in place and fully certified, all that remains is to advertise the property, make yourself available for viewings, carry out right to rent and credit checks, draw up tenancy agreements – and you’re ready to go.

why purpose built student accommodation is better than BTL None of this applies to PBSA

As a turnkey investment, purpose built student property should require no further outlay beyond the initial purchase price, apart perhaps from a one-off legal fee. Nor should it require any investment of time; all letting, vetting, rent collection, repair and maintenance should be automatically taken care of by onsite management.

This is why it’s important to seek out a 10-year fixed income agreement rather than a 2-5 year one. The longer agreement will cover inevitable major outgoings like a new kitchen, whereas the shorter period demands less commitment to standards from management.

Ongoing costs and duties

Unless you bought your buy-to-let for cash, there will obviously be the monthly mortgage repayments – repayments which have to be made regardless of the property’s occupancy status.

Maintenance and repair costs can fluctuate wildly; one year your biggest expense might be a dab of paint on a chipped skirting board, the next the boiler might pack up in the middle of the coldest snap since records started. You will need to have a contingency fund available at all times to deal promptly with the unexpected.

Likewise furniture, fixtures and fittings can all require repair or replacement at very short notice.

In the meantime, there will be regular compliance costs such as HMO licence renewal. Any changes in legislation will also have to be covered

Being a landlord doesn’t just involve paying out all this money in order to receive (hopefully) significantly more, it also requires a major time investment. It’s a 24/7 responsibility with unpredictable and frequently antisocial hours.

The alternative is to appoint a management company to run the property for you, but do shop around first. Depending on the location, property management will rarely cost less than 7% of your rental income, and can go as high as 17%.

why purpose built student accommodation is better than BTL None of this applies to PBSA

Mortgage repayments don’t come into the equation as these are cash-only investments. However, since their lock, stock and barrel total purchase price compares favourably with a buy-to-let mortgage deposit, it simply means an easier buying process with no further outgoings.

We referred earlier to economies of scale on site purchase, and the same applies to the management of your property. Because of the size of the development, it’s more economical to have a team permanently onsite to take care of every single aspect of your investment – at no extra charge to you.

But ultimately, it’s all about yield

Of course, every buy-to-let property is different, but most experts agree that 5-6% gross is a reasonable average yield. That’s assuming minimal void periods, no rent defaulting, no costly, time-consuming and stressful eviction proceedings and no structural mishaps.

The landlord will certainly have worked hard to earn it.

But the UK property landscape is changing, with increasing concern at local and national level about the severe housing shortage, forecast to reach 1.8 million by 2025.

In order to discourage multiple home ownership, changes have been made not only to Stamp Duty and HMO legislation as we’ve seen, but also to landlords’ income tax and mortgage lending criteria.

It used to be that landlords were entitled to claim 10% of yearly rental income against wear and tear; this was changed in 2016, and today they can only claim for actual costs.

In April 2017, the 3-year process of abolishing tax relief on mortgage payments began. Until 2020, tax relief will be capped at 20% and then it will be removed altogether.

So let’s say you, a higher rate taxpayer, have a £100,000 interest-only mortgage on a flat which yields a monthly income of £750. Assuming £1,000 per annum in ground rent and service charges, last year you’d have made £1,560 NET.

In 2020, you’ll make £360 NET.

They’ve also made it much harder to take out a mortgage. Until recently, you had to show that the cost of the mortgage was covered 1.25 times by your rental income. Nowadays, you have to demonstrate that the same cover will exist even if the interest rate hits 5.5%.

There’s also a daunting Affordability Test; these measures combined have left a lot of buy-to-let landlords wondering whether it’s worth the time, effort and expense.

why purpose built student accommodation is better than BTL None of this applies to PBSA

The best student property investments will provide you with a predetermined, contracted annual yield of 8-10% NET for 10 years.

Be careful, though – some of them come with lower yields, shorter fixed income periods and hidden charges.

Capital growth – good things come to those who wait?

It’d be nice to think that, after all the effort and commitment you’ve put into your buy-to-let, the time will come when you can finally sell it on at a handsome profit (even after paying the requisite Capital Gains Tax).

The trouble is that when that time does come, you’ll be at the mercy of a range of external factors quite beyond your control.

The UK residential property market might be going through one of its periodic slumps or stagnations; nearby industries might have relocated; your commuter railway network may have become a byword for unreliability and inefficiency; local schools and hospitals might have closed; everybody’s worst fears about Brexit may have come true.

The neighbourhood might have gone downhill, and what about the property’s condition? Suppose you need to liquidate quickly?

why purpose built student accommodation is better than BTL None of this applies to PBSA

As commercial properties, these student apartments are valued solely in terms of their capacity to deliver consistent rental income.

All personal preferences and requirements which are such a factor in residential property purchase go out of the window, meaning your market isn’t just bigger, it’s global. Any property with a demonstrable track record of income generation becomes very attractive indeed to a new buyer anywhere in the world.

If the fixed income period is fully transferable upon resale, it will be possible for you to make as much as 40% capital growth by the judicious application of yield compression.

 

The final scorecard

A buy-to-let residential property will be quite expensive to buy, convert and maintain. Managing it properly will be time-consuming or costly if subcontracted.

Yields are unpredictable and, with the introduction of new tax regimes, likely to prove inadequate. Capital growth prospects are fuzzy, such is the unreliable nature of the residential property market.

Purpose built student accommodation of real quality, on the other hand, should represent good value at purchase and deliver predetermined, contracted fixed NET yields of 8-10% for 10 years.

It should be fully managed 24/7 on the owner’s behalf and there should be no further costs whatsoever during those 10 years.

The fixed income period should be fully transferable at any time, offering the opportunity to achieve significant capital growth free of UK Capital Gains Tax.

So ultimately it would seem to come down to a choice between laborious landlordship and effortless income. There are tougher decisions in life…

 

Share this article

No Comments
You might also be interested in
As seen in:
Guardian: in the pressThe Times: in the pressCityscape: in the pressTelegraph: in the pressGulf Times: in the pressFinancial Times: in the pressAs seen in The Mail on Sunday