There are two real types of student property one is a normal residential property that is in an area popular with students, this property type can be for students and can also be for traditional tenants.
The alternative is purpose-built student accommodation, generally small 12-15 sqm properties which are restricted to students only.
Many people find these student accommodation offers attractive, they give high yields which catch the attention of novice property investors, after all, if there is an 8% rental yield why wouldn’t we take it.
The latter of these two property types is a commercial investment. One of the reasons many people buy them is that they have not factored in an exit strategy, and have the belief that they are buying something that has resale value.
The challenge with the latter is if the building doesn’t perform you won’t get your 8%. Forget if it is ‘assured’ rent, most of the time the rental guarantee is not in the name of the company who sold it to you, only the management company of the building itself, so if there is no rent, no assets, and no retained cash, who will you sue for unpaid rent?
There are some fantastic student property companies who we will happily share with you, however, at Baron & Cabot we don’t carry them.
So why don’t we?
The main reason is an exit strategy. As the property isn’t generally self-contained, and you are restricted to just renting to students, what happens when or if the development isn’t tenanted (which happens – ask us for examples to google).
Equally, what is the resale value? You cant buy it with a mortgage so it’s only going to be sold to an investor. There is no resale market so you will have to advertise it somehow.
The company who sold it to you said they would sell it? Go and ask them how much they will charge as a percentage of the property value.
You’re never going to sell the property ever? – Maybe this can work, but have you really calculated how high risk this is?
Truth is its only value is a multiple of the rental income. If a residential property has a lower rental income yield, it will often not cause an effect on value. In actual fact when it happens it normally means the area has been gentrified and there are more buyers than renters, your rent yield drops but value significantly increases.
In a student property (and we’re only talking about the ones restricted to students only) drop their rental income the value drops. The reason is that as there isn’t really an asset unless you own the whole block, you can only sell for a multiple of rental income.
Any experienced investor would want over 10% NET for this kind of risk, from you.
Ask yourself the question. If the full block really is getting an 8% rental guarantee, why sell it to individual investors and not sell the full block to a pension fund?
Establish how many years you will be keeping a property for, even if it’s for life which properties will overtake your student rental yield within a couple of years? Don’t make the mistake of a 1-year cash flow when buying a property.
As mentioned earlier there are some very good student property firms, and while we choose not to sell them we will happily share those names with you.
Before you do anything at all, get some free advice from a specialist at Baron & Cabot.
