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Students were once a must-avoid for landlords. But not now. With accommodation always in demand, they're ideal, reports Esther Shaw
Students are not renowned for their cleanliness or ability to look after their living space - or even for paying their rent on time. Yet certain landlords are viewing this sector as an increasingly appealing prospect.
While much of the buy-to-let market is in the doldrums, student letting remains relatively recession-proof - accommodation is always in demand. The latest figures from the UK University & Colleges Admissions Service (Ucas) showed an 8% increase in higher education applications last year, as more people looked to delay entering the jobs market.
But while investment firm Assetz claims investors can enjoy high net yields of 5%-6%, not all are convinced.
"It's important not to be blinded by the idea that the yields on a student buy-to-let will be far higher than the yields on a mainstream buy-to-let," says Richard Morea of broker London & Country. "Plummeting prices and a downturn in sales have led to a glut of properties available to rent across the market, which is forcing down both rents and yields - and student properties are no exception."
Michael White, from mortgage website Emailmortgages.com, says that although prices are lower, the ongoing costs of buy-to-let are higher and rental values weaker. "Landlords across the board are fighting to retain tenants, and also competing with the more reluctant landlords who have entered the fray offering cheaper rents," he adds.
Price comparison service Moneysupermarket.com shows the number of buy-to-let products has fallen from 4,384 in July 2007 to just 213, and that while mainstream mortgage rates have reduced by 2.6% since last June, the average buy-to-let rate only fell 1.51%.
"Rents also need to be higher to qualify for a buy-to-let mortgage," says spokeswoman Louise Cuming. "In 2007, the average requirement was for the rent to represent 112% of the mortgage payment but this has now risen to 123%."
Melanie Bien of broker Savills Private Finance adds that landlords will need a deposit of at least 25% to access the most competitive deals.
"Fees are also much more of a consideration," she says. "In some cases you may have to fork out up to 3%." The Mortgage Works, for example, has a tracker with a rate of 3.39% and a one-year fix at 3.99%, but both deals need a 30% deposit and carry a hefty 3.5% arrangement fee.
Andrew Montlake from broker Coreco warns that landlords need to be prepared for more wear and tear. "You'll have to spend money at the end of each year repairing damage," he says. "Students can also be slow in paying rent, so you need three to six months of mortgage payments put aside to cover this."
There's a raft of legislation to consider, too: houses may need to be licensed under the "houses in multiple occupation" agreement, deposits must be protected under the tenancy deposit protection scheme; fire, gas, electrical and other safety requirements must be met; and landlords are also legally required to show tenants an energy performance certificate.
"This is a precarious market," says Richard Mason from price comparison service Moneyextra.com. "Prospective landlords also need to be aware that student buy-to-let is an entirely different ball game from the mainstream."
Nonetheless, brokers agree that student lets can be profitable. "Provided you can get funding, you will be able to access a steady stream of tenants and good yields," says Bien "Student landlords typically have lower void periods with the added benefit of an annual let and often a parental guarantee, which should ensure the rent is paid."
Ray Boulger, of broker John Charcol, says by letting rooms separately it should be possible to generate more rent than as a single family unit.
In the traditional hotspots, Durham offers one of the best returns, according to buy-to-let specialist Paragon Mortgages, generating an average yield of 14%, followed by Nottingham on 13.5%.
"Growing university towns such as Stoke, Hull, Derby and Swansea are producing stronger yields than some more established locations," says Paragon spokesman John Heron. "Popular north-west university locations such as Liverpool and Manchester also generate strong returns."
With property prices around 25% off their peak, and relatively low interest rates, now is a good time to buy, according to Boulger. "A fixed rate for around five years makes sense providing there is no intention to sell within that period," he says. "BM Solutions has a five-year fix at up to 75% loan-to-value (LTV) at 5.49% with a 2.5% fee. For a lower LTV of up to 50%, Godiva has a five-year fix at 5.4%with a £1,999 fee."
"There is more wear and tear"
James Peirson, 50, a dental surgeon from Norwich, recently bought a six-bedroom property in Leamington Spa for his son, Ben, 20, to live in while studying at the University of Warwick.
He owns around a dozen buy-to-let properties, but this is the only one he rents out to students; the majority of his mortgages were arranged through broker London & Country. "I started to look at student properties when I knew Ben was going to Warwick," says Peirson.
Ben, now in his second term, lives rent free and his father lets the remainder of the rooms to students who each pay around £300 per month.
"The yield is definitely slightly higher than on my other properties," Peirson adds. "You get a fixed-term of rent for 11 months a year. But on the downside, there is a higher level of wear and tear.
"It's a good investment and I have no plans to sell it on when Ben graduates."
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