What’s so good about student properties?

The first good thing is that the market will always be there! Secondly, if you play things right, you can achieve higher yields than if you were to let the house out as normal. For example, if I were to let out my three-bedroomed terraced house to a couple with two kids in the area of Withington/Didsbury in Manchester then my average gross income would be say £433 per contract month.

However, if I were to let it out to students, I could convert the bottom reception/lounge and rent it out as a house with four bedrooms. For an average rent of £50 per week, I would receive £866 per month – basically double! This increased yield can be achieved with the commitment and correct attitude required to attract the right student for the right property.

What sort of profit can you expect?

In any property investment, I always apply the same rule of thumb. Here it is no different, I call it the rule often. It’s very simple to remember when looking at properties. Simply calculate the annual rent and multiply it by ten – this gives you the purchase price. So if you see a three bed, two reception roomed house and you know the room rate is £60 per week then the calculation is:

So if you see the house advertised for £110,000 then go for it! If it’s advertising for £150,000 then forget it. Speak to letting agents or look in the local press for typical rental values for the area that you are looking at. This yield is also stated as a payback period – the length of time it would take to own the property if you reinvested all the income earned to replenish your savings. You would calculate it like this:

This equates to ten years. Ten % is a like-for-like comparison to a bank or building society rate. So if your bank is offering 4% you know that you can earn 2.5 times as much from investing in property. But this assumes that you have funded the whole property purchase out of your own funds. Usually this is not the case. When you borrow to finance the purchase the returns are significantly higher.

It’s surprisingly easy to manage a property outside your area once the property is set up right. There are many areas that offer you a return of 10% or greater and student properties can do the same.

Sometimes for student rental, the average gross yield per year is calculated as:

As you can see, the average has been calculated by charging half-rent during the summer period. This is where the landlord will charge 50% rent during the summer to reserve the property for the start of the academic year and is more commonly known as a retainer. During this agreed period, you are not to let your property to anyone else as this counts as rent. For more information see Chapter 4 on legal issues.

The VarsityLets scheme offered by Bradford and Bingley guarantees full rent for the year, meaning that the yields are increased. How much in demand or desirable your property is will have a considerabe effect on this average, i.e. if my house has all the latest mod-cons, full speed internet access, large bedrooms, newly fitted bathroom and so on, then I would feel extremely confident in charging full rent 52 weeks of the year and can adjust profit and yield figures by +1 or 2%. If I have a squalid property with a hazard-prone shower unit and rusty old kitchen hobs, then I would expect it to be more desirable if I charged rent for term times only.

As an arbitrary example, we look at a three-bedroomed house1 at a purchase price of £145,000 in Bristol. We can see the differences where average yield 1 is the formula used above and average yield 2 is full 52 weeks rent for such a property. If the standard room rate is £52 per week, then the figures come out as shown.

A three-bedroomed property plus front reception converted to bedroom, equalling four bedrooms in total.

In general, when looking through the listings in Chapter 5, the yield and profit given are considered as a calculated minimum/average and should be weighted roughly + 1 or 2% if the landlord decides, and has the capability of charging full rent for 52 weeks as demonstrated above.

The example, for Bristol, shows that the average expected yield range is between 6.7% for a three-bedroomed house, but could be as high as 7.5% if 52 weeks full rent is charged. In this example, I personally would choose not to invest in Bristol.

What about capital appreciation?

Capital appreciation is the amount the property rises in value over time. I never include the gains by capital appreciation in my calculation of yields because it is an unknown figure at the point you make the investment. If there was any certainty of the capital appreciation of a property then the purchase price of the property would include this gain.

As there is a lot of uncertainty over capital appreciation because of the numerous variables involved it is very difficult to predict when house prices will rise. And remember the gain is only realised when you sell the property, and the difficult thing with any investment is knowing when to get out and sell.

I see capital appreciation as a bonus. I focus on the investment as it stands. If it makes money now it will almost certainly make you money in the future. If the property prices crash – who cares! You are still making money as the rent rises with inflation and the mortgage payment is still the same. If property prices increase again – great! You can realise that equity by remortgaging or by selling and buying further properties! This way there is no downside risk and only upside potential.

Admittedly there is a lot of money to be made in capital appreciation speculation, but it should be left to the professional property investors. They have the time to research the market and can stomach the loss if there is a property price crash.