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May 14, 2020

10 reasons why student accommodation is worse than a creepy classmate, and a terrible investment

If you think investing in student accommodation is a good addition to your portfolio, read more to find out just why we rate this so poorly.

This week I wanted to touch on the subject of investing in student accommodation.

We get approached with this all the time as it’s heavily marketed to expatriate and overseas investors. Have I ever promoted a student accommodation project? No! Never in my life!

On the surface, these schemes may appear compelling. They are usually high-end developments offering occupants luxury services, and guaranteed returns ranging anywhere between 6%-12%. They are also relatively cheap to buy and sold as a completely hands-off investment.

As amazing as they appear, these are illiquid and high-risk. I’ve shared 10 reasons why I believe they are one of the worst property investments you can make.

1. You can’t get a mortgage

Leverage is the holy grail of property investing. It’s what makes it so attractive. With student accommodation, there is no financing available; because the majority of lenders are averse to lending on this type of property. That means you miss out on a leveraged return. Also, if a bank is not willing to put money into it, should you? If you are not looking for leverage, and just want a stable income, buy a fixed-interest bond! Getting your capital back will be much easier.

2. Insufficient Capital Growth

You will not see the same appreciation year on year as you would with a regular buy to let property. So, if you are interested in holding investment properties that have the possibility of strong capital growth, you should stick with other residential options.

3. Guaranteed Rental Return

Things can go wrong in “guaranteed rent” schemes if the company assuring it falls short or doesn’t have the financial resources to honour the guarantee. The advertisements are very compelling: Guaranteed net income for 5 to 10 years with no void periods and no management fees. Sounds too good to be true, it is! These guarantees are built into the price. Also, if a guaranteed rent arrangement goes wrong or the company offering it goes bust, it can be difficult for landlords to get their property back, as it will depend on whether the company has gone into administration or liquidation.

4. Post Rental Guarantee Period

What happens at the end of the guaranteed rental period? Are you still likely to get that guarantee? No. Commonly, the amount you have been receiving will drop dramatically. That is because the property will be older and not as appealing, and it is likely that there will be a newer shinier development being marketed close by with all the bells and whistles, and a nice, long rental assurance.

5. Management Fees

Although the management fees are usually covered during the rental guarantee, you need to be aware of what happens after that. Typically, the fees are very high for these types of properties. It can be a nightmare if you are stuck with a ridiculous charge each month as changing management company can often require 90% of owners to agree to the change. If the project was marketed to many overseas buyers, this would be almost impossible.

6. Lack of Rental Income Stability

Most student accommodation properties are occupied from September to June. That means that from July to the end of August, tenants either are not paying rent or paying a reduced fee for the entire summer. As a landlord, you may only get income a few months of the year from your investment. Sounds great, right?

7. Higher levels of wear and tear

By design, student accommodation has an extremely high turnover with new students coming in almost every year. That makes having a consistent, reliable tenant difficult. It also means that you will experience a lot more wear and tear with your property resulting in the need to buy new furniture regularly to ensure the unit remains appealing.

8. Licensing & Insurance

There are additional points that investors need to consider, such as licensing and insurance. The issue is that many companies that manage these investments have limited liability and are small companies with little financial backup. Investors must understand the company credentials to avoid putting themselves in a potentially compromising situation.

9. You can’t live there

With other types of investment properties, such as buy to let’s or HMOs you can choose to live in the property, making you eligible for certain tax deductions. However, it’s unlikely you will live in your student pod, as fun as a trip down memory lane may appear.

10. Reselling is notoriously difficult

Reselling these types of investments is hard. There is no open market like with a regular buy to let, and the only people that may be interested are investors. That significantly limits your options. You will have to find a buyer that is interested in having a student accommodation investment property and then convince them to buy an older unit with no rental guarantee in place.

Buyer Beware!

In addition to the above, the developers behind these schemes offer eye-watering commissions to agents that sell them, and these can be as high as 12%. It can be confusing for investors as these types of assets can often be described as some of the best performing. However, that is when done by institutions like pension companies, investment funds or real estate investment trusts. These institutions have a lot more control as they buy whole blocks and appoint and run the management of the schemes.

Conclusion

I’m no mathematician. But, you don’t need to be Rainman to work out that these deals don’t add up. When it comes to property, you are better off investing your money in properties where you are in control. Not some complex, illiquid pod that has very little resale value on the open market. It’s not a course worth taking!

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Article by: Rory van den Berg