Profit from student property
If there's one regret I share with my parents about my time at university in Sheffield, it's not buying a house. Back in September 2001, figures from the Land Registry show we could have picked up a property for around £54,012. When I graduated in June 2004, average property prices had risen to £95,497, and in April 2007 to £125,393. Instead, I and my two flatmates (well, our parents) paid £650 a month in rent.
Given the monthly payments on a 10-year 5% fixed-rate repayment mortgage would have been around £575, my parents not only missed out on an opportunity to make a serious profit, but also ended up spending way more than necessary to keep a roof over my head.
While property prices have slowed since then, thousands of parents are investing in property in their children's university towns and cities. With average student rent at £56.30 a week, rising to £81 in Oxford and £101 in London, according to Accommodation For Students, it can be a wise investment, providing you choose the property and area carefully.
The first step is to identify your time span for the investment, explains Louisa Fletcher, founder of Propertypriceadvice.co.uk and the property expert for GMTV. "There are two options: a long-term investment of around 15 years, which will house your child during their studies and then can be let out to other tenants, or a short-term investment of around three-to-five years while your child is at university, after which you can sell it on."
It's important to identify your goal, as this will determine what type of property you buy. If you choose the long-term investment route, Fletcher advises choosing a one or two-bedroom flat or apartment, "because there will always be letting demand for them."
If you want a short-term investment, the emphasis should be on finding a bargain. "Go for a three, four or five-bedroom house," advises Fletcher. "You want something cheap, so consider rundown properties - although they may require a more detailed survey."
Where to buy
This will depend on a number of factors, including your child's choice of university, the property market in the area and your budget. Fletcher says there are big bargains to be had if you do your research. "Look for areas where old polytechnics have become universities, or where the university is expanding with new departments or campuses, like Birmingham and Bournemouth. Property prices will be rising in these areas and over five years you will get a return."
Fletcher adds that if you live in the South and your child is moving to a university in a northern city, such as Newcastle or Liverpool, property will be more affordable and a sound long-term investment.
Once you've identified the area, it's also important to get the right property and location. You will need to consider proximity to the university and the town centre, as well as transport links and the safety of the area.
How to fund it
Unless you have substantial savings, your options for buying the property will be borrowing against the equity in your own property or taking out a buy-to-let mortgage. The first option is the most popular because taking out a buy-to-let mortgage can be tricky. Cath Hearnden, partner at broker My Mortgage Direct, says: "Buy-to-let mortgages are not regulated by the Financial Services Authority because they're commercial products." As a result, there are rules about letting to other family members - they can't occupy more than 40% of the property.
A few providers, such as Bath Building Society, Heritable Bank and Teachers Building Society, offer specialist student buy-to-let mortgages for parents, although rates are higher than standard buy-to-let products. However, it's worth speaking to an independent mortgage broker who will be able identify suitable lenders and find you the best deal.
If you plan to borrow against your own property, consider whether you can cope with the increase in your mortgage payments. "What about the summer holidays when students return home?" asks Hearnden. "You need to plan for this if you're relying on rental income to help cover your mortgage."
Being a landlord
Being a landlord can be hard work. If you plan to let the property to three or more tenants from two or more households, it will need to be inspected and granted a home of multiple occupancy (HMO) licence. Simon Thompson, managing director of Accommodation for Students, explains: "Since HMOs became mandatory last year, landlords have much stricter regulations based on square footage, such as the number of fire escapes, kitchen and bathrooms."
You are also responsible for the safety of your tenants, so you must adhere to strict legal guidelines for gas, electricity and fire safety, and install working smoke alarms. More information is available from communities.gov.uk.
Most student accommodation is let furnished. Consumer group Which? estimates it costs around £2,500 to furnish a two-bedroom flat. You'll need to provide basic appliances such as a cooker, washing machine, fridge/freezer and kettle in the kitchen; a bed and wardrobe in each bedroom; and a sofa, chairs and table in the communal area. It is advisable to draw up an inventory and ask your tenants to check and sign it when they move in.
Landlords must also now sign up to the new Tenancy Protection Scheme that came into force in April 2007.
Finally, and most importantly, draw up a tenancy agreement and seek adequate insurance - which must include public liability cover. Which? advises not handing over the keys until the contract is signed.
There are also a number of tax implications to consider when buying a second property for your child, and the first is income tax. Any rental income generated from the property will be added to your other income and taxed as the profits of a business.
You should also bear in mind capital gains tax (CGT) and inheritance tax (IHT). When you come to sell the property, any profit you have made above the individual annual allowance of £9,200 will be subject to CGT of up to 40%. Owning a second property could also make you liable for IHT or increase your bill.
There are a number ways to mitigate your tax liability and it's worth speaking to an independent financial adviser for advice. You can find one in your local area at unbiased.co.uk.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.