With over 2 million students in higher education, it’s safe to say the student housing market is huge - and still growing.
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Student accommodation is a significant sector in the UK property market. The value of purpose-built student accommodation at the beginning of 2020 was predicted to be in excess £53bn - which suggests that it could be a lucrative area for investment.
The UK is among the most popular study destination for students from around the world and international enrolments increased 3.6% in the year 2017-18, to more than 458,000. Higher education in the UK is most popular amongst students from China, India, the US, Hong Kong and Malaysia
But the days of student accommodation being substandard properties that were rented cheaply on an informal basis have long gone. Today's students - and particularly overseas students which make up a large proportion of the student cohort - are well funded and discerning, and will expect clean and modern housing. Luxury accommodation is springing up near universities and colleges up and down the country as students expect more for their money than ever before, with high standards of comfort and wifi as standard.
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In a recent student housing report, property experts Savills identifies the potential of, offering better provision than low-quality university housing stock. Savills suggests that partnerships with universities to upgrade existing stock may be a profitable strategy.
You could expect the overall yield on a standard buy-to-let with a single household tenant to average 5.8% but HMOs - Houses in Multiple Occupation - with student tenants yield an average of 10.2%.
But providing student property is not without challenges.
For many, their student house will be their first time venturing into the renting world and problems can occur.
Late rent payment is a common problem that landlords face when letting to students. Students may struggle to pay their rent on time is because their student loans often come in late. It's common to require the tenant to provide a guarantor who, in the event of missed payments, will be responsible for the rent.
Wear and tear are expected but any damage exceeding this should be deducted from the tenant’s initial deposit. a well-detailed inventory should be done before tenants move in.
Most students tend to go home during the Christmas and summer breaks, meaning the property could be empty for a month or so. Some will be prepared to pay for these periods. The long summer vacation can be more of a problem. A long void can upset your finances.
There can be problems with noise and anti-social behaviour which may affect neighbours.
What type of property are students looking for?
The need for quality accommodation may require investment. Converting existing property or building from the ground up can both be profitable. The returns can be more attractive than traditional lets:
Demand in student areas is strong and predictable
Student lets tend to offer particularly high yields
It offers a constant supply of new tenants
Students may be happy to set up a direct debit or standing order and payment will go into your account once a month
If you have a local college nearby, you can team up with their student accommodation team and they will find and reference tenants for you.
There are two ways to become a student landlord. To acquire and if necessary convert an existing property into a student HMO, or studio accommodation, or to build suitable property.
Funding an HMO as student accommodation
Your property may be categorised as an HMO (House in Multiple Occupation) if it accommodates three or more unrelated tenants who share a kitchen, bathroom and communal living area. If your property is over three storeys and there are five or more occupants, you must apply for an HMO license.
This costs around £500 to £600, depending on where in the country your property is, and usually lasts for five years. Some councils insist that you have an HMO license regardless of the number of students you have, so always make sure that you check with your local authority.
When applying to provide student accommodation, your local authority will issue you with a set of guidelines that you must carry out.
These include that your property has a gas safety and electrical check, that there is a means of fire escape, that you have installed mains smoke, fire and carbon monoxide detectors on every floor and that you make sure that all furnishings are safe and fire safety compliant. Unlike a standard let, with shared occupancy and one tenancy agreement covering all the occupants, an HMO usually requires individual short-term tenancy agreements with each of the tenants.
With an HMO as all your normal legal responsibilities you must ensure:
Smoke detectors are installed
Electrics are checked every five years
The property is not overcrowded
Adequate cooking and washing facilities
Communal areas and shared facilities are clean and in good repair
Your boiler's gas safety certificate is up-to-date
Investing in student accommodation
The growing demand for student accommodation remains attractive due to the good yields in the UK. Investors and developers are increasingly looking to develop student accommodation and then hold as an investment with steady and predictable returns - Student accommodation has performed well as an investment historically, and with rental growth outperforming inflation in recent years.
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Where you are in the country will influence your potential profits - but it is safe to say that there could be greater profitability from letting.
So, while a typical four-bed house in the south-west will rent out to a single family for around £800/month, if you were to rent the same space to four students, you could expect to generate a gross income of £2,400/month.
Taking out your expenses such as utilities, broadband, cleaning and maintenance costs, you could easily be looking at generating a net profit of £1800/month for exactly the same property.
The profits from purpose-built accommodation may be higher still. A great deal will depend on the part of the country where you are investing. London property prices are higher and London universities command a premium - it is only natural that student accommodation in London will also be more costly, and potentially more profitable.
On the negative side, properties tend to suffer more wear and tear when let to students and, as a result, you are likely to spend more on maintenance at the end of a tenancy than you would with a traditional let. Students will expect properties to be fully furnished, but you may be able to use secondhand furnishings provided that they are clean and sound.
The funding available for student property
The stability of the student letting market means that there are many lenders willing to lend funds for the development of student housing. However, finding the most appropriate lender that will lend at the right loan to value and at the lowest rate of interest needs specialist help.
What are the terms for student accommodation development finance?
The terms for development and acquisition finance on student accommodation varies between lenders with some refusing to lend on this asset class and others offering very attractive terms on both the rate and fees. However, getting specialist funding may be essential.
Student HMOs are traditionally seen as unlikely to attract family renters and as often being of poor quality, offering little security for the lender. To make matters worse, the modifications required to turn a property into an HMO, including fire doors and escape routes, individual heating and meters in each room, will further detract from the resale potential.
An existing buy-to-let mortgage may have clauses preventing you from turning it into an HMO.
As a result, many investors believe that a Commercial Mortgage is needed for HMO property. At Rangewell, we know the specialist lenders who can offer competitive deals for landlords looking to purchase an HMO or convert an existing property, with an HMO mortgage. They may be more costly than a conventional buy to let mortgage but can cover up to 75% loan-to-value.
What about developing student property?
You may be able to acquire an existing HMO and simply fit it out for student tenants - but you may require Development Funding that will allow you to convert a property to student accommodation.
Development Finance can help you acquire a property and fund work on it - and when the project is finished, it will allow you to refinance the property with a more conventional financial product. It offers some features that make it particularly attractive for this kind of project, including:
Staged draw-down: you only pay for funds as and when you need them, reducing costs - you don’t have money that costs you interest standing idle in the bank.
Rolled-up interest repaid at end of term: allows you to use all your liquid finance on build and fit-out
Loan amount minimum: usually £200K
Agreed exit: sale or mortgage finance
The typical terms for development lending are:
Loans from £500,000 up to several million
Up to 80% of total costs - this may be made up of 100% of build costs and 80% of land purchase, stamp duty and professional fees
Lending subject to 65% of gross development value
Rates from 3.75% for lower loan to value lending
Lenders fees from 1.5% and similar exit fees on the loan amount
Terms 6 to 18 months
You may be able to acquire an existing HMO and simply fit it out for student tenants - but you may require development funding that will allow you to convert a property to student accommodation.
Development Finance can help you acquire a property and fund work on it - and when the project is finished, it will allow you to refinance the property with a more conventional financial product.
What criteria is taken into account when applying for student housing development finance?
With our help, finding a lender for both licensed and non-licensed HMOs can be straightforward, although each lender has its own approach and criteria, and costs may be a little higher than comparable buy to let arrangements,
Some will base their valuation on the price achieved if it were purchased as a single dwelling, restricting the amount that you can borrow. However, others will base their valuation on the achievable rental income or ‘investment value’ when making their lending decision.
Some may only consider you for an HMO mortgage if you are an experienced landlord. Most will make it a condition of the mortgage offer that you are deemed ‘fit and proper’ to run an HMO.
Other considerations may include:
The number of letting rooms and expected or actual rental income
Your experience as a landlord
Whether you’ll be managing the property yourself or using managing agents
Help arrange funding for a first time student landlord
Find the most competitive funding arrangement for student let
Find finance to allow a landlord to secure a large house close to a London university
Source funding to allow a landlord to build his property portfolio
Arrange funding based around a remortgage of a landlord’s existing student property to allow him to buy another.
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Every type of finance for every type of business
Our goal is very simple - to help businesses find the right type of finance as quickly, transparently and painlessly as possible.
Helping you build your profits
Improve your returns
Experienced investors are seeing the opportunity to raise the overall rent earned from a property by renting rooms to students
Funding based on existing property
We can help you remortgage property you already own, providing cash for buying additional property.
Specialised solutions for student landlords
We can approach lenders who may lend based on the investment value of your property - the amount it will realise in rent, rather than its value as a property.
Funding for multiple properties
Lending can be arranged for multiple properties, allowing you to grow a student accomodationsbusiness.
High loan to value
Mortgages can provide up to 75% LTV, making it easier for you to buy the property you want.
Maximise your profits
We can help you find the most competitive funding, ensuring that you can maximise your returns.
Frequently asked questions
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Is student accommodation a good investment?
Here are some pros and cons of investing in student property and this differs from standard residential property.
Pros of investing in student property:
Student properties are often cheaper to buy as they're on the outskirts of the city centre and the fringe of campuses
Students typically pay more rent than other tenants, such as a family property, so they'll return greater yields.
In the right area, landlords can expect to receive yields of up to 20% higher for a shared student house than a standard property.
In most cities, there is a significant demand for student accommodation. This gives landlords access to a steady stream of tenants and will lower the chance of the property remaining unoccupied.
Cons of investing in student property:
Renting to students poses higher wear and tear levels, and investors should be mindful of the annual upkeep costs.
Additional set-up costs may be needed as landlords need to acquire the right licensing and will need to ensure they are undertaking renovations to ensure the student accommodation meets the legal requirements.
Properties are likely to remain unoccupied from June to September, so tenants won't pay rent or will pay it at a reduced rate depending on the market. This may differ slightly if you're housing international students, so bear that in mind.
How do you finance student accommodation?
At Rangewell, we can use our property finance expertise to support your business – and ensure that you have the financial solutions you need. We can help source business lenders who can provide specialised funding for the student market - and search their offering to find you the lowest HMO mortgage rates. By doing this, you get to keep as much of the rent received as possible, helping you make more profit.
Lenders will vary greatly in what they offer and even a fraction of a percentage point can make a substantial difference to what you actually pay each month. It means that getting expert support to find the most appropriate deal is essential to save money.
At Rangewell, we help investors of all kinds find the finance they need. We cover the entire UK lending market, which means we can help you find the most cost-effective property finance for all property investment needs - and to help you make the most of your particular plans.
To find out more about purchase costs, speak to Rangewell today!
What are the terms for student accommodation development finance?
The terms for the student accommodation sector will vary between lenders as their criteria are so different. However, the typical terms of lending are:
Up to 80% of the overall costs. This usually includes 100% of the build costs and 80% of land purchase, stamp duty and other professional fees
Lending will be subject to 65% of the gross development value (GDV)
Rates from 3.75% for lower loan to value lending
Lenders fees from 3.75% for lower loan to value lending
We'll lend across the whole of the UK
To find out more about the Student Accommodation Scheme, speak to Rangewell today.
What paperwork is required?
Firstly, you should ideally apply for a loan before you need it. It would help if you had an idea of the lender's requirements before committing to a loan. You'll need to have the following documents on hand.
Credit score: The lower the credit score, the higher the risk, but this doesn't mean to say you won't qualify for a loan if you have an adverse credit score. Businesses can check their credit scores online but may have to pay a fee to access a full report.
Annual revenue: Make sure you have accurate financial statements over the past two years. Many lenders will ask for copies of your bank account transactions so they can confirm cash flows that are reflected on your statements.
Updated business plan: The lender will want to know how your loan will be used and how the company plans to grow, so ensure you have a ready-to-go business plan available. It should also include a plan on how to pay the money back.
Additional collateral: You'll need to provide a personal guarantee to the loan, or you can pledge additional collateral such as personal real estate or other financial resources.
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