Insider Secrets: Auctioneers’ Knowledge Tips & Hints From The Pro’s
Yesterday I had an unexpected call from an old friend whom I haven’t seen for several years, asking for some advice on buying property: not about property investing per se , more general guidance about buying in the geographic area in which I hold the bulk of my portfolio. I have to say I always enjoy a good chat about property, but what made this conversation particularly interesting was that my friend has a number of objectives to achieve from her foray into investing, objectives that I may well share in a few years’ time. Let me explain.
She is going to theological college as a mature student. Her thinking at the moment is that she will retain her house in the Southeast, take out an equity release loan or re-mortgage, then let it out to cover the cost. With the equity released she will buy a property near her college, possibly with a view to sharing with other students and using that income to help with her day-to-day costs. When she graduates, she can choose whether to keep or sell one or both of her properties. This will depend on where she is posted once ordained, but either way she will have a lump sum or an income to supplement her stipend, or alternatively, a pension fund in place for retirement, or if she ever wants or needs to leave the ministry. If she can find the right property and get the figures to ‘stack up’, probably using a fixed-rate mortgage, I think this all sounds like a good idea.
So why am I so interested? Well not because I’m thinking of becoming a student or being ordained. The reason why this is a subject close to home is that my four kids are growing up fast. In four years I might well be looking at ways both to fund my eldest through higher education and to provide accommodation. If daddy is going to have to pay, needless to say I’d like to be able to do it in the most cost-effective and, dare I say, profitable manner.
Actually, if you’ve read my previous articles, you’ll know that as part of their ‘education’ I try to involve my children in my investing activities. During schools holidays, coming to inspect properties is seen as a ‘treat’, especially as it usually involves a trip to a restaurant on the way home. My eldest, at age 13, can already make a better job of analysing a possible property purchase than many investors twice or three times his age. So my outside hope, although I admit it’s a bit of a long shot, is that they will sort out their own accommodation. After all, Dr Dolf de Roos, the antipodean property investor and author whom I admire greatly, bought his first investment property using bank finance at the age of 17. As you may know, he went on to do an engineering degree and then his doctorate. Presumably, he was still a student when he bought. If he can do it, why not Jones junior? Dream on!
An obvious opportunity to explore when sending one’s own kids off to higher education is buying a property for them to live in, that also doubles up as an investment. This is not a new idea. Some of my peers lived in accommodation bought by daddy when I was a student in the late 1980s. The big difference between then and now is that, as I was doing a bespoke course and learning how to become a chartered surveyor, daddy was usually a member of the ‘profession’. He knew what he was doing and had access to funds. Today, with buy-to-let and more flexible landlord and tenant legislation, the opportunity is available for most parents to consider, although surprisingly few do.
Any parent looking at this route will need to have a clear idea of what they’re trying to achieve. Are they intending to hold the property only for the time their child is at college? Will they want to sell in three or four years’ time when their course finishes? If so, are they looking at this as an investment, or just a means of providing affordable accommodation? If the former is true, do they want to buy in an area where there are better prospects of capital growth? If so, they will need to do their sums to ensure the figures make sense after they’ve allowed for stamp duty (if any), capital gains tax, two lots of solicitors’ fees (one on the way in, one on the way out), estate agents’ fees and the cost of financing.
Perhaps they intend to hold the property as an investment once the child has moved on, thus possibly making yields a more important consideration. Then they’ll need to decide whether they’re providing accommodation for their child to share with other students. Most will be. Most students look forward to leaving home, living with like-minded friends and having a social life, but who’s going to manage the property, collect the rent and organise any repairs? Would it be fair to put this responsibility onto your child? These and other issues need to be addressed before they take the plunge and buy a property.
The number of full-time students in higher education has increased significantly over the last few years, tempting many landlords into the student market. At one extreme, property companies and housing associations are developing and providing purpose- built ‘halls of residence’; at the other, private individuals are buying single properties, sometimes through auction and often with buy-to-let finance. A consequence of a larger number of landlords in the market is that, generally, because of increased competition, the quality and standard of accommodation offered has improved. Long gone are the days when, like Rigsby from Rising Damp, you could buy a cheap property, stick in some second-hand furniture, sit back and collect the rent. Students expect more for their money. As well as decent properties in good repair and condition, switched-on landlords are providing mod-cons and extras, like free Broadband access.
For the right property in the right area, students are now prepared to pay more than would have been achievable a few years ago. Interestingly, these ‘higher value’ lettings have been demand driven. Landlords should have no problem letting good quality accommodation in the right location, even if there is competition with cheaper properties. I buy property in the Northeast and it has struck me that areas in Newcastle upon Tyne, Jesmond and Heaton, with some of the most expensive housing, have large student populations. Clearly the students think it’s worth paying the extra rent.
Of course, location will always be a key determinant of demand. For obvious reasons, a high proportion of student dwellings are located within easy reach, either walking distance or on a major bus route, of the campus. However, with the increase in demand for quality property, many students are also prepared to travel further, if necessary. One concern I have is with regard to the rather vexing issue of student loans. We are told that an average student is likely to leave higher education with debts of £20,000. For medical students, this figure could be £70,000 or more. If this is the case, won’t students eventually be forced into making savings where they can, thus gravitating back to cheaper accommodation?
In the meantime, the price of reasonable quality properties means it can be difficult financially for new investors to enter the student letting market. I recently spent an afternoon with an investor contact of mine who specialises in student lets in the large city near to where I live. His properties are in average, as opposed to the best, areas, because when he bought he was primarily chasing yields. If he were to start again and buy in the same areas, his initial gross yield would be 5% or less, because of market increases in property prices. With fixed-rate mortgages being offered at only just under 5%, buying a property for student lets with finance makes no sense at all. Even cash buyers would struggle to get a positive cash-flow once they’ve taken account of management fees, repairs, voids and insurance.
However, all is not lost. The alternative is for new student-let landlords to buy at the cheaper end of the market. With the number of students in higher education at an all-time high, there is a desperate need for affordable accommodation and properties in cheaper areas will let. One of the best ways to find student tenants is through the University Accommodation Officer, who will rightly monitor the quality of properties being offered. Many universities run accreditation schemes, so a landlord must be careful that cheaper doesn’t mean poor quality.
In my home city, I have seen that many landlords find it difficult to let their properties in student areas in the cheaper suburbs, despite the large number of students looking for accommodation. Often, though, the standard is poor. For the sake of spending some money to bring their properties up to scratch, many landlords seem prepared to tolerate the long voids that inevitably result. Foolish. There are several points to remember if you think you might be interested in the student market. Most landlords let on a room-by-room basis. To keep the paperwork simple, you can put all occupants on a single lease as joint tenants, but things can get messy if one of the occupants wants to leave early.
Most lettings are for ten months of the year. It is possible to charge a holding fee over the summer holidays, but this is not universally practised across the country.
Students are students: they can be inconsiderate in the way they treat your property. A way to control behaviour is to insist on parental guarantees and then to enforce them. Having said that, not all students are teenage tearaways. In many areas there is a shortage of good-quality family accommodation for mature students. I let to students at a local maritime and seafaring college in the North. In the main, these are mature students and usually from overseas. I have never had even a hint of a problem with any of them.
Perceived wisdom dictates that girls sharing generally look after a property better than boys sharing. There is some truth in this, but don’t forget that girls often have boyfriends who’ll stay over! Also, girls tend to throw more parties than boys. To my mind, it’s six of one and half a dozen of the other.
Depending upon the type and size of property you buy and the numbers sharing, you might be deemed to own a HMO, a House in Multiple Occupation. A licencing scheme is being introduced whereby owners will have to comply with strict fire and safety regulations. These will include providing proper hard-wired fire alarm systems with ‘break glass’ warning panels, secondary lighting to shared areas, fire protected staircases and proper means of escape from the upper floors. If in doubt, talk to the local environmental health officer and find out whether the property complies before you buy. If not, you’ll need to make sure that you factor in the cost of the work when deciding how much you can pay for the property.
Regardless of whether the property is a HMO, you will need to comply with current regulations for having electrical and gas systems tested regularly and the necessary certificates produced. You will also need to be aware of regulations concerning fire resistant furniture. I live in a small, rural town whose tiny agricultural college is now part of the local university. I’ve recently heard that there are plans to expand the number of students by another 300. Given that that’s effectively doubling the current intake, there will inevitably be a significant increase in the number of residential students looking for accommodation locally. Now there’s an opportunity worth looking into.