Mis-sold student accommodation investment – why strategy is important

Student Accomodation

So today's blog is all about the mis-selling of student accomodation investment, as part of my series of uncovering the truths, lies, deceptions of many common alternate investment strategies.

Despite having criticism leveled at me from many people because they think that I have just been trying to sell what I do and down play their strategies… at no stage am I saying don't do any of the alternative strategies in this series. I am simply saying know the rules of the game, trust no-one, research as if your children's lives depended upon it and discount all the urgency placed on you by salespeople.

Today's topic of student let properties is no different. My major problem with these is that people are not being given the full rules of the game, they are fed the benefits but not the downside and in today's marketplace (actually any marketplace) that's mis-selling and deceptive practices.

First of all there two types of student accommodation investments:

1st: is student housing which are normal residential properties rented on a per room or single tenancy basis

2nd: is student pods (these have become popular recently because they are lower capital required for entry and often come with rental guarantees for the first few years).

Getting a mortgage…

It's not a normal residential so the rules change. You are more likely to get a maximum of 60% if its a proper house and none at all if you're looking at the many student pods being blasted around these days. What's more concerning is the fact that in the past 4 years as lending tightened and student lets were squeezed out of lending criteria the prices have crept up and vendor finance was offered, meaning that there was no truly independent check on the values being sold.

…but they have an independent valuation.

Not likely, most valuations are either done by real estate agents (which are more appraisals than valuations) or when they are done it's on a commercial basis the end valuation bears no relationship to the true re-saleable marketable value of the investment property.

Exit strategy…or lack of it… you cannot just walk into any estate agent and sell it…

Don't think for a minute that this is easy to resell asset in any marketplace. You'll discover that most agents don't want to go near it or simply aren't setup to handle selling them. So you are pretty much stuck with the asset once you own it, especially the student pods.

The extension of this is that to sell a student let when it's new an agent like myself will make around 10-20% of the price as commission. So there's little motivation to sell it when it's old unless you are going to pay me the same sort of commission.

That will be a be a big ask considering you probably vendor financed it at a price well above what's it worth and then you have to add the cost of commission.

It all comes down to management once you own it…

This is true of any asset, if the management is unprofessional its going to cost you more money and time so its a risk. So many student lets are being sold as this management company is “well known”, “experienced”, “handles 100s of student lets” or heaps of other throw away comments. Yet the actual management company turns out to be a newly setup company, many times owned by the developer.

Watch out for sky-rocketing management charges…

It's an old trick that the management company sets up a maintenance company and gives all the work to that company. Sure this may not be in all cases but the same thing can happen if the wrong people are chosen.

It never happens in the first two years…

So often the let will be sold with a two year guaranteed yield, it is normally just another way of turning the extra money you paid for the property into a massive selling point. My question is what happens after two years? And this is the reality facing lots of people with student lets.

Also what happens when the student let gets old and not attractive to students, after all, students these days expect the best of everything (even though its mum and dad paying for it most of the time)? The reality is that the rental returns may not keep up with your expectations unless the property is well maintained… Something that can be a problem with students who haven't learnt the responsibilities of looking after other people's stuff.

Now before I continue, student lets can provide an excellent yield, generally higher than a normal residential buy to let property and this is the attraction of a property of this type. Student populations can even raise house prices and investment property yield in some areas. I have absolutely no problems with this.

It's the wrong strategy for you…

I am a massive lobbyist for people to focus on their own strategy, know the rules of the game and make money from it.

However, my biggest problem with student accommodation investment as an alternate strategy is that it's the wrong strategy for most people – capital up in a high yield, low or no capital growth (and one that you cannot remortgage or take the growth out and utilise it) is the wrong strategy…

Most people need to access capital on a regular basis to grow their portfolio and for over 90% of people that I meet this is the case.

So please before you buy this type of asset be sure to sit down with the team and map out the strategy so you can grow your portfolio in the most effective and safest way.

Headline pitches like “great yield” or “awesome cash flow” are often fraught with danger so be careful and think ‘what's my ultimate strategy?' and if you do buy, expect to be holding the property for a very long time.

Call the team on +44 (0)207 923 6100 and have them map out a specific strategy with step by step plan for you before you run off and buy these specialist assets with a potential sting in the tail.

Live with passion,
Brett Alegre-Wood

Brett Alegre-Wood
October 12, 2011

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