Do students really make bad tenants?

to let signsMany people think that students party all night, sleep all day, and squeeze their studies in where they can.

As for looking after their digs, the popular stereotype is that they can't use washing machines and can't be bothered to wash up.

%VIRTUAL-SkimlinksPromo%But while that may be true of a minority, today's students are altogether more focused on their studies, and a world away from The Young Ones. They also make excellent tenants for landlords who want to achieve a good rental yield, potentially strong capital appreciation and minimal arrears.

Stuart Law, chief executive of property company Assetz, says: "The student property sector has proved to be one of the most resilient investment sectors during the downturn, with rental incomes and property values remaining stable or increasing."

Top marks
The first, and biggest, benefit of letting to students is the fact that you get a higher rental income because you can usually fit more tenants into one property. A typical three-bed semi with two reception rooms can be converted to accommodate four bedrooms, and maybe five, if there's a loft. That makes a huge difference to your return compared to letting the property to a family.

Bob Young, managing director of buy-to-let lender CHL Mortgages, explains: "The rental return is higher, because typically a student property is a multi-let. So for example a three-bed house in Manchester that might command £800 a month rent from a family, could be let to four students at £500 a month each, a total rental income of £2,000 a month."

According to Zoopla, landlords in Birmingham can achieve an annual rental yield of 7%, the highest in the UK, with Nottingham, London and Coventry not far behind with average yields of 6.4%.

Secondly, house price growth has historically been stronger in university towns and cities than in the rest of the country, so you are likely to see the value of your investment rise.

According to Lloyds TSB, the average house price growth in university towns and cities over the last 10 years outperformed the wider market, with more than two-thirds of all university towns recording house price increases in excess of the UK average. In fact,11 of The Times' top 20 university towns have seen average house prices rise by at least 75% over the past decade.

Guaranteed rent?
While it's not always the case, the practice of paying the rent in advance at the start of each term is still widespread in the student lettings sector. Clearly this takes away one of the biggest risk factors for landlords – rental arrears.

Even if the rent isn't paid upfront, landlords have another safety net because in most cases the student's parents will usually act as guarantor for the rent if the child cannot pay it. This is another huge benefit for landlords operating in this market.

Learn the hard way
However, letting to students is not without its challenges and any landlords interested in entering this market need to do their homework first. It's important that you are aware of the common pitfalls and how to avoid them.

For example, while many students are hard-working and tidy, let's face it; the majority of them are teenagers living on their own for the first time. Realistically there is going to be more wear and tear in a student property, if only because there tends to be more tenants in one place.

You may need to repaint between tenancies and recarpet more often than normal. Also plan your décor wisely – wood floors and rugs might be easier to maintain than carpets.

An important thing to be aware of is that there are additional rules and regulations for those who let out their property to multiple tenants, in what's known as a House in Multiple Occupation (HMO). Young explains: "You do need to be aware of legislation if you let a HMO, particularly rules around upgrading fire doors and ensuring emergency access."

Could demand drop?
According to UCAS there was a 7.4% drop in applications to universities in 2012 compared to 2011, probably as a result of increased tuition fees. This controversial subject has undoubtedly put some young people off university, but will it cause a problem for student landlords?

It's unlikely that landlords in popular university locations will see any drop in demand for accommodation says Young. "The increased tuition fees are an issue for student landlords to consider but they are less of a concern in established university towns and cities. Oxbridge, Manchester, Leeds and Sheffield for example are all very popular and there will also be a high number of students in those areas requiring decent accommodation."

Of course, less popular university towns could suffer, although overall student numbers are predicted to increase over the next decade, according to the British Council.

If you research the student market carefully, and choose your property location wisely, there is the potential for the holy grail of buy-to-let investments – a strong rental yield, minimal arrears and decent capital growth. And no landlord can ask for any more than that.
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