By investing in a buy to let property for a university bound offspring, parent's can save their child money and hopefully reap a healthy reward. Business Moneyfacts Editor, Lee Tillcock suggests prospective parents may have a lot more to learn about the University option.
The latest Business Moneyfacts survey confirms there are almost 40 lenders who would consider student lets, so there is certainly choice in the market, but encroaching legislation and other purchasing options need to be considered before a parent enters the fray.
University dwellings have historically provided above average returns; research from Halifax showed the average rise in property prices across cities and towns of the top twenty performing universities over the past five years was 88 per cent, while the largest universities by size outside of this list saw property prices rise by 100 per cent. Bearing in mind the UK average of 83 per cent during this period, the figures provide comfortable reading.
The reasons for parents purchasing a buy to let property for their university-bound offspring are obvious. By buying a house and letting any spare rooms, the rent should cover the mortgage repayments and possibly more, providing rent-free accommodation for their child. Once the course finishes they may decide to pocket any capital gain or keep the property as a longer-term investment.
But are parents aware of the rapidly growing red tape they need to comply with? The grace period for House of Multiple Occupancy (HMO) licensing has expired, so any new qualifying property purchaser will need to comply or face fines of up to £20K. But as licence fees, criteria and type vary locally from Council to Council, assessing the additional costs can be an almost impossible task.
The standard HMO criteria lists a three-storey property, with 5 or more tenants from 2 or more families sharing facilities e.g. bathroom or kitchen – a typical student house! However as individual councils can choose the criteria, or implement selective or discretionary licences, it is essential that you do some homework first.
And not only does the criteria and application process vary but just as importantly so does the cost. Recent figures indicate fees can range between £100 and £2K – a most unwelcome extra cost, at a time when the children are already pulling hard on the purse strings.
We decided to take a look at a range of university hot spots to see the potential confusion parents could face, and examine the differing cost structures imposed.
It must also be remembered that licences are non transferable. If a parent decides to sell the property when their child leaves university the new proprietor will need to obtain their own licence: extra expense is not a great selling point. And should they decide to keep the property for longer than the usual 5-year life span of the licences, they need to factor in renewal costs.Licensing fees should reflect the actual costs of licensing a property with a fair and transparent fee structure; let us hope that individual Local Housing Authorities (LHAs) follow these guidelines. Some lenders such as Capital Home Loans and Skipton have already amended their lending criteria on HMOs, and I am sure others will follow suit.
Unfortunately HMO licensing is only the tip of the 'regulation' iceberg, already further legislation is planned for Housing Health and Safety Ratings System (HHSRS) and the implementation of Residency Property Tribunal and Tenancy deposit schemes. The alterations required under the HHSRS alone according to predictions by the Residential Landlords association could mean a rise in rent of £55 per tenant per month.
Parents entering the buy to let market should like any investor, view this as a long-term plan, recent research carried out on the ARLA website found the expected lifespan of a buy-to-let investment is 16.2 years.
But there is some good news, by utilising one of the last property related investment opportunities left by the Chancellor, purpose built student accommodation can be purchased through a Self-Invested Personal Pension (SIPP). This type of investment property attracts full UK tax relief on the purchase of the apartments and tax-free rental income, the sale of the property is also free from capital gains tax.
Whilst a buy to let property can seem an attractive option for parents of university children, they must consider the full picture carefully, weigh up the benefits, against the costs of legislation, improvements to the property and be fully aware of the future rulings planned. Also it is essential that they seek advice from a qualified accountant and financial adviser, as taxation can also be complicated. And finally don't assume buy to let is the only option, parents are able to raise funds against equity in their own residential property, or could possibly consider one of the few specially designed residential mortgages.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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