Student property is one of the most popular real estate investment options. It is argued that students will always require hostels around campuses. What is the rate of return on student properties, and can you get better returns elsewhere?
While student property comes with handsome rewards, it also attracts a fair share of risks.
It is impossible to make a blanket statement on student accommodation and the rate of return on investment. Profits from such a project depend on personal expectations, the location, and whether the properties are purpose-built. The market forces like demand and supply around the area also affect the return on investment.
Types of Student Accommodation
Student property was traditionally defined as Student Houses of Multiple Occupancy or Student HMO. Changing demand and government policy have changed the landscape. Investors are pouring money from all corners of the world to develop properties for students. Before looking at the pros and cons of investing in different properties, it is necessary to understand the classes.
Purpose Built Student Accommodation PBSA
The properties are designed and built with the student in mind. Beyond providing accommodation, they are meant to offer a student-specific and high-quality living experience. The aim is to attract local as well as international students.
The properties provide such amenities as Wi-Fi, security, property management, communal working facilities, even hubs, and gym facilities, among other amenities. The fact that they are designed with the student in mind means that they tick all the boxes of what the student could be looking for. The suitability to student’s life means that they will stay longer. It assures the investor solid returns as long as the students are in session.
Student House of Multiple Occupancy (SHMO)
It is the traditional approach to student accommodation. It was designed to reduce the cost of housing. As such, most of the amenities were shared. It also had a temporal view or a makeshift approach because old houses were renovated or converted to meet accommodation needs.
The idea is losing its shine as students demand higher-quality accommodation. It is no longer an issue of taking whatever is available. They want a decent and standard living area. The purpose-built houses rule the real estate sector, driven by students’ preferences.
Investors are still buying and building both types of houses. Here is a look at the advantages and disadvantages of investing in both types of homes.
Pros of investing in Purpose Built Student Accommodation
- High demand- the properties are built with the student in mind. They, therefore, provide better spaces, modern design, and appropriate amenities. They have become more attractive to students, resulting in better returns for the investors. Students are ready to pay the highest price possible for space in some of these hostels.
- Market confidence- investors love the idea of purpose-built student accommodation. They are, therefore, staking their resources to provide the best amenities to students. Billions are spent every day to expand the spaces available for PBSA. Even in 2020, when the pandemic was at its peak and colleges turned online, billions were still invested in PBSA. It is a massive vote of confidence from the market.
- Prime location- students have no problem living in multistorey buildings. It allows developers to maximize on limited space to obtain maximum returns. The properties are also located around already developed neighbourhoods hosting education institutions. Investors are guaranteed reliable returns because of the location despite minimal investment. It explains why many of them are turning to properties for investment.
- The advantage of building management- the developers retain the role of managers because students are highly temporal occupants. However, management can be delegated to third parties. It leaves the investor with all the time and an opportunity to grow other investments. It falls within what one would define as a hustle-free investment.
- Off-plan investment option- off-plan investment options give better returns. Your capital will be lower. You also can withdraw capital before the end of the project and still make a profit. The arrangement reduces the time it takes to get returns from your investment compared to other forms of real estate investment.
- Sustained returns- Purpose Built Student Accommodation offers an exciting experience to dwellers. The location is also an advantage because students desire to stay near their learning institutions. Students must also find quality accommodation, leaving you as their only option. Such factors raise the occupancy rate. With trimesters in most colleges, occupancy is assured.
The advantages will depend on the state of your property. Government regulations will also differ in specific areas and may favour your investment. Despite the benefits, there are demerits to consider when investing in student property.
Cons of investing in Purpose Built Student Accommodation
Purpose-built student accommodation or PBSA also comes with unique disadvantages. Here are some drawbacks to consider when investing in this type of property.
- No mortgage option– you have to pay the cost upfront because the real estate segment does not come with a mortgage option. The arrangement demands a considerable investment that you might not manage to gather. The vast capital demand could slow down your investment goals.
- Capital growth could be lower- properties around learning institutions are expensive. Students are also demanding the best amenities, yet they do not have the money to pay premium rent. Semester breaks also reduce annual occupancy rates. All these factors will reduce the rate of capital growth. You are likely to find other types of real estate investments offering better returns.
- The catchment area is restrictive- you cannot build such a property at a place without students. The tenants can also only be students. Such restrictions will lower your returns if students are out of session or uncomfortable with your design. Unfortunately, other people might not want to live near students or institutions. It means that your catchment is restricted to the student population. Such narrow clientele can be challenging to handle.
Pros of investing in Student House of Multiple Occupancy
Student House of Multiple Occupancy offers a cheaper alternative. It is still a preferred accommodation option in many locations. Here are the pros and cons of investing in the Student HMO.
- Cheaper for the investor– multiple dwelling units are designed to save money. They come with many shared amenities that reduce the cost of construction. Such minimal expenditure gives the investor room to invest in multiple dwellings and, therefore, increase his profit margin.
- Reduced tenancy risks- several tenants share a single room. If one of the tenants moves out or cannot raise the rent, you will still collect from the others. The arrangement is one of the ways to reduce exposure.
- The demand still exists- the low cost still pushes students to occupy the student HMO compared to PBSA. Students are comfortable with the kind of communal life associated with these dwellings. They are aware that they will be there for a few semesters. If they can save on accommodation and still enjoy a decent life, they will gladly occupy such a room. You are, therefore, assured of a decent return over the years.
- High returns- Multiple occupancy houses are sometimes converted from other residences or buildings. It is one way of regenerating old neighbourhoods and structures. An investor puts in a small figure but gets huge returns from rent. Even houses that have already paid their construction cost can still be converted into Student HMO. It results in an excellent return on investment.
While student HMOs come with advantages, they also present disadvantages worth considering before investing. Here are the cons of investing in student HMO.
Cons of investing in Student HMO
- Lower demand– the nature of Student HMO has caused students to turn to Purpose Built Student Accommodation. Consequently, the need for Student HMO is lower. You might not attract students to pay the premium amount. It is, therefore, likely to take a while to plough back your investment.
- Legal duty- the quality of construction combined with age presents a legal challenge. Authorities need assurance that their tenants are safe. The task could prove to be an added cost. In case of injuries at your premises, you will be required to pay heavy compensation.
- High maintenance cost- the old houses and high occupancy come with a larger maintenance bill. The factors eat into your profit. It will slow down your return on investment and prove to be more expensive in the long run.
- It is difficult to secure a mortgage. Financial institutions are hesitant to provide a mortgage to investors using the Student HMO route. Therefore, it will take time to accomplish your investment goals.
The critical factors when considering accommodation are quality, location, and price.
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