Student Buy-To-Lets: A Bad Idea?

Is it a good idea to buy your student offspring a property to live in while they're at university?

If you have a child heading off to university this autumn, finding somewhere to live may be top of their priorities. So, it is worth investing in the student buy-to-let (BTL) market or is being landlord to a house full of students too much hassle?

Yields are higher

On paper it looks like a no-brainer as figures suggest that student buy-to-lets is where it's at. According to research by the Property Investor Show, the student towns are achieving yields over and above the national average of 6.4% - with some, such as Nottingham and Durham, achieving average rental yields of more than 9%. And most buy-to-let investors believe this trend will continue, despite the credit crunch.

After all, the numbers of people going into higher education continues to rise - so the demand for student accommodation looks set to increase too.

To some extent, the reason for the success of the property market in student towns is obvious: house prices in these areas are always going to hold up better than many other places partly because - inevitably - these areas appeal most to buy-to-let investors.

One of the reasons is that the rent achievable on properties rented room by room to several students is often higher than if the property was rented to a family.

Another advantage to buying a house for your child to live in while at university is that you will have some control over where they live, the state of the property and how safe it is. Obviously it will also mean that your child won't be spending their student grant lining the pockets of an unknown landlord, while dealing with all the trials and tribulations of living in privately rented accommodation.

Once your child has graduated, parents have the choice of selling up and using the profit to help them onto the property ladder in their own right or perhaps continuing to play landlord to a new set of students.

To avoid Capital Gains Tax, you could decide to put the property in your child's name. This would also allow your child to take advantage of the Government's Rent a Room scheme, which allows a live-in landlord to receive up to £4,250 a year tax-free. Bear in mind, however, that the property would then belong to your child, who could in theory sell up against your wishes and bank the money.

The downsides

Unfortunately it's not all good news - the student BTL market has some disadvantages too. Supposing you buy a three or four-bedroom house for your child to live in while renting out the other rooms to their friends, it could put your son or daughter in an awkward position.

One house-mate effectively owning - or their parents owning - the property might make the other sharers feel unequal. Meanwhile your child will effectively be the live-in landlord and will have to deal with day-to-day issues such as collecting rent and making sure the bills are paid. You'd have to be pretty sure they were mature enough to do this to be confident the arrangement would work.

On the other hand, you could argue that - compared to your typical student tenant - the tenants of your child's BTL will be less likely to wreck the place, seeing as they live (and are friends) with the owner.

Still, another potential pitfall is what you would do if your child decides to leave their course early or wants so change to another university; suddenly your long-term investment plans are in doubt.

Other potential problems include increasing amount of paperwork landlords need to do. These issues are highlighted in fellow Fool Christina Jordan's Is Buy-to-Let Just Too Much Hassle? article.

The Housing Act 2004 introduced licensing for houses in multiple occupation (HMOs) in April 2006. Mandatory licensing now applies to properties with three or more storeys occupied by five or more people from two or more families, but local authorities can also require licensing for other kinds of HMOs.

On top of that, since April last year, the Tenancy Deposit Scheme means that landlords have to protect tenants' deposits by having them held in a separate account and allowing an independent third party to rule on any disagreements about the money's return.

The next rule change to come into effect is that from 1^st October this year all landlords will be required to provide prospective tenants with an Energy Performance Certificate detailing the energy efficiency of the property.

Finally with rumours of a house price crash seemingly gathering pace every week, investors will be questioning whether it's wise to enter the BTL market at the moment at all.

Suddenly making a quick profit on property while your child is at university doesn't seem so simple, does it?

> Compare buy-to-let mortgages at Fool.co.uk