In the UK, most students live in purpose-built student accommodation for their first year and then move into private rentals for their subsequent years.
This is not an absolute given, some students choose to stay in PBSA for the entirety of their time at university while a few opt for alternative forms of accommodation, such as living with their parents or taking lodgings with local families, but it is very much the standard path and for good reason.
Living in PBSA gives first-year students an in-built social network and a high level of emotional security, while living in private rentals allows more senior students to benefit from the support of their peers as they advance into genuine independent living.
This means that landlords who are looking to rent to students have two options.
One is to invest in PBSA and the other is to invest in residential buy-to-let which has appeal to students. Neither route is intrinsically better than the other; indeed, some property investors may opt to use both routes.
This guide will introduce you to both routes and highlight their relative advantages and disadvantages.
PBSA is commercial property whereas buy-to-let is residential property
Of all the differences between the two ways to rent to students, this is arguably the most important, particularly since many, if not all, of the key differences between them, ultimately derive from this fact.
Commercial property and residential buy-to-let work to completely different sets of rules, which may make the former more appealing to investors who are tiring of the heavy regulation in the residential buy-to-let environment.
With PBSA you never actually own the property, with residential buy-to-let you might
The standard way to invest in PBSA is to purchase a specific unit within that property, however, in commercial property, units are highly unlikely to be stand-alone entities which can be let independently and sold on the open market.
Instead, they will be managed by a third-party company, which will usually buy back any unwanted units and sell them on to other investors. Therefore, when you purchase a share in a commercial property, what you are really buying is an income which is tied to an asset, rather than an asset, which can be used to produce an income.
With residential buy-to-let, you have the option to own an asset; however, there is flexibility here. For example, you could opt for an interest-only mortgage and dispose of the property before the end of the term without ever having built up any equity in it.
The possibility of developing a portfolio of tangible assets may appeal to some property investors, especially in the UK, where capital appreciation is pretty much taken as given (at least over the long term), it is worth remembering that you can only benefit from capital appreciation when you sell a property.
Until that point, you have the expense of maintaining a repayment mortgage, which will reduce your rental yield, plus ongoing maintenance and insurance costs. With a commercial property, you just pay your money, take your choice and receive the associated income.
PBSA is automatically managed for you, residential buy-to-let you have to manage yourself
PBSA is always managed by a commercial company, which takes full responsibility for the management of the property. This includes setting the price(s) at which your unit(s) will be let.
On the one hand, this prevents you from having the opportunity to make decisions for yourself (e.g. setting prices and choosing tradespeople). On the other hand, these companies are generally experts in their field and hence are probably better placed to take important decisions (such as pricing) than the average property investor. Plus the fact that they automatically take care of the day-to-day management of the building relieves investors of the need to make their own arrangements.
With residential buy-to-let, the landlord has ultimate control over every aspect of property management and with that power comes the associated responsibility and, in some cases, expense, particularly if landlords wish to use lettings agents.
In this context, it’s worth noting that as of June 2019, it will be illegal for landlords (or lettings agents) to charge additional fees to tenants over and above the rent.
This means that landlords who fail to anticipate every reasonable expense will have to absorb the cost themselves.
It’s also vital to be aware of the fact that, these days, landlords also have to comply with a plethora of regulations, some of which may be set by local authorities and hence may vary from area to area. Failure to comply with these can lead to serious penalties, which can be particularly frustrating if they are levied for purely administrative reasons.
Property management also extends to tenant management, which can be a rather challenging area for residential buy-to-let landlords, especially when dealing with students. On the plus side, modern students do tend to be fairly responsible tenants overall.
While the change to a loans-based system has been controversial, it has also turned students into investors in their future, who are more likely to be studying, working or going to the gym than throwing alcohol-fuelled parties. It also helps that for many students, their student loans are guaranteed income.
Many students have parents who will at least, be guiding them if not supporting them financially and if push comes to shove, universities tend to have rules which allow them to withhold the degrees of students who bring the university into disrepute.
On the minus side, students may need a bit of guidance as to what is and is not expected from them in terms of property maintenance (and similarly what they can and cannot expect from you) and residential buy-to-let in general is currently a potential minefield due to the conflict between the Right to Rent Act and the Equality Act.
The Right to Rent Act was successfully challenged in court, however, this does not mean that it has to be abolished, it may simply be reworked. This may be less of an issue when it comes to renting to students than when it comes to renting to the general population for the simple reason that students are more likely to have acceptable ID, but it may still be a consideration for some landlords.
Mark Burns is the managing director of property investment firm Hopwood House.