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Should I invest in university apartments?

Student accommodation can offer great rental yields to property investors, but it comes with its own unique risks.

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As of 30 June 2016, there were 401,423 international student visa holders in Australia according to the Department of Immigration and Border Protection. That's approaching half a million people in need of accommodation. For property investors, this number could seem quite appealing.

University apartments are a solution to housing the influx of international students, and they can be a unique strategy for investors. But before you decide to invest in student accommodation, it's important to understand the particulars.

What is student accommodation?

Student accommodation is housing near university campuses that has been specially designed to house university students. Sometimes the properties are repurposed detached houses, and sometimes they are unit blocks.

In most cases, student accommodation is leased as individual rooms in a property. Sometimes the individual rooms are even further divided, with bunk beds allowing multiple occupancies. The properties are usually leased furnished, and the rental cost includes services such as Internet and utilities.

Will lenders finance student accommodation?

Some lenders are willing to finance student accommodation, though most stay away from these properties. This is because they operate like serviced apartments, and lenders are often sceptical of the resale and capital growth potential.

Lenders also hesitate at accepting university apartments as security for a home loan due to the limited rental market. While there are plenty of students in need of accommodation, the fact that many university apartments don't allow non-student tenants means the market is restricted.

However, there are lenders who are willing to offer home loans to invest in university accommodation. Most of these lenders, though, will only lend up to 70% of the property's value. This means you'll need at least a 30% deposit.

What are the upsides of investing in student accommodation?

The numbers speak for themselves when it comes to the scale of the opportunity. The number of international student visa holders in Australia is growing. The 401,423 international students in 2016 was up from just over 350,000 in 2013.

In addition to demand, student accommodation often equates to more secure rental income. Many international students pay rent in advance and often pay 6-12 months in advance. Many also have financial help from their parents. Because of this, university apartment investors often have added reassurance that they'll receive all the rent they're owed.

What are the downsides of investing in student accommodation?

University accommodation is not without its pitfalls, however. Aside from the difficulty in obtaining finance, university accommodation often only generates seasonal demand. If students leave during university holidays or between terms, properties can be left untenanted.

Student accommodation also often comes with high management fees. Property managers often have to be more involved in day-to-day management of student accommodation, and these costs can eat into your yield.

The high turnover also means you may have tenants who aren't as conscientious in how they treat your property. This can lead to higher repair and maintenance costs.

Is it worth it?

Student apartments tend to have higher rental yields than average rental properties. Also, if you can convert the property into a traditional residence at some point in the future, your university apartment’s proximity to public transport and services can equal good capital growth.

But you also face higher vacancy rates and management fees. Moreover, you could face tight restrictions on the use of your property.
As with any investment, it's important to weigh up the pros and cons. Do research on the specific property you're considering to work out the yield versus the costs, and take into account the risk of untenanted periods.

Student accommodation can definitely be a great opportunity for the right investor. Understanding the pros and cons of these properties will help you determine if it's the right opportunity for you.

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