When investing in property, most traditional investors look to use as little of their own cash as possible. Instead, they use funding from banks (mortgages) and other lending institutions and wherever possible, release equity from existing investments in order to fund further ventures. Many mentors and property professionals teach this as a tried and tested method as it’s a good way of building up an extensive property portfolio. I myself got in to property after reading Robert Kiyosaki’s “Rich Dad, Poor Dad” books, but having experienced the recession in 2008, I have also experienced the dangers of this first-hand.
In the mid-2000s, there was an abundance of young people in search of financial freedom and desperate to build a property portfolio. I knew of people who were declined a credit card but the system of ‘self-certification’ with the lenders enabled them to buy numerous properties. A friend of mine had five houses that he rented out. His mortgages came to £2,150 per month, and he was bringing home £2,500 per month with his own mortgage and bills to pay. He was heavily dependent on the income generated from his rent, and even more dependent on the exchange rate. As a result, when the exchange rate increased and he lost two tenants, he had no other investments to draw from. He lost all five properties over an eight-month period, along with his credit rating, deposits and money he had spent on renovations. If he had used some of his capital to buy a property with cash, maybe one with a rental guarantee, this could well have saved his portfolio.
A rising trend is the number of investors looking to diversify and secure a cash property investment. Guarantees do not always work, but one sector in which they generally do is Purpose-Built Student Accommodation (PBSA).
There are some great deals out there, with fully equipped and furnished studio apartments for under £70,000 and with guaranteed returns from 10% NET for three to five years. Having said that, it is always important to check that the guarantee is in line with the market rate for rentals and that there is a good level of demand in the area.
This is a relatively mature and established market now and is certainly one of the fastest growing. One of the downsides is that the value of your asset is derived from the rent it generates, so you will not see large increases in value, but a modest 2 to 4% per year in line with rent increases. But the strength of the market has made these investments extremely attractive. When the market was in its infancy 10 to 15 years ago, these investments were difficult to sell on because everyone was buying new. But demand has exceeded supply and the only way to secure the best terms in this market is by buying off plan. So there is an active market now for completed PBSA, meaning that there is a good exit strategy now for these investments.
As well as being a great ‘portfolio builder’, and in some cases a ‘portfolio saver’, PBSA is a great first time investment. Over 80% of our investors who buy PBSA re-invest and that is mainly due to the fact that they have made good money from their initial investment. When starting out in property investment, it is important to get something that is low risk, but also important to make money from the investment. Having a guarantee in place can take all of the worry away from void periods and problem tenants. It is also completely hands-off for the investor, so you don’t need to solely look at locations close to where you live. A staggering 44% of investors who enquire about PBSA in a particular location with us who invest, do so in a different location to the one the enquired about.
Finally, my experience in PBSA has shown me over the years that the best locations to invest are not the big cities. Big cities have numerous rental options for students. They are also normally higher priced, and as the value is derived from the rental achieved, the locations in smaller cities and towns generally have more demand, will see higher increases and are more secure. We have recently launched two new PBSA developments where there is a proven demand and the returns are much higher than those being offered elsewhere. As always, these developments will sell fast and there is an incentive for those who invest early, plus, it’s always great to secure the best units available in any development as they will be in the highest demand both for rents and resale.
For more information please contact our team on 01244 343 355.