He’d just been to a property seminar (red flag!) and had been told all about this “fantastic” investment vehicle called “Student Accommodation”. A brand new property (yet to built actually) located just 3 km from the CBD, 6.5% yield on a 5 year lease and all this for just $299,000. “Wow, what a buy,” he enthused!  What a buy indeed! ‘Sam’ had just discovered the ‘booming’ student accommodation market!

So, is student accommodation a “boon” property investor’s dream or a “boom” that could blow up their face?

Supply Vs Demand

My experience with student accommodation pushes it to the bottom rung on the success ladder and even lower for an off-the-plan property. Typically this type of ‘investment’ is fraught with danger. That’s a bold statement, but the fact is student accommodation fails just about every sound investment test; they are incredibly easy to buy (red flag, no competition, over supply), almost impossible to sell, tough to finance and too often, loss of value. Let me explain.

How to have them fight for your property

The best property you can buy is one you can sell to an owner occupier who will “fall in love” with it. The best of those properties are ones that will appeal to high income earners because they can afford to compete against other keen buyers to “win the right” to buy your property resulting in a potentially much faster sale at a much higher sell price. Student accommodation has zero appeal to home owners.

Properties that appeal to high income earners will be located close to highly paid jobs (eg inner suburban). The properties with the most appeal will be houses, townhouses and low/medium density (< 8 flats in a block) and like a good red, with some age on its side; in fact the older the better (starting in the early 80’s and older).

They couldn’t buy even if they loved it!!

The problem with student accommodation (and serviced apartments, hotel rooms, Defence Force housing etc) is that an owner occupier cannot buy it even if they did fall in love with it because the property will have a long term lease that prevents occupation by the owner.

Just try and get out of it!

So, what is your exit strategy, who can you sell it to?  Only another investor and that immediately shrinks your available market by 70%. And since the vast majority of property investors buy suburban flats, townhouses and houses you reduce your pool of interested investors to the few investors who ‘fall prey’ to the same clever marketers that introduced you to the concept. And that is where on-selling gets extremely tough.

You are now competing against the huge & costly marketing power of the project marketers who have access to a never ending list of brand new properties to sell.  You lose on three fronts, marketing power, budget and substantial supply over demand.

Pay through the nose!

You also are at risk of paying sometimes way too much for the property at purchase because these properties appeal to such a tiny segment of the real estate market. Because the marketers have to spend such huge sums on marketing, advertising and agents’ commissions the extra costs are simply passed on to the buyer, you!

Huge competition, but it’s against you!

So, what does it mean that you have to compete against the marketers. Instead of paying the local real estate agent 2.75% commission, these specialist agents charge up to 8%, and instead of spending say $5K on a single page glossy in a real estate book or a colour ad in the local paper, you need an entire high quality, multi page brochure spruiking the tax benefits, cashflow, yield etc.

The marketers talk about the superior yield, maybe 6.5% compared to 4.75% for a quality flat in the inner eastern suburbs, but they never mention the high maintenance costs (furniture replacement every 5 years, extra wear and tear from students that come and go), management fees etc. And what happens when the lease does expire, they hold all the cards, they write they lease and they set the lease, they have complete control. In some cases, you may be compelled to renew the lease if the majority votes in favour of an extension. You have no control.

The Golden Rule

One of my golden rules, if you buy anything that is “packaged” you will pay a premium. The glossier the brochure, the less the substance or what I call “intrinsic value”.

How to do it right and make a killing!

If you really do want to invest in student accommodation, create the product yourself and save heaps and make even more.

Find yourself a 4 or 5 bedroom suburban house close to a university (eg Melbourne’s Frankston, Burwood, Clayton etc), install internet, a desk, chair and bed and then you can charge each bedroom out at $100 to $140+ (that’s up to $560+ pw for a 4 bedder).

Partition the lounge room and get another bedroom, maybe two. Some shrewd investors even put in a transportable home or bungalow in the backyard and boost their income even further. Imagine 6 rooms at say $140 pw per room for a total rental income of $840pw. That’s over $43,000pa which could represent a return of 7% or more. And when it comes time to sell, restore the house to its original condition and enjoy the normal capital growth for that area.  What more can you ask for, high income and good capital growth.

When accommodation is tight, these kids even pay for their room when they go home for the holidays! But, don’t forget, either you have to manage the rent collection or pay someone to manage it. That might mean providing a room return for managing the property. That’s if you want to manage 5 or 6 students, that is but at least you will get a great, real return on your investment.

Advice from the Master

Here’s a tip from the richest and most successful investor in the world, Warren Buffet, “Investing is simple, but not easy.” The message, keep it simple, buy intrinsic value just like the professional, long-term property investors do and you give yourself the very best chance to outperform the market.

If you need assistance with your portfolio, contact Financial Architect, Andrew Gardner on 03 9509 8911.

Both the Government and the Regulators are providing every possible resource for those who can, the ‘winners’, to move into the market and take full advantage of the opportunities.

The RBA shocked the market with a rate cut of a full 100 points (1%) bringing the best rates down to around 7.85% after most banks passed on about 80 points - fantastic news for property investors. In the past few days, almost as surprisingly, a number of the banks have slashed their rates by up to .25% bringing the best rates down to around 7.62%.

The Federal Government’s stimulus package gave families and pensioners extra cash to spend, doubled and tripled the first home buyers grant and guaranteed bank deposits.

So, what does this mean for property prices?

Well the short answer is, broadly, nothing… yet! Auction clearance rates are still well down.

But it’s a very different story for the savviest property investors who are starting to creep quietly back into the market, picking up some of the best bargains in a decade. I’ve already started to see evidence with a number of clients uncovering great deals in the past few weeks.

The first picked up a brilliant flat with little competition while another found a great little one-bedder yielding an amazing 5½% and another found a similar one-bedder yielding 5 1/4% - when was the last time you saw Inner Melbourne returns like that? 2001! The fourth client picked up a great 3 bedder $150K under 2007 prices, again in an inner Melbourne suburb.

So, what does this mean for you?

Along with my panel of property experts I am convinced there is every chance that those who bite the bullet, (and the window of opportunity is closing), will get a rare chance to pick up properties at near decade best value and then ride the crest of the wave as prices start to surge as investors pour back into the market chasing the rapidly rising rents caused by historically low vacancies.

Spurred on by higher rents and lower interest rates, I expect momentum to build with the first home buyers followed by the “real price-drivers”, owner occupiers buying on emotion, to push prices higher again which could draw the investors with “herd mentality” into the market to create even greater competition and generate stronger price growth.

Now this is not going happen overnight I believe it will take some time for prices to really kick, but I believe the biggest gains will be seen when confidence starts to build, probably when positive trends are detected in world financial markets.

Needless to say this action is not right for everyone; you need consider your circumstances; for example, the security of your employment, your cashflow, your equity position and your capacity to manage another property.

A word of caution; even in these times, good buying is not universal. Before buying get good “independent” advice to ensure your buying is prudent, responsible and really does represent good value. A recent example was a client who was persuaded by the promoters of ‘positive cash flow’ properties to buy “under-valued” houses in south west Sydney and “cash in on the growth to come”. Sadly, real growth isn’t predicted for years as the number of foreclosures in this mortgage-belt continues to mount.

As always, successful investing is dependent upon good buying decisions and good buying decisions are dependent on good advice/support.

As the barefoot investor says, tread your own path!