Analysis: Rich cashing in on student digs

High interest rates and high living costs make investing in a house for student offspring a sound option for those who can raise the capital. Alison Utley and Jared Wilson report.

The rich are ploughing smart money into property for their student sons and daughters as the poor struggle with damp digs and growing debt.

Student loans, cheap mortgages and soaring rents are fuelling a growth in the numbers of parents buying houses for their student sons and daughters.

For many, life in the ubiquitous student house is a necessary evil - part and parcel of the university experience.

But with so much emphasis given to student poverty and debt, and justifiably so, it is easy to forget that many undergraduate and postgraduate students are fairly or very well-off .

Richard Greenwell remembers being completely horrified when he visited his elder son's student house in Leeds. "It was damp, there were snails climbing up the walls and the kitchen was subsiding," he recalls. "And we forked out thousands in rent for that squalid place."

When their second son, Dave, also went to Leeds, the Greenwells thought again. "We decided to buy a house for them and it has worked extremely well," said Mr Greenwell, who is from Shrewsbury in Shropshire.

With booming property prices in many parts of the country, and low interest rates, more parents are considering buying houses for their children to live in while they study.

Six years on, the Greenwell family is delighted with the investment. "Although we were running at a loss last year because we needed to instal some new windows, every other year we have made a small profit on the rental income," Mr Greenwell said.

The house was not bought primarily as an investment, but the Greenwells have seen an appreciation in the value of their property. "Even if we had lost money on the capital outlay, we would still have saved on rent," Mr Greenwell said.

His family has saved something like £16,000 in rent over the past eight years.

Dave Greenwell is now studying for a PhD in chemistry at Leeds and still lives in the house, which is in the Hyde Park area of the city, close to the university.

He said: "You hear so many horror stories about student housing and we just thought life's too short for this. I think first and foremost my family wanted to know I was happy, I don't think they really imagined making any capital gain out of this.

"It's so nice being secure in my own place, especially as a PhD student, because there is always uncertainty about when you will finish. And of course I am not wasting money on rent."

His friend, Richard Graham, is also studying for a PhD and rents a room in the house. His parents give him an allowance to live on and although he has worked in the summer holidays, he has not taken a term-time job.

Mr Graham said: "I am very lucky that my parents are able to make sure I am all right financially. They have supported my decision to use most of my holidays for revision rather than to earn money."

And it was worth it because Mr Graham gained the top marks in his year. "It certainly helped not having to work since time is a real issue when you are studying."

Mark Woods, the son of former England footballer Chris Woods, is another fortunate student who does not need to work to enjoy life.

Having just come back from three weeks in Florida, Mr Woods is looking forward to returning to university, where he will begin his second year in film and media studies. And he is having the best time of his life.

"I know I'm really lucky that money isn't a concern for me because a lot of students do struggle financially," he said.

Mr Woods has not worked since becoming a student, although he did have a job in his home town of Sheffield during his gap year.

"I managed to save quite a bit and haven't had to use any of my savings yet," he said.

Mr Woods has not taken out a student loan and although he does not get a regular allowance from his family, they do discuss how much money he needs to be comfortable.

He was educated privately, drives his own car and owns his own cell phone and computer. He spends much of his spare time go-karting with his friends.

Mr Woods said his father seriously considered buying a house near the university but decided against it because he already knew a property owner there who would rent him a nice house.

He lived in university halls during his first year and chose the most expensive option because it allowed him to get his own bathroom.

James Robbins, a 21-year-old business and accountancy student in his final year at the University of Exeter, owns a five-bedroomed house minutes from the campus.

Originally from Derbyshire, he bought the house, situated less than ten minutes walk from the university, for £220,000 in May 1999. A recent valuation priced it at £280,000.

Mr Robbins is entering his third year as a student landlord. "When we decided to move out of halls, I knew I wanted to buy a property," he said.

"Five friends moved in with me and I charged them £50 a week. Last year I realised that I only wanted four people to live with, so I charged them £60 instead."

The property has three floors, including five bedrooms, three bathrooms, a breakfast room, dining room, utility room and sitting room.

"Everybody that comes round says what a nice house I've got. I just have to make sure I keep it that way. It's a great feeling knowing it's my own place and it makes me want to look after it more," he said.

In Mr Robbins's case, the rent covers his mortgage and leaves a tidy profit afterwards. He uses the skills picked up from his course to balance the rent coming in with the predicted repair expenditure.

"The course has definitely come in handy," he said.

Like many landlords, he steered clear of making the rent inclusive of bills because he feels that his tenants would be more likely to be careless about using them. "I'd be particularly worried about the telephone and electricity bills," he said.

"The worst moment was when my housemates wanted to have a party. They eventually waited until I was away and completely trashed the house. There was mess on the walls and on the carpets and lots of glasses and plates were broken. I had to tell them that I was going to charge them for it or take it out of their damage deposit. It caused a bit of an argument."

So does he find it hard to balance the roles of being landlord and friend?

He said: "I would recommend it, but it can be a challenge. You just have to make sure that they pay by direct debit so that no matter what happens, the money comes through on the first of the month. That way at least the financial side tends to sort itself out."

According to estate agents, there has never been a better time to invest in property, and what better reason than to buy a house in which your son or daughter can live while studying.

Greg Ketteringham, a partner in Castlehill estate agents in Headingley, said: "When interest rates are high, people tend to leave their savings in the bank but at the moment they often see bricks and mortar as a better investment.

"And with the stock market currently performing badly we are seeing more parents than ever buying houses for their son or daughter while they are students."

The benefits can be numerous according to Mr Ketteringham, whose office is in the heart of Leeds's student land.

"Your money is working hard for you. At the same time, your son or daughter has somewhere secure to live. And then there's the added bonus of saving on rent and getting a regular income."

Usually, the primary motive is a better quality of life for the student son or daughter but the economics of the deal need to make sense.

Mr Ketteringham said: "You need to take advice since investing in an unpopular area could leave you out of pocket and your investment could go down. But having said that, the market up here has been very very strong for two years now and is continuing to go up."

The amount spent on student houses obviously varies but typically in Leeds it is between £50,000 for a two-bedroomed back-to-back terrace and £150,000 for a larger property.

And according to Mr Ketteringham, although most parents will sell the house once their son or daughter leaves university, some get a taste for being a landlord and carry on renting.

Mark Walklate of Headingley Estates stressed the importance of doing the figures carefully before taking the plunge.

He said: "People are becoming more astute and they realise property can't go on rising forever. And what if your son or daughter drops out of university, or the sharers fall out or refuse to pay?

"You need to be able to budget for a variable income and there are issues to be thought through. We find that many parents pull out of house deals at the last moment when they realise how complicated all the various elements can become. But you can make an income of about £40,000 over a three or four-year period."

The advent of the student loan has seen business really take off for Stuart Goff, head of the Totally Group, which specialises in buying and selling student properties.

But Mr Goff said things really took off with the abolition of the grant in 1999. Since then, there has been a 200 per cent rise in students or parents looking to buy homes.

"In the old days, parents used to feel they were contributing enough to their children's higher education, but now that loans have come in, many more are looking for ways out of the debts we hear so much about. As a result, the trend to buy student homes has exploded," he said.

Although fear of crime is certainly a factor, with three-quarters of Mr Goff's clients buying homes for daughters in areas considered more safe than some student areas, the finances, he says, speak for themselves.

Even parents wealthy enough to pay cash for a home for their student son or daughter are advised to take out a mortgage and put the home in their child's name.

"It makes very good sense because students are exempt from capital gains tax from any profits they make on the house, they do not pay income tax on the rent, and they can also take advantage of any first-time buyer discounts that lenders are offering," he said.

But parents need to act as guarantors of any mortgage because lenders will not finance a mortgage on the basis of rental income alone. How much they can borrow obviously depends on what they still owe on any existing mortgage.

Mr Goff finds that once their children are at university, the majority of parents are coming to the end of their mortgage repayments. Not all, though. He recently failed to find a mortgage for a family whose annual income was in excess of £200,000.

"They were just mortgaged up to the hilt already but this is very unusual," he said.

An average spend of say £80,000, which will buy a house to sleep four students in most cities in the north of England, can cost as little as £320 a month in repayments at the moment.

The rental income from three rooms would probably add up to about £535 a month, at £40 a week per room, leaving the owner about £200 a month to play with, even without any capital gain.

"When you add in what you are saving on your own rent you are looking at a saving of much more," Mr Goff said.

Rents in student houses do vary around the country and Mr Goff doubts that the finances would work out quite so neatly in London where house prices and rents are much higher than the rest of the country.

The National Union of Students estimated recently that average weekly rents in London were about £87 compared with £34 in the Northeast and the Midlands.

Another factor is the advantage of getting offspring on to the property ladder early in life and the responsibility and maturity that brings with it.

And with the property market so buoyant, Mr Goff has been selling student houses after just three years making profits of up to £30,000.

"This is a big improvement on the early 1990s when clients were often not making a penny on the capital investment," he said.