Relocation Relocation host, Veronica Morgan, explores whether student accommodation is a good investment.
Like all investments, you need to consider the big picture before making a decision on where to park your money. However we hear of a lot of "mum and dad" investors who buy student accommodation purely because that is all they can afford with their limited budget. So if the only reason on you are buying student accommodation is because you can't afford anything bigger/better, I would encourage you to consider the bigger picture.
You won't get a more passionate advocate of property investing than me but I do wonder whether there are better investment options if your budget is limited to $200,000 and you want to buy in a capital city. Some alternatives that spring to mind include shares, CBD parking spaces, property in satellite suburbs (although you need to be careful here too), government bonds or simply leaving your money in the bank. Maybe you could go into partnership with a trusted friend or family member and extend your budget that way. Or possibly the bank will lend you more than you think.
Our greatest concern with student accommodation is the limited scope for capital growth and the difficulty encountered when trying to sell these apartments. Both problems stem from the one main cause: they have a lack of owner occupier appeal. Owner occupiers are the property buyers who push up prices, largely due to their emotional involvement. Owners occupiers are not interested in buying student accommodation for the obvious reason that they can't live in the property.
And another reason why student accommodation can be difficult to sell is that the apartments are often smaller than the banks lending threshold (commonly 50 sqm). Which leads us to a bit of real estate irony: since the banks usually require a larger deposit for properties under 50 sqm, assuming you have the borrowing capacity, you could potentially buy a more expensive (larger) property with a significantly smaller deposit. And by stretching into a higher price bracket you may be able to afford a property that will have a likelihood of better capital growth. Of course the affordability will be an issue, as you will most likely have to cover a shortfall in rent but this is an option worth discussing with your financial planner or accountant.
Investment strategies need to take into account your current stage of life as well goals for the future. Student accommodation may be the right if you are heading into retirement and want to minimize your borrowings and simply want an income. But it could be the wrong solution if you are seeking to reduce your tax bill and build equity while you are in your prime earning years.
The entry costs of investing in real estate are high compared with many other investment options and the exit costs are high too, so making any property investment decision requires careful thought and we strongly recommend you get expert guidance from a professional who knows your individual circumstances and long term goals.
The bottom line on student accommodation as a capital city property investment option is that it is not necessarily a bad option. But the worst reason to go for it is that you can't afford anything better.