Maximising profits from a student let
Making as much profit as possible is the main objective of any student landlord.
Your student letting business may make a profit already, but you may still be able to make even more money by following some of our tips.
Don’t make the classic landlord mistake
Many investors buy a property, refurbish, let, and then move on to the next project without considering tax-effective ownership, keeping good financial records and dealing with tax.
Taking your eye off the financial ball can cause problems in the long-term.
Letting student property is a business and no business can run without up-to-the-minute information about cash flow, expenses, and future liabilities.
11 Tips For Improving Profits
Here are some different ways to bring in more cash. Don’t forget not all these tips will work for your student letting business
because personal and local factors can limit the action a landlord can take.
1. Pushing up the rents
Putting the rent up instantly increases cash flow and providing expenses and other outgoings stay the same, increases profits.
Many landlords are scared of charging rents that nudge the upper limits for their accommodation.
Review rents at least annually and make a modest increase in line with inflation to stop increasing bills from eroding profits.
2. Pushing down expenses
Putting up prices increases cash flow, but pushing down expenses increases profits.
Don’t cut expenses to the bone, but shop for deals when contracts come up; get quotes from tradesmen rather than relying on a ‘mate’ and find competitive suppliers.
3. Avoiding rental voids
Marketing is crucial for a property business. A room is not earning money while empty and impacts on cash flow.
Manage tenants – take prebookings for the following academic year in time to list your property at the local university’s house fair.
Put an agreement in place around Christmas or the New Year if your current tenants want to stay on, as the new intake are generally looking for accommodation during January.
Manage the rents
Students are great at spending money and not always as good at paying bills.
Make sure you impose credit control –
- Screen tenants before they move in
- Set a regular date for collecting rent
- Don’t let rent arrears build
Remember you go short if a tenant fails to stump up the rent on time. The missing money has to come from somewhere – if it is out of cash flow, then cash is not available to spend elsewhere or is borrowed at a cost on overdraft.
4. Refinance your mortgage
A good way of improving personal finances is to remortgage to extract your initial investment from the business.
Mortgage interest is set off as a business expense, while you can put the cash in the bank or spend the money how you like tax-free.
Many landlords do not claim interest on the money borrowed against another property, like their home, as a business expense.
A landlord can reclaim any interest on business borrowing regardless of the security for the loan – including their home or money spent on a credit card.
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5. Improve your student house
This is not necessarily an instant solution. Improvements are capital costs reclaimed against capital gains tax when selling an investment property.
The result of the improvement, like an extra couple of rooms in the loft or an extension, generate more rent, is improved cash flow and more profits providing expenses do not jump pro rata.
6. Keep good financial records
Landlords need to keep detailed records that are cross referenced by owner and property.
This information highlights the financial performance of each property and identifies which make most profit or lose most money and why.
Extracting profit and loss figures for each owner produces accurate figures for personal tax returns.
Keeping good financial records makes examining costs easy to claim tax reliefs or allowances. This not only applies to day-today running costs, but other financial reliefs like capital allowances.
For instance, if you own a car and business use makes up 30% of the mileage, claim 30% of the running costs of the car – plus capital allowances which are special reliefs for businesses that reduce tax.
7. Tax effective property ownership
This is a simple tax reducer missed by many couples who own property jointly.
Take a married couple owning a student let that makes £15,000 a year profit. If they have equal shares in the property, the one who is a top rate taxpayer (40% or more) has £3,000 income tax to pay, while the other pays £1,500 at the lower rate (20% or less).
Often the lower rate taxpayer does not work or has an income short of the top rate threshold (£35,000 for 2011-12). If property ownership is adjusted so the lower rate taxpayer takes more of the profit, the overall amount of tax due is reduced. This only applies to married couples or civil partners as the transfer is capital gains tax exempt for them but not anyone else.
Take our couple above. Switch their shares of ownership from 50:50 to 80:20 in favour of the lower rate taxpayer and the tax liability comes down because the tax on the 80% share is charged at 20% on £12,000 (£2,400) and 40% on £3,000 (£1,200).
Instead of paying £4,500 income tax jointly, they only pay £3,600 on the same profits.
8. Kitting out your student let
Every property needs occasional maintenance and repairs. Remember a rental property is for business; so do not expect to finish the property like your home, but think of the needs and wants of tenants.
There’s a fine line between overspending and reducing your profits and not spending enough that makes your property unmarketable.
Many landlords with more than one property impose the same colour schemes across their portfolio. This way they can buy paint and soft furnishings, like curtains, in bulk and ask for a discount.
Buy fittings and furniture for your market as well. Be realistic about your tenants and how they will treat your property and spend your cash accordingly.
Rather than heading for cutting-edge design, students want sturdy, functional, and robust furniture and fittings.
If you are not sure how to kit out a rental property, view a rival student let or go through some photos on web sites to see what other landlords are providing.
9. Manage the property yourself
Many landlords have no idea what they are letting themselves in for when they start letting to students.
If you live a distance from your investment or work full time, you may well want to consider letting through an agent who will find the tenants, collect the rent and handle small repairs.
This service costs money – about 15% plus VAT of the annual rent. If you have more than one property with a letting agent, negotiate a discount on the fees – most will come down to at least 12% if not more.
Landlords who live close to their investments are often more hands on and manage their properties themselves.
This can be labour intensive, especially if you have three or more properties because the problems will fly in thick and fast and sorting them out almost becomes a full time job.
10. Market your features and benefits
Look at how the big boys in the student lettings game, like private halls provider Unite, market their properties.
The offer a student package rather than a room to let that includes bills, contents insurance, broadband, and wi-fi marketed as a single monthly payment.
Also, highlight your distance from campus, transport links, and local facilities.
Providing a hotline for dealing with problems and repairs also shows you are customer-conscious.
11. What sort of return should you expect from a student let?
If you trade in a void without any figures for comparison, you will never know whether your business can make more money or whether you are at the top of your game.
Benchmarking is the process many businesses apply to measuring their performance against others in the same market. Several organisations publish student letting data – NatWest Bank and Lloyds TSB have annual student surveys, London commercial estate agent Frank Knight publishes stats for student lets in London and specialist landlord mortgage provider Paragon Mortgages has a letting index as well.
The big corporates like Unite also publish useful data in the annual reports to shareholders.
All of these publications can give provide good indicators of performance, like average rents, yields and occupancy, often broken down by region.
Comparing these figures with your letting business can be useful, but remember they are often regional averages rather than precise statistics for individual properties.
A good measure of profitability and performance is to work out the return on investment or ‘yield’ from a student let.
To calculate yield:
- Work the annual rent received
- Work out the total annual expenses
- Deduct expenses from profits to leave a net profit
- Add up your cash investment in the property, which is your deposit plus annual expenses (from the step above)
- Divide the profit or loss by your cash investment
- Multiply by 100
For example, you buy a student let for £350,000 and let the property for an annual rent of £22,000 and annual expenses of £8,000. Your cash deposit was £87,500.
Net profit is £22,000 – £8,000 = £14,000
Cash investment is £87,500 + £8,000 = £95,500
Yield is £14,000 divided by £95,500 x 100 = 14.65%
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