A home of their own

As another university year dawns, thousands of students in Scotland are brushing themselves down after the annual stampede for accommodation in our university towns and cities.

According to statistics published in May by the Scottish Executive, almost 300,000 students enrolled on higher education courses across the country in 2005-2006, ensuring high demand for accommodation. Competition to bag the best of the properties is stiff, with many students starting their search months in advance, often at the expense of focusing on end-of-year exams.

A smaller proportion of students, the fortunate ones, will be thanking their lucky stars in the shape of Mum and Dad for making a substantial investment, purchasing a buy-to-let property, with their child’s name written all over it.

With many parents looking to property as an investment vehicle, the notion of killing two birds with one stone by selecting a property which will also serve as a “home away from home” for children is worth consideration.

Investment potential

In terms of return on investment, purchasing a flat in student towns and cities can be highly profitable. Research published in June by Halifax Estate Agents showed the average house price in the top 20 university towns and cities in The Times Top University League Table 2007 trading at a premium of £48,020 to the average house price in their region.

Properties in Edinburgh, which features within The Times survey, command £47,729 above average prices within the region. According to the list, the average rise in property prices across the top 20 university cities and towns over the past five years was 77%; Edinburgh’s average for the past five years was 97%.

Once the decision has been taken to purchase, as a property consultant I often hear clients ask “Whose property is it anyway?”; “Should I be the legal owner or should it be owned by my child?”; and “What is the best way to ensure a happy arrangement for us all?”

To answer these questions, three major considerations need to be factored in at the outset: tax and financials, management, and legalities.

Whose benefit?

Clearly, as with any investment, money matters are to the fore. If borrowings are required, look at the borrowing abilities of the parent owner, versus child owner. As a rule of thumb, it is likely parent borrowers will achieve a cheaper, more straightforward mortgage deal. However, as mortgage lenders are keen to procure new business, many will look at an individual’s situation and offer flexible solutions.

The client should consider who is to benefit from the investment: if it is a quasi-pension arrangement, parents should remain legal owners, and should take care that the property they select will provide a solid income source in the future, as well as meeting the present day needs of their child. Alternatively, if the property is intended to be a first foot on the property ladder for the student child, capital growth should be the primary goal.

Parents may see this situation as an opportunity to release money from their estate by gifting, in which case putting the property in the child’s name should be considered. As well as seeking professional tax advice, parents would be well advised to consider the practical implications of such a gift. If for example the purchase is to suit the needs of an eldest child, how will younger siblings be equally accommodated, literally and figuratively?

The student landlord?

Secondly, a raft of practical matters need to be addressed concerning day-to-day management of the property to ensure smooth sailing, before the first housewarming party is a twinkle in the child’s eye.

The very nature of the investment makes it likely that the purchased property is located far from the parental home. Regardless of legal ownership, someone has to take on the responsibility of routine, and not-so-routine, problems which crop up in every rental property.

Geographically, it may make sense for the child to be in charge and to develop some useful life skills. This is however potentially too great a burden for a young fledgling property owner, and may come at the expense of academic endeavour.

Being a landlord is as much about people management as property management. For the student child also wearing the hat of landlord, the conflicting roles of beer buddy and rent collector may be untenable.

Generally speaking, money and students make poor bedfellows. Students are prone to lend and borrow cash from flatmates, which may make life tricky for the child landlord as rent day looms. To avoid unpleasant scenarios such as “Please deduct that £20 I lent you at the pub last week from my rent this month”, care needs to be taken. Poor property management such as this can lead to lost rental revenue and lost friendships.

Regulation, regulation…

Today’s landlords face an escalating amount of legislation to contend with, not least rules for houses in multiple occupation. Under the Civic Government (Scotland) Act 1982 (Licensing of Houses in Multiple Occupation) Order 2000, if three or more people living in a single dwelling are unrelated, the property needs an HMO licence and all tenants should be parties to the tenancy agreement.

It is essential to investigate regional HMO rules at the outset of property purchase as laws differ regionally. The HMO rules in Scotland state that a property needs an HMO licence when there are three or more unrelated occupiers, but a child who is an owner occupier is not included when counting the occupiers, i.e. a flat occupied by an owner and two tenants is not classed as an HMO. Taking advantage of this provision can represent a significant financial saving in fees and time spent dealing with bureaucracy, over the course of a university life.

Whether or not an HMO licence is needed, any parent should be diligent in complying with all required safety regulations such as electrical appliance and wiring tests, gas appliance tests and installing smoke and carbon monoxide detectors.

All landlords in Scotland now need to register with the local authority, who must be satisfied that the landlord is “fit and proper”. Under the registration scheme there are penalties for landlords who are not deemed to be taking sufficient action to deal with the antisocial behaviour of their tenants. In reality, these obligations are not particularly onerous, and the steps a landlord needs to take to remain on the right side of the law are pretty straightforward.

A proper lease

Whatever the ownership situation, parents should go to lengths to ensure that all shared living arrangements are made legal. A watertight tenancy agreement will protect the welfare of both investment and child.

Temptation to avoid formal agreements should be resisted, not least as the mortgage lender is likely to require this. The specific nature of the lease does depend, however, on the ownership.

The most straightforward situation presents itself where the property is parent owned, in which case a joint and several short assured tenancy (SAT) should be created, treating the child the same as the other tenants.

This has the advantage of placing the child on the same footing as his or her flatmates, sharing the tenancy obligations, and taking responsibility for shared costs. Asking the child to pay their share of the rental deposit from their own pocket can invoke a sense of ownership and ensure parents are unlikely to be left with a property in questionable condition, once the child and other tenants decide to head to pastures new.

To keep costs to a minimum, some parents may consider self managing the property; however a word of warning. Being a parent is a hard task; being a parent and a landlord is harder. To keep recriminations and squabbles between family members and housemates to a minimum, the services of a reputable property management company can be invaluable.

The short assured tenancy rules do not apply in the event of resident landlords, therefore in the case of child owners, individual lease arrangements would be the practical solution. This allows the owner to take advantage of the rent-a-room provisions. While there are tax advantages to this setup, upkeep of communal areas such as livingroom, kitchen and bathroom may be left open to neglect with the majority of work falling to the child owner. Guard against this by vetting flatmates, collecting parental guarantees and checking references if the other tenants are unknown on moving in.

Business sense

Regardless of ownership or how the client chooses to manage it, buying a property for the children at university can accumulate into a highly worthwhile nest egg. Parents can also be safe in the knowledge that their child is happily ensconced in suitable accommodation to concentrate on their studies and enjoy university life. Always remember though, this is primarily a business vehicle so a client should resist the temptation to become a soft touch.