Invest in student accommodation for attractive tax breaks

Students are usually regarded as an investment in the future but for holders of self-invested personal pensions (Sipps), they have just become a very good vehicle for investment in the here and now.

Flats in student halls of residence are the only forms of residential property that can be held in Sipps, offering very attractive tax breaks. Halls of residence are great investments for people who don't want to get involved - they are managed professionally and the universities can exert considerable pressure on students to treat their accommodation with at least some respect.

The returns on student halls of residence are good, with rents rising by about 10 per cent for each of the past three years, says investment company Assetz.

Stuart Law, the managing director, says: "With more overseas students choosing to study in the UK, government initiatives to increase full-time further education numbers and new licensing to reduce the number of traditional 'digs' available, the recent rises in student rents look set to continue."

Because first-year students are obliged to live in halls, and many concerned parents prefer their offspring to live in halls throughout their student years, it is almost unheard of for a unit to remain empty. Halls are also routinely used to put up delegates to summer schools and conferences in vacations.

"Dedicated halls of residence are very profitable hands-off investments and highly suitable as property-based pension assets, being cash generative even in the first year," Law says.

If the unit is bought for a Sipp, there is also virtually no tax to pay on purchase or rental income. It is even exempt from capital gains tax on eventual sale.

Assetz is selling units in a new hall of residence at Lincoln. The apartments range from four to six bedrooms. All the four-bedroom units have sold but prices of the remaining flats go from £243,000 to £307,000.

"Students can be untidy but apartment refits, including carpets and furniture, are covered under the management costs, meaning the investor's net rental income is well protected, and Lincoln Halls have their own void safety net which shares rental voids between all investors," Law says.

A typical investor paying £243,000 for a five-bed apartment and borrowing 85 per cent of the money would, after management costs, make a rental income of nearly £15,000, Law says. "This represents a healthy net yield of 6.1 per cent after management costs, which on a 5.2 per cent mortgage rate leaves the investor with a remarkable £4,147 profit in the first year." Assetz will be offering another hall of residence in Loughborough later this year.

Investing in students does not have to be in halls. Your offspring may want to live elsewhere, or they may plan to live in the place after graduating. In which case, choosing a university with profitable property may be (almost) as important as academic excellence.

Buy-to-let lender Landlord Mortgages has just completed research into university towns with the best returns on property. Top of the list is London, despite rocketing prices. An average terrace house costs just under £300,000, but Landlord Mortgages expects this to rise by £17,400 during the next three years. Add a saving on rent of £1,500, and you come out with a profit of nearly £19,000. If some of the rooms are rented out to other students, the return will be much higher.

But the difference in gross yield between London and the 10th most-profitable university town, Manchester, is very little - at about 15 and 14 per cent respectively. Property investment up north is a lot cheaper - the average terrace house costs £100,000.

Parents also have access to the best possible market research, says Lee Grandin, the managing director of Landlord Mortgages: "With stiff competition for rented accommodation in university towns, investors are faced with a captive audience, meaning that this type of buy-to-let investment can prove highly profitable."

Parents should not be deterred by talk of a slowdown or even slump in property prices, Grandin says. "It is true that property prices are high," he says, "but there is still scope for profit, with predicted house price growth and steady rental yields."