The luckiest students will be graduating with a home of their own

Buying a house for a child at university could prove a sound investment if parents do the legal groundwork and get the location right. Esther Shaw reports

Student digs are not exactly re- nowned for their standards of cleanliness, furnishing or maintenance, or for being subject to stringent safety checks.

And many students, it seems, are no longer prepared to put up with it. According to Abbey Mortgages, 154,000 of them – some 14 per cent of the current student population in Britain– are hoping to buy their own home in their university town, either alone, with friends or with the help of their parents.

Indeed, buying bricks and mortar for their children to live in while they're at university can make financial sense for parents.

"By doing so, you are not throwing away money every month for sub-standard rental accommodation," says Melanie Bien from mortgage broker Savills Private Finance.

In theory, the rent you get from letting the other rooms should cover the mortgage repayments, so providing rent-free accommodation for your child.

Another advantage is the peace of mind you get from knowing that they're in a safe environment.

"Finding a decent [rented] property for your children to live in at university can be a traumatic experience," says Andrew Montlake at broker Cobalt Capital.

David Smith, senior partner at Dreweatt Neate estate agents, adds: "The concern for parents is often that once their child leaves student halls after the first year, they are at the mercy of private landlords."

But if they decide to help them buy a home, parents must remember that it is their child who will have to manage the property, stresses Ms Bien. "He or she effectively becomes the landlord and is responsible for finding tenants, for maintenance and for collecting rent. This may be too much responsibility."

Lisa Taylor from financial analyst Moneyfacts adds that living with friends who are also your tenants can be difficult, given that the relationship must now involve a business element.

"There is also a raft of legislation to consider," she continues. "Your student house may need to be licensed under the House in Multiple Occupation agreement. There are also fire and safety requirements, as well as the new tenancy deposit protection scheme."

It makes sense for parents to try to help with as much of the process as possible, such as settling tenancy agreements, carrying out regular maintenance checks and ensuring that the tenants set up direct debits to pay their rent.

Students have a reputation for causing damage and not paying rent, but problems can be avoided by ensuring references are properly checked and parents' details taken so they can act as guarantors.

If you can't do this yourself, you might want to consider hiring a managing agent – although this will eat into profits, to the tune of around 15 per cent of the rental income.

If you are looking to make big money quickly from student property, then think again.

"As house prices slow, and indeed fall, in some areas, there is less opportunity to make a quick buck than there might have been in the past. Indeed you should think about owning a property for five to 10 years," says Ms Bien.

While rental accommodation for students will obviously be in demand in university towns, it is important to research the area before you buy.

"There are always particular roads near the university that are popular with students – even if the standard of accommodation is not as good as in other, less sought-after locations," says Mr Smith at Dreweatt Neate.

The good news is that student lets tend to provide above-average returns – particularly near the more popular universities. According to broker Landlord Mortgages, the average student property offers a yield of 6.59 per cent, far higher than for a standard buy-to-let property (currently 5.42 per cent).

"Generally speaking, it is possible to obtain a greater yield as you are renting to four or five people, rather than one family unit," says Cobalt Capital's Mr Montlake.

Durham offers the best return on investment for landlords, with low property prices and high rent – giving an average annual yield of 9.12 per cent. Nottingham, Stoke, Sheffield and Blackpool are all near the top of the list. Among the least profitable towns are Cheltenham, Guildford, Pontypridd – and Crewe, with an average annual yield of just 3.4 per cent.

Parents looking to buy can either use existing savings and investments, raise capital against their own home to pay the deposit or fund the purchase, or opt for a buy-to-let mortgage.

They also need to consider the tax implications arising from the ownership of the property, says Sean Scahill of accountants The Fisher Group. "If you opt for the property to be in your child's name, you need to be comfortable with the child potentially having a large amount of cash at his or her disposal if it is sold.

"[But] if you want more control, this does mean that when you come to sell, you will be subject to capital gains tax [CGT] on any profits made."

Buy-to-let investors did, however, receive a welcome boost in the last pre-Budget report. The Chancellor, Alistair Darling (pictured), announced plans to standardise CGT rates. This means buy-to-let investors could pay CGT at just 18 per cent – as opposed to a maximum of 40 per cent at present – when the time comes to sell up.

Six to view in the South-east

£748,500

Salisbury Green, Southampton

Four-bed detached house with L-shaped kitchen, and front and rear gardens

£575,000

Lightwater, Surrey

Four-bed detached house with swimming pool in rear garden

£450,000

Walderslade, Chatham

Four-bed period detached cottage; lots of original features; front and rear gardens

£380,000

Sandwich, Kent

Three-bed detached property, large rear garden, sun terrace and integral garage

£240,000

Hastings, East Sussex

Five-bed terraced house with two bathrooms and front and rear gardens

£198,000

Rye, East Sussex

Modern semi-detached three-bed home in cul de sac; rear garden and off-road parking