Student housing - a lucrative investment opportunity

In recent months, the return of international students has been highlighted as a major factor impacting the rental crisis across the nation. However, data released by the Property Council of Australia in April 2024 tells a different story. According to this landmark report: Myth busting international students' role in the rental crisis, written in partnership with the Student Accommodation Council, international students make up only four per cent of Australia's rental market.

According to subsequent information released by the Property Council of Australia this year, several factors are influencing the supply and affordability of rental homes nationwide. These include the increase in smaller and single-person households, intrastate migration, and the trend of converting bedrooms into home offices.

Although international students have returned to Australia post-COVID, the rise in rents does not correlate with their return. In fact, rents started increasing in 2020, a period when there was no international student migration and most students had gone back to their home countries.

Despite their minor share in the rental market, international students contribute an estimated $34 billion in export income across tuition fees and living expenses, injecting substantial revenue into the Australian economy. The Property Council of Australia report also stated that Australian students account for a further six per cent of the rental market, bringing the total students looking for accommodation near universities to an estimated 1.4 million individuals.

There are essentially two types of student housing: on campus accommodation, also known as purpose-built student accommodation (PBSA), and private rental housing, which includes units or shared housing.

On-campus purpose-built student accommodation

According to the Property Council of Australia report, the current pipeline of new PBSA developments will not meet future needs, and the projected 7,770 new beds due to become available by 2026 are insufficient to alleviate demand. PBSA offers high rental yields and caters specifically to university students with rent-per-bed models and shared amenities. Despite its advantages, PBSA has a limited supply and faces high demand, making it a competitive but potentially rewarding investment.

While the government has mandated universities to build more student housing, the challenges facing the construction industry suggest that alternative solutions will need to be explored to accommodate this vital demographic.

Private rental units and shared housing

Student rental units hold the potential to deliver high rental yields, but the initial investment will be vast, considering that most student apartments are located close to universities and often in city centres where property comes at a premium. The risk of having vacant units over the December/January holidays might outweigh the benefits of owning a valuable piece of real estate.

The most popular form of student accommodation in Australia is shared housing. These larger properties provide private rooms and shared facilities, including a kitchen, bathrooms and communal leisure areas, making them an affordable housing option for students.

Investing in older, second-hand properties that can be converted into student housing near universities, could present a lucrative opportunity with excellent rental yields. Additionally, these properties offer significant depreciation potential and other deductions, further enhancing cash flow.

Property depreciation refers to the natural wear and tear of a property and the assets within it. The ATO governs legislation that allows property owners of income-producing buildings to claim a tax deduction relating to this wear and tear.

Below is a case study of a four-bedroom house, built in 1995 near a university in New South Wales, showcasing the impact on cash flow after claiming depreciation as a tax deduction on the rental property. The case study will further illustrate the difference in cash flow when the investment property is converted to student accommodation.

The original investment property was purchased by an investor in 2021 and subsequently rented out to a family at $615 per week until the end of 2022, when the family moved out.

Table 1: Cash flow on 4 bedroom house before and after depreciation

Assumption: Tenanted 52 weeks of the year.

With the property ideally located near the university, the investor aimed to leverage the potential rental yield available in student housing by converting the four-bedroom house to shared student accommodation, ready for the January 2023 student intake. The previous owner spent $160,000 renovating the property, upgrading the kitchen and bathroom, replacing flooring, repainting and adding security features.

The current investor added a second bathroom, upgraded laundry and kitchen appliances and added furniture to convert the property to student accommodation. They requested a depreciation schedule for the upgrades.

The investor was able to claim depreciation on the previous owner's structural renovations, as well as on the new upgrades. Table 2 illustrates how property tax depreciation on a converted four-bedroom property, now used as student accommodation, impacts the investor's cash flow, assuming it is tenanted for 45 out of 52 weeks at $300 per week per student.

Table 2: Cash flow on converted student house before and after depreciation

Assumption: Tenanted 45 weeks of the year.

Converting the original four-bedroom property into student accommodation boosted rental yield and claiming depreciation on these upgrades further enhanced the property's cash flow.

Due to a significant increase in cash flow and possessing a large plot of land, the investor decided to build a new second dwelling, adding two more bedrooms. This expansion brought the total number of bedrooms to six, all designated for student accommodation. The investor once again requested a depreciation schedule on the newly built dwelling.

Taking into account the costs of converting the existing second-hand property and the expenses involved in constructing a second dwelling, BMT calculated the overall increase in cash flow for this investor. Now owning a six-bedroom property used as shared student accommodation, the investor rents out the rooms in the main house at $300 per week per room and the rooms in the second dwelling at $350 per week per room.

Table 3: Cash flow with additional 2 bedroom granny flat before and after depreciation

Assumption: Tenanted 45 weeks of the year.

By converting the original four-bedroom property to student housing and building the additional secondary dwelling, the investor significantly increased the rental yield on the property while also increasing the capital value of the property from the original purchase price of $800,000 to close to $1.43 million, primarily due to the enhanced potential rental yield now available on the property.

As universities continue to attract both local and international students, converting second-hand properties into shared student accommodation can offer excellent rental yields and hold significant depreciation potential, further enhancing cash flow.

For more information on how to maximise the depreciation deductions on your student housing investment property, contact BMT Tax Depreciation on 1300 728 726 or request a quote.