Paying the year at check-in brings cash forward and avoids some bad debt, but the residents who take the offer are the ones least likely to default.
An upfront payment discount is worth offering only if the cash arrives earlier and the bad debt it avoids together exceed the rent given away. On an illustrative £190 a week, 51-week tenancy paid in three instalments, a 3.0 per cent discount costs £290.70 a bed against £148.04 of earlier cash and, for the low-risk students who actually take it, £32.30 of bad debt avoided: a net cost of £110.36 a bed, the equivalent of borrowing at 9.82 per cent. The break-even discount is 1.86 per cent.
Worked in full in Student Housing Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Many student housing operators let residents choose between paying the year in instalments and paying it all at check-in for a discount, and some residents, often international students without a UK guarantor, pay in full in any case. The offer is usually set by habit and justified loosely as "better for cash flow and bad debt". Both effects are real. Neither is free, and the second one is smaller than it looks.
| Input | Value |
|---|---|
| Weekly rent | £190.00 |
| Tenancy | 51 weeks |
| Rent for the tenancy | £9,690.00 |
| Instalments (September, January, April) | 3 × £3,230.00 |
| Months earlier: January and April instalments | 4 and 7 |
| Upfront payment discount | 3.0% |
| Value of cash to the owner, a year | 5.0% |
| Unrecovered loss on later instalments, average resident | 2.0% |
| Unrecovered loss on later instalments, residents who pay upfront | 0.5% |
The value of cash is the rate the owner earns on deposits or saves by drawing less on a revolving facility. The loss rates are after guarantor recoveries and apply only to the January and April instalments: the September instalment is collected before the keys are handed over under either option.
Cost = rent for the tenancy × discount = £9,690.00 × 3.0% = £290.70 a bed, or £5.70 a week.
Timing value = instalment × cash rate × months early / 12, for each later instalment.
January: £3,230.00 × 5.0% × 4/12 = £53.83. April: £3,230.00 × 5.0% × 7/12 = £94.21. Total £148.04.
Excel: =3230*5%*(4+7)/12
Bad debt avoided = later instalments × loss rate of the resident who pays upfront = £6,460.00 × 0.5% = £32.30.
Net = £148.04 + £32.30 − £290.70 = −£110.36 a bed.
Break-even discount = (timing value + bad debt avoided) / rent = £180.34 / £9,690.00 = 1.86%.
The resident advances £3,230.00 for 4 months and £3,230.00 for 7, £2,960.83 of money-years in all. Implied rate = £290.70 / £2,960.83 = 9.82% a year, as simple interest. Solved exactly as an IRR on the net cash advanced in September, £6,169.30, it is 10.59 per cent, so the simple figure, if anything, flatters the offer.
| Item | Low-risk taker | Average resident |
|---|---|---|
| Discount given away | −290.70 | −290.70 |
| Value of earlier cash | 148.04 | 148.04 |
| Bad debt avoided | 32.30 | 129.20 |
| Net to the owner | −110.36 | −13.46 |
| Break-even discount | 1.86% | 2.86% |
At 3.0 per cent the offer loses money even if the residents who take it were as risky as the average, by £13.46 a bed. They are not. A student who can pay £9,690.00 in September, or whose family can, is precisely the resident least likely to miss the April instalment, so the bad debt actually avoided is a quarter of the average figure and the loss is £110.36 a bed.
On an illustrative 600-bed scheme where 25 per cent of residents, 150 beds, take the offer, that is £16,554 a year off net operating income. Capitalised at a 5.50 per cent yield it is £300,977 of value, for a policy nobody priced.
Read it as a loan. The 9.82 per cent implied rate is what the owner pays residents to lend it two instalments early. If the scheme's revolving facility costs less than that, the discount is the dearer source of cash.
| Discount | Cost a bed | Net, low-risk taker | Net, average resident | Implied rate |
|---|---|---|---|---|
| 1.0% | 96.90 | 83.44 | 180.34 | 3.27% |
| 2.0% | 193.80 | −13.46 | 83.44 | 6.55% |
| 3.0% | 290.70 | −110.36 | −13.46 | 9.82% |
A 1.0 per cent discount pays under either assumption, because it borrows at 3.27 per cent, below the 5.0 per cent value of cash. A 2.0 per cent discount pays only if the takers are as risky as the average resident, which the self-selection argues against. The decision turns far more on the size of the discount than on the bad debt estimate.
The calculation changes if the upfront option is what wins the booking: if a resident would otherwise have booked a competitor, the comparison is the discount against the whole bed's rent, and the pace of bookings, tracked in how to forecast occupancy from booking pace, is the place to test that claim.
Counting the average bad debt rate as the saving. The portfolio's bad debt provision is set across all residents, and the upfront discount is taken by a self-selected, lower-risk group, so most of the bad debt it appears to avoid would never have arisen. The second mistake is to treat the earlier cash as worth the whole discount: £148.04 of timing value at 5.0 per cent is barely half of £290.70. Both errors flatter the offer, and the cost is easy to miss: the discount is usually booked as a reduction of rent collected, so it quietly lowers RevPAB without ever appearing as a line of its own.
The rent roll, RevPAB and NOI that this discount sits inside are built in the free workbooks for this case.
The break-even discount equals the value of receiving the later instalments early plus the bad debt the takers would have caused, divided by the tenancy rent. On an illustrative £9,690 tenancy with instalments 4 and 7 months early at a 5.0 per cent cash rate and a 0.5 per cent loss rate among takers, that is £180.34, or 1.86 per cent.
Only for residents who would otherwise have defaulted, and they rarely choose to pay a year in advance. In the illustration the average unrecovered loss on the January and April instalments is 2.0 per cent, £129.20 a bed, but for the self-selected upfront payers it is 0.5 per cent, £32.30. Using the average overstates the saving four times.
Divide the discount by the money-years advanced. A 3.0 per cent discount on £9,690 is £290.70 for advancing two £3,230 instalments by 4 and 7 months, £2,960.83 of money-years: 9.82 per cent a year. A 1.0 per cent discount implies 3.27 per cent, which is cheaper than most facilities.
This article is one calculation from Student Housing Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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