Campus Cribs: Buying Real Estate Property for Your College Student
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So you didn't buy a rental home as part of your child's college savings plan? No problem. Buy a property for your teenager to live in now while they're attending college. It can be a worthwhile investment financially as well as an excellent learning experience.
In Boulder, Colo., if a parent bought a condo in the 1980s and held on to it for four years, they most likely would have sold it for about what they paid for it. If a parent bought a condo in the 1990s and sold it in four years, they most likely would have made enough profit to pay for their child’s education at the University of Colorado.
Owning the property your student lives in while he or she attends college can be beneficial in several ways:
- Stability. The student won’t need to look for a different apartment to live in each year. In addition, you can pick the lifestyle that will help your student succeed in school by choosing the location and the quality of housing that best fits their needs.
- Fixed housing expenses. In the past, apartment rents in Boulder have typically increased on an annual basis. By purchasing a property with a fixed rate mortgage, your student's housing expense will be fixed. In addition, you won’t have to deal with paying security deposits or going through the hassle of getting the deposit back.
- Storage space. Having a single place to live in that you own means your student will not have to worry about storing furniture over the summer break.
- Life lessons. By purchasing a home for your student, you'll be providing him/her an excellent learning experience. Your student will not only learn about the process of investing in real estate, but will also learn about the responsibilities that go along with property ownership.
- Financial benefits. Potential financial benefits include possible appreciation in value, possible tax benefits, and debt reduction on an amortized loan which increases equity build-up.
However, also consider the potential drawbacks of buying for your student:
- Unpredictability. Staying put for four or five years can be difficult for a college student. He or she may decide to transfer to another school, spend a year abroad or (heaven forbid) drop out and move back home. Investing in one place for your student to spend his or her entire college career could be a bad move.
- Responsibility. If you rent out extra rooms in the home, your student will have to act as a landlord. He or she needs to be mature enough to collect rent, pay bills on time and possibly deal with irresponsible roommates. If the roommates won’t cough up the rent, your student will be in a very awkward situation.
- Insufficient appreciation. If you plan to sell the home shortly after your student graduates in four to five years, you may not get enough appreciation to make up for the costs of buying and selling the property. In addition, college towns often have lower-than-average appreciation rates.
- Additional costs. Parents typically spend between $5,000 and $10,000 for room and board or rent for their student, so a monthly mortgage payment is often not much more expensive. But don’t forget to factor in the additional costs of homeownership besides the mortgage, like maintenance expenses, homeowners association fees, insurance and taxes. You may find that buying a home doesn’t make as much financial sense as you think.
Before deciding to buy a home for your student, crunch the numbers to make sure the investment makes sense. Even if buying a home is more costly than you expected, you might decide to go through with the purchase anyway so your child has a nicer place to live with more amenities.
I have two sons who attend the University of Colorado. I bought them each a condo using owner occupied FHA financing. Each lives in the unit and has a roommate paying rent to help pay the monthly mortgage. At the end of their college careers, they most likely will have built up some significant real estate equity to use in the next phase of their lives.
I've had some clients buy a piece of real estate in which they had all two, three or more of their children live in while attending college, in some cases, spanning a 10-year time frame. Rather than throwing money down the rent drain, they've built equity in a real estate investment over this period of time.
Owning and Financing the Student Property
Talk to your accountant and attorney to determine the ownership method that works best for you. Some parents will buy as owner occupied property; others will treat it 100 percent as a rental property for additional tax benefits. There are many ways of holding title, including creating a Family Limited Liability Company (LLC).
Several options are available for financing your student property.
- FHA "Kiddie Condo" loans. If you want your student to be in title to the property and you want to pay the minimum amount down, using FHA financing is the easiest way to purchase a property. The FHA “Kiddie Condo” loan program helps students qualify for loans by allowing them to co-borrow with a blood relative. Down payments for this type of loan can be as little as 3 percent of the total purchase price, and interest rates are lower than those on investment properties. Maximum FHA loan limits vary by location so check to see what they are for your county.
- Non-owner occupied loans. Some parents will choose to own the property as investment property by putting 20 percent down and using non-owner occupied conventional financing. The Chase Family Opportunity Mortgage allows parents to classify the property as a second or vacation home, therefore allowing them to pay less in points than on a rental property mortgage.
- Interest-only loans. An interest-only loan, rather than a fully amortized loan, is another option. The advantage of using an interest-only loan is that it reduces the monthly payment.
If you're buying a condo, check the owner-occupancy ratio of the complex. This may affect the type of financing you can secure.
Help Your Child Establish Credit
If you decide to have your child on the mortgage and deed, help your child establish credit before you apply for a mortgage. Obtain a credit card in the student’s name, preferably a year prior to your purchase. Also, if the student has a car, it's a good idea to have a small loan on the car in the student’s name which can also help their credit rating.
Rental Roommate Income
You can buy a one-bedroom condo for your student to live in by themselves. However, a two-bedroom unit will allow for a roommate and the rent from the roommate can supplement the mortgage payment. If you find a three-bedroom unit or home, the rental income from two roommates can help the monthly cash flow even more.
Check the local ordinances for occupancy limits in the community where you want to buy. You may find that five students cannot live in one property. In Boulder, zoning rules allow three unrelated people in an LRE zone and four unrelated people in an MRE zone.
Roommate Lease or Rental Agreement
Even though the potential roommates are typically close friends, have each roommate sign a written rental agreement. Consult with an attorney for specific format and wording. The agreement should cover all the items found in a residential lease such as:
- Rental Rate and Due Date
- Security Deposit
- Notice to Vacate
- Utility Payment Agreement
- Maximum Occupancy
Is it Better to Purchase a House or a Condo/Townhome?
It depends on whether or not you think your student will be able to handle homeownership responsibilities like exterior maintenance, snow removal, lawn care, etc.
Often a condo suits the student life better since most college students won’t be interested in mowing the lawn in their free time. You'll have to pay a homeowners association (HOA) fee for a condo or townhome, which covers these maintenance items. This increases your cost but ensures that maintenance is taken care of. Read more about HOAs.
- No lawn care, snow shoveling or exterior maintenance
- Easier to just leave for the summer
- Owner occupancy ratio of the complex could affect ability to purchase, sell or refinance
- Homeowners association fee may be high and out of your control
- Loud stereos might bother nearby neighbors
SINGLE FAMILY HOMES
- No concern over occupancy ratios
- A single family home might be easier to resell than a condo since you tend to have more competing properties when selling a condo or townhome
- No homeowners association fee (unless you buy a house in a planned unit development)
- Student needs to mow and water the lawn and shovel snow
- Neighborhood may be less friendly to a group of students living there
Disposing of Your Rental Property When Your Student is Ready to Move On
When your child has moved on (hopefully graduated), he or she can continue to live in the property, you can keep it as an investment rental or for your next child, or you can exchange it for a piece of investment real estate somewhere else.
For example, one family I worked with purchased a property for their first child who attended and graduated college. They did a 1031 exchange for a property in a different college town where their next child was going to attend school.
Use this worksheet to help you calculate your expenses and determine the monthly cash flow.
|Monthly Principal and Interest Payment||_______________|
|Mortgage Insurance (if any)||_______________|
|HOA Fee (if any)||_______________|
|Total Monthly Payment||_______________|
|Roommate Rental Income||+______________|
|Net Monthly Expense Before Utilities||_______________|
|Tax Benefit (if any)||_______________|
Duane Duggan is a broker associate with RE/MAX of Boulder, Inc. For more real estate tips, visit Duane Duggan and the Boulder Property Network.