Parents who have kids ready to go to college soon have a lot to think about when making several investment decisions in their child’s future. Many spend time on academic programs, dorm and food, athletics scholarships, return-on-investment, and college internships or co-op programs. Real estate, too, could be a key component in that calculation – if done right.
Whether you purchase, rent, or opt for the relative ease of the traditional dormitory set-up, don’t forget to consider your student’s specific needs and preferences, length of stay, and commuting. As in most markets, cost correlates with convenience—the more you spend, the closer to school they can expect to live.
First, let me list the key benefits of owning a property your child lives in while they attend college:
- Stability. Your child won’t need to hunt for a different apartment to live in each year. Such investment also affords you to select a lifestyle that will help your student succeed while attending college while providing a choice in housing that best fits their needs and your budget.
- Life lessons as a landlord. A lot of experience comes with the responsibility of property ownership. You could be providing your child with an excellent learning experience as they learn about the process of investing in real estate, especially if you decide to rent out the extra rooms to other students.
- Fixed housing expenses. In most markets, apartment rents in college areas typically increase annually, only partly driven by market conditions. With a fixed-rate mortgage, your child’s housing expenses could be static, more or less. Paying security deposits will be eliminated as well as any hassles of getting the deposit back.
- Storage space. Moving every year means finding places to store your stuff during the summer or internship periods. Having your own home means your child will not have to worry about moving or storing furniture over the summer break.
- Financial benefits. Potential economic benefits include possible value appreciation, tax benefits, and debt reduction on an amortized loan, which increases equity build-up.
Before deciding to buy a home for your student, you should also look at the downside.
When your rent out extra rooms in the home to other students, your student will become a landlord. They need to take responsibility for collecting rent, paying bills, and potentially dealing with irresponsible roommates, leading to potentially awkward situations.
If you sell the property once the student graduates, there is always a likelihood that you may not get enough appreciation to make up for the costs of buying and selling the property. Though standard room and board cost approximately $10K or more, your monthly mortgage may not be any higher. However, other costs may be associated with owning a property, like maintenance expenses, homeowners association fees, insurance, and taxes.
Financing the Student Property
Before making any decision, it’s best to talk to your accountant and an attorney to determine the best homeownership method. Several options exist. Some parents will buy an owner-occupied property; others will treat it 100 percent as a rental property for additional tax benefits. You could also create a Family Limited Liability Company (LLC) for holding the title.
From a loan perspective, look into the following options:
- FHA “Kiddie Condo” loans – yes, that’s what we call them!
- Non-owner occupied loans – classify the property as a second or vacation home, and pay less than rental property mortgage
- Interest-only loans – rather than a fully amortized loan, it reduces the monthly payment
FHA financing is one of the best ways to purchase a property for a minimum down and to have your student be in title to the property. The FHA “Kiddie Condo” loan program helps students qualify for loans by allowing them to co-borrow with a blood relative. Down payments could be as low as 3 percent of the purchase price. Maximum FHA loan limits vary by location and your county. You can find more information by researching sites like these:
Even though the potential roommates could be close friends, have your student sign a written rental agreement with each roommate. Have your attorney draft the correct format and wording. The contract should cover typical terms like rental rate and due date, security deposit, vacating notice, utility payment agreement, maximum occupancy, parking, pets, etc.
Let me know if I can help you in any way with your home search for a college-bound student. Feel free to text or call me any time, and I will be glad to share with you more information.