Parents must determine whether their child will stay at the school or if the investment is worth the risk.
As your son or daughter is looking at college costs, you see how big the bill will be to live in a dorm – an average of $10,138 to $11,516 annually for room and board, according to the College Board. For that amount, you think, you could buy your kid his or her own condo to live in during college.
You’re not the first parent who has had this idea. While it’s not the right move for every parent, some actually do buy their children a condo or home to live in while they’re college students.
“On paper, it’s a lovely strategy,” says Beth V. Walker, a certified college planning specialist with the College Funding Coaches and a financial planner with The Wealth Consulting Group in Colorado. But Walker says the strategy has many unknowns.
For one, she says, what happens if your student doesn’t like the school and drops out or transfers after a year? That happens to as many as 1 in 3 freshman students, according to U.S. News Best Colleges data.
Four (or six) years is a short time frame for a real estate investment. For example, if you had bought your son or daughter a property at the height of the real estate boom in 2005 then you expected to sell it in 2009, after the market crashed, you would have been looking at a significant loss of value in many cities. “I think the runway may be too short,” Walker says. “You’re talking about a lot of capital in a four-year period of time, or today’s world maybe six.”
Buying a home for a college student to live in, for many parents, would make financial sense only if it were part of a long-term real estate investment strategy – for example, the parents planned to keep the property and continue to rent it out long after their child graduates and leaves town.
“It’s not inexpensive to get into the real market and get out,” says Allen J. Falke, of counsel to the Mirick O’Connell law firm in Worcester, Massachusetts. “If it’s a market that appreciates, it might make sense to invest in the market. But you’re taking a market risk.”
Andrew Vallejo, a Redfin real estate agent in Austin, Texas, has worked with a number of parents buying places for their students to live, even though the cost of a modest condo near campus can be $250,000 to $500,000. In Austin, home to the main campus of the University of Texas, a studio condo near campus can rent for $1,500 to $1,800 a month, he says.
While most of those buyers look for small condos, some have sought single-family homes near the city center where they would be allowed to add a second living unit to rent out. “Resale’s usually excellent when you’re closer to the core of the city,” he says. “A lot of buyers plan on keeping their properties as part of their portfolio.”
If rental property is part of your overall investment plan, Walker suggests an alternative strategy: Buy rental property wherever you want (perhaps in your current city) and pay your son or daughter to manage it for you.
Because added income may affect a student’s financial aid, this is usually a better strategy for families who don’t qualify for need-based aid or tax credits. “It’s a tax scholarship,” she says. “I now shift income into my student’s 15 percent tax bracket.” She cautions that it’s important to set the rental up as a business and follow all the laws scrupulously, including making sure your child makes a tax contribution commensurate with what he or she is paid.
“You need to do it right. You need to do this to the letter of the law,” Walker says. “If you do it, the benefits are huge.” You may also need to consult an accountant who knows your family’s financial situation, as well as a financial advisor or financial aid expert to set up the business to best benefit all involved.
Here are eight questions to ask before you buy a house or condo for your college student to live in:
What’s your time frame?
Four years is a short time to expect to make a profit, or just break even, on a real estate investment. Are you willing to sell for less than you paid or hold onto the property longer if the market changes?
Do you want to be a landlord?
You may plan for your son or daughter to take care of the property, but few 18-year-olds have experience with tasks even so basic as using a plunger on a stopped-up drain or calling a plumber. Will your 18-year-old know when to repair and when to replace the washer or dryer, and is he responsible enough to handle even such basic tasks as changing furnace filters and smoke detector batteries? That means you’ll need to be involved with property maintenance, as well as pay for repairs and upgrades.
Will your child need roommates?
Finding and dealing with roommates is a challenge for any young person, and the dynamic changes when one party’s parents own the house. How will disputes be handled? What will your child do if the roommate fails to pay rent or his share of expenses?
Are freshmen allowed to live off campus?
Some colleges and universities require freshmen students to live in the dorms. Even if it’s not required, will your son or daughter suffer from missing out on this experience?
Will you charge your son or daughter rent?
Tax treatment is different for rental property than it is for second homes. If your child pays rent, that may become income to you, though it will also give you some additional deductions for expenses. You will probably need to consult your accountant to make sure you’re doing everything right.
Will whatever arrangement you make affect your child’s financial aid?
Financial aid is based on the entire family’s financial picture. If your child has no room and board expenses, does she lose part of her financial aid? If you pay her to manage a property, does that affect her grants?
What happens if your student drops out or transfers to another school? Even the most responsible young person may discover his initial college choice is not a good fit. Or, he may change his focus to a field of study he can better pursue elsewhere. What will you do with the property if that happens?
Does the place you’re buying allow the type of rentals you want to do?
Condo and homeowners associations usually have rules for rentals. Tenants, including roommates, may need to be screened (for which you’ll pay a fee), and there also may be rules on how often a place can be rented each year, for how long and to how many people. Many condos ban short-term rentals, and some cities do, too, plus restrict how many unrelated people can share a dwelling. Read the rules and ordinances carefully before you buy.
Source: US News
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