Parents who have kids ready to go to college soon have a lot to think about when it comes to making the several investment decisions in their child’s future. Many spend time on academic programs, dorm and food, athletics scholarships, return-on-investment, and college’s 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 he or she attends 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 which 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 on an annual basis, only partly driven by market conditions. With a fixed rate mortgage, your child’s housing expense could be fixed more or less. This will also alleviate the need for paying security deposits or the typical 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 place means your child will not have to worry about moving or storing furniture over the summer break.
- 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.
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. He or she needs to take the responsibility of collecting rent, pay bills and potentially deal with irresponsible roommates, which could lead 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 typical room and board cost approximately $10K or more, your monthly mortgage may not be any higher, however, there may be other costs 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 as 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 they are called!
- 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.
For a minimum down, and to have your student to be in title to the property – FHA financing is one of the best ways to purchase a property. The FHA “Kiddie Condo” loan program is designed to help 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 agreement should at minimum cover typical terms like rental rate and due date, security deposit, notice to vacate, 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.