The average cost of private colleges has nearly doubled over the past three decades, while public colleges have risen about 150 percent.
Families have little power over the tuition they pay. But they can control the cost of living—on-campus room and board costs an average of $12,000 to $13,600 a year. To save money (and sometimes make money), some families choose to skip dorms and dining halls and instead buy a home for their college-aged children to study and sleep.
The benefit is simple: your students can live with friends who pay rent. This covers the costs of your children and ideally it covers the costs of the property. When you graduate, your child leaves with a diploma and you can have assets in a home that, luckily, is appreciated throughout your child’s college career.
Several real estate agents and financial planners said there was little data to track how many parents adopted the tactic, but it was not unusual, even in the frenzied housing market of recent years.
“It’s a common occurrence, and it makes sense,” said Jim Creed, a financial planner in New Braunfels, Texas.
Why Parents Consider Buying a Home for Their College Students
Buying a home means saving on college costs and a good investment, says Robert Persichitte, a financial planner in Arvada, Colorado. He points to a client who purchased an old townhouse within cycling distance of the University of Colorado Boulder campus.
“The daughter lives with three roommates,” he said. “The roommate’s rent pays the mortgage and their housing costs are zero except for utilities and miscellaneous bills.”
When the students graduated, the parents sold the place for a profit.
That parent wasn’t a single case: Persichitte’s second client also bought a Boulder house for her daughter while studying at the University of Colorado. She plans to keep the property indefinitely and rent it out.
“Rents are much higher than mortgages, and landlords also get tax benefits,” Persichitte said. Seeing the property as an ongoing source of income makes more sense than selling it because the property has appreciated quite a bit and the owner will owe a lot of capital gains tax if she sells. Instead, he said, she plans to let her daughter inherit it, a move that would exempt her from capital gains tax if she decides to sell.
Whether buying is right for you will largely depend on housing prices and rents in the area where your child is attending college. In shared homes, Crider noted, “you charge per household, which usually means a higher total rent.”
Other families see benefits in hiring children as property managers. The move shifts income from potentially higher tax rates for parents to potentially lower rates for students, and provides students with a job with flexible hours to earn money to cover day-to-day expenses. Alternatively, students can deposit property management income into a Roth IRA if they want to double down on their investment for the future.
Benefits can go beyond financials
In addition to providing financial benefits, college homes can help families with other problems. Dawn Monsport, a real estate agent in Lawrenceville, N.J., and her husband bought a one-bedroom apartment to save on education costs, but it also helps balance the family’s spending on each son.
A son went to a more expensive college. Another opted for a cheaper agency. Monsport and her husband bought an apartment for their son at the cheaper school, knowing he would buy the property from them with monthly payments.
“We gave him a nice down payment and we won’t charge him interest,” Monsport said.
At a public college in western Minnesota, a couple with a child watched other students molest their gay offspring during their freshman year. (Money doesn’t release parents’ names to protect students from any further negative attention.) Another year in a dorm could mean another year of bullying, so the family bought a three-bedroom house off campus About a mile between student residences. First and second year of school.
The student lived in the house with two roommates during his final three years of college.
“We’re on less than $500 a month,” the family’s mother said. “The rental income paid for our mortgage and paid for our children’s room and board.” A year after the students graduated, the family sold the house for slightly more than they paid.
“It’s not always easy being queer in a small town,” the mother added. “Having a safe home is psychologically valuable.”
Disadvantages of Buying a Home for College Students
There are many potential benefits to owning college property. It can also bring huge risks and troubles.
Parents who buy a college home invest a lot of time, energy and money in the project when they buy the home, buy the home, choose renters, maintain the home and eventually sell it or make it a long-term rental.
No matter how great your child and her roommate are, every property has issues: broken or worn things, accidental damage, a neighbor who may not like living next door to a college student. After your child graduates, you will know less about potential renters because you will no longer have an inside source of information. If home is not nearby, you may need to hire a manager.
Rental income can also complicate your tax situation, especially if the property is located in another state, Persichitte said. You will owe ordinary income tax on the rent you collect, less your expenses. Selling a property at a profit, you may be subject to capital gains tax on your income.
You’re also putting a lot of money at risk because the home you’re buying could lose its value. Persichitte points out that even if it gains value, it’s not liquid until you sell it.
“If you need cash urgently, real estate is not for you,” he said. Tenants can also cause damage far beyond the value of any bond.
If you save a lot of money in a 529 plan, keep in mind that you can use the money to pay for college for your child’s room and board, but you may not be able to use the 529 funds for a mortgage.
Buying also has the potential to complicate emotions within the family. Buy a place for your college student and you become your child’s landlord – at a time when many young people are becoming more independent of their parents.
Considering buying a home in a college town? What to know first:
While the idea of earning rental income for a home your son or daughter can live in sounds appealing, you shouldn’t take it lightly. Here’s how to conduct due diligence:
Don’t ruin your finances (or your lifestyle)
Whether buying a second home during college makes sense for your family depends on how much on-campus room and board your college charges, the cost of real estate in a college town, your family situation and your appetite for venture capital and being a short- or long-term landlord .
crunch your numbers
Find out how much you can pay for your home and what your monthly payments will be if you’re financing the purchase – keep in mind that mortgage rates have risen a lot over the past two years. Add estimated costs for utilities, food, and home maintenance. How does this figure compare to the rent per bedroom you might be charging your child’s roommate, or the cost of room and board that colleges charge?
Predict your income
You also need to know how homes in similar areas have appreciated in value over the past five years or so. Is it possible for you to buy a property now and sell it at a similar or increased price in four or five years? You’ll want to recoup the transaction costs as well as the down payment and monthly mortgage installments.
Jeremy Bohne, a Boston-based financial planner, says you shouldn’t use this tactic if the outcome of an investment can seriously affect your financial situation, especially if it changes your retirement plans.
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