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Investing in College Townhomes for your Student

Parents are Buying Homes in College Towns to Avoid Pricey Dorms: Pros and Cons of Investing in College Townhomes for Your Student

The cost of attending private colleges has almost doubled in the past three decades, while public college costs have increased by around 150%. Families have limited control over tuition fees, but they can manage their living expenses, which typically range from $12,000 to $13,600 per year for on-campus accommodation and meals. To save money, some families opt to forgo dormitories and dining halls and instead purchase a home for their college-age child to live and study in.

The advantages of this approach are clear: the student can live with friends who contribute to the rent, covering both the student’s expenses and the property’s costs. By the time the student graduates, they will have obtained a degree, while the parents will have gained equity in a home that, if fortunate, has appreciated in value during the student’s college years.

Although there is limited data available on how many parents choose this strategy, it is not uncommon, according to multiple real estate agents and financial planners, even in the current competitive housing market.

Why Some Parents Consider Purchasing a Home for Their Student

According to Robert Persichitte, a financial planner in Arvada, Colorado, purchasing a home can be a smart financial decision that saves money on college expenses and serves as a profitable investment. Persichitte highlights a client who bought an older townhome near the University of Colorado’s Boulder campus. The client’s daughter lived with roommates, and the rent they paid covered the mortgage, resulting in zero housing costs for the family, apart from utilities and incidentals. When the student completed her studies, the parent sold the property at a profit.

This case is not unique. Another client of Persichitte also purchased a home in Boulder for their daughter’s college residence. The parent intends to retain the property and rent it out because the rental income is significantly higher than the mortgage payment. Additionally, the owner benefits from tax advantages. Keeping the property as a continuous source of income is more sensible than selling it due to substantial capital gains tax implications. Instead, the parent plans to have their daughter inherit the property, which can potentially eliminate capital gains tax if the daughter decides to sell.

The feasibility of such a purchase depends on property prices and rental rates in the specific area where the child attends college. When sharing a home with multiple occupants, higher total rent can be charged, as emphasized by Jim Crider, a financial planner. Some families find it advantageous to employ their children as property managers. This strategy allows the parents to shift income from their likely higher tax bracket to the student’s probable lower tax bracket. It also provides the student with a flexible job opportunity to earn money for daily expenses. Alternatively, if the family wants to focus on future investments, the student can contribute their property management earnings to a Roth IRA.

The Benefits can go Beyond Finances

Dawn Monsport, a real estate agent based in Lawrenceville, New Jersey, and her husband made the decision to purchase a one-bedroom condominium as a college home, not only to save money on educational expenses but also to address other family concerns. The couple had two sons, one attending a more expensive college and the other opting for a more affordable institution. They bought the condo for the son attending the less expensive school, with an agreement that he would eventually purchase the property from them through monthly payments. Monsport explains that they provided him with a substantial down payment and waived any interest charges.

Another couple, who wishes to remain anonymous to protect their child from further negative attention, had a child attending a public college in western Minnesota. Unfortunately, the student experienced harassment from peers while living in the dorms during their freshman year. Recognizing that another year in the dorms would likely mean more bullying, the family decided to purchase a three-bedroom home about a mile away from campus between the student’s first and second year. The student resided in this house with two roommates for the remaining three years of college. The family’s mother shares that their monthly expenses were under $500, as the rental income covered the mortgage payments and their child’s room and board costs. One year after the student graduated, the family sold the house for slightly more than its initial purchase price.

The mother of the family emphasizes the value of having a safe place that felt like home, particularly for their child who faced challenges as an openly queer individual in a small town. The decision to provide a secure and supportive living environment had significant psychological benefits for their child.

Potential Risks of Buying a Property for Your Student

Purchasing a property for college purposes can offer numerous advantages but also entails significant risks and challenges. Parents who decide to buy a college home invest considerable time, effort, and money in the entire process, including searching for a suitable property, making the purchase, selecting tenants, maintaining the home, and ultimately deciding whether to sell it or keep it as a long-term rental.

Regardless of how responsible your child and their roommates are, every property is prone to issues such as wear and tear, accidental damages, and potential dissatisfaction from neighbors who may not appreciate living next to college students. Once your child graduates, you will have limited access to inside information about prospective renters, which might require hiring a property manager if the home is not in close proximity.

The rental income received from the property will also complicate your tax situation, particularly if the property is located in a different state. Robert Persichitte, a financial planner, explains that you will be subject to ordinary income tax on the rental earnings after deducting expenses. Furthermore, if you sell the property at a profit, you may be liable for capital gains tax on the resulting earnings.

Another aspect to consider is that by investing in a college home, you are placing a significant amount of capital at risk. The property you purchase could potentially decrease in value, and even if it appreciates, it is not easily liquidated unless you sell it. Persichitte advises that if you require quick access to cash, real estate may not be the best option. Additionally, tenants may cause damage that surpasses the value of any security deposit provided.

It is important to note that if you have substantial savings in a 529 plan, those funds can typically be utilized to cover your child’s college room and board expenses but are unlikely to be applicable to mortgage payments.

There is the potential for emotional complications within the family when purchasing a property for your college student. Assuming the role of your child’s landlord can introduce complexities at a time when young individuals are striving for increased independence from their parents.

Thinking about Buying a Home in a College Town? Here’s What you should know First:

Considering the purchase of a home in a college town? Here are some key factors to consider before making a decision:

Financial Considerations

Before diving in, carefully assess the impact on your finances and lifestyle. Factors such as the college’s cost of on-campus room and board, real estate prices in the area, your family’s circumstances, and your comfort with assuming the role of a landlord should be taken into account.

Calculate Expenses

Determine the potential cost of buying a home and the associated monthly mortgage payments, considering the current higher mortgage rates. Include estimated expenses for utilities, food, and home maintenance. Compare this total with the amount you could charge as per-bedroom rent to your child’s roommates or the cost of the college’s room and board fees.

Projected Returns

Research the appreciation rates of similar properties in the area over the past few years. Assess whether it is likely that the property you purchase will maintain or increase in value over the next four or five years. It’s crucial to factor in closing costs, the down payment, and monthly mortgage installments to ensure a satisfactory return on investment.

Financial Impact

Evaluate how the outcome of this investment would affect your financial situation, particularly in relation to your retirement plans. Jeremy Bohne, a financial planner from Boston, advises against pursuing this strategy if it would significantly impact your financial stability or alter your retirement goals.

By carefully considering these factors and conducting thorough due diligence, you can make an informed decision regarding the purchase of a home in a college town.

So is Buying a Home for your Student For you?

Buying a home in a college town as a housing option for your student can have its pros and cons. It offers potential financial savings and investment opportunities, allowing you to offset costs and potentially build equity. However, there are risks and challenges involved, such as property maintenance, tax implications, and the possibility of decreased property value. It is crucial to weigh the financial impact and conduct thorough research before making a decision.

If you need guidance to determine whether this is the right move for you, consider reaching out to Kristi Wirz, one of our buyer’s agents, who can provide valuable insights and assistance in helping you make this choice.

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