Buying property for college-bound child can make sense

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A checklist for parents of new college students: Don't forget to: a) pay the tuition; b) have the safe-sex talk; c) have the drinking-and-driving talk; and d) buy your student a house or condo.

Pardon the whiplash on that last one, but the fact is, many parents are investing in real estate close to campus for their college-bound offspring. Oftentimes, it's preferable to shelling out dormitory fees or apartment rent.

Statistician Walter Molony of the National Association of Realtors estimates there are about 3 million campus houses and condos in America today, properties that were purchased primarily for the owners' college-bound students.

That represents about 8 percent of the nation's 37.4 million investment properties, but excludes 6.8 million vacation homes.

For students, a campus house or condo can offer greater freedom, a choice of roommates and more amenities.

For parents, it offers a chance to recoup some of the skyrocketing costs of higher education.

As the owner of a campus house, your goals are similar to those of any landlord. You want a property that you can keep fully occupied and that will produce rental income to at least cover your costs (mortgage, taxes, insurance). You also want to be sure you have signed leases and security deposits from every renter.

What scares many parents -- and keeps the dorms full -- are the unknowns. What if I can't rent it? What if my kid drops out? What if the housing market suddenly flatlines? What if? What if?

Robert Sheehan, consulting economist for the National Apartment Association, had a good experience. He bought an old four-bedroom Victorian in a reviving neighborhood of Richmond, Va., for his daughter to live in while attending Virginia Commonwealth University. After his daughter graduated, he sold her the house with easy terms.

But Mr. Sheehan didn't repeat the process when his son enrolled in Carnegie Mellon in Pittsburgh. Why? Carnegie Mellon provided better digs less expensively than he could have purchased.

"He lived in a two-bedroom apartment on campus that was 1,600 square feet," Mr. Sheehan says. "Where he was in Pittsburgh, where you have five universities in a several-block area, it was tough to find places that you could buy that easily."

Mr. Sheehan says the trick to deciding whether or not to buy is to size up the campus community before taking the plunge. You want a property you can afford that won't be hard -- or costly -- to sell after graduation.

"The question is, how much growth is there in the community?" says Mr. Sheehan. "The ideal situation is a relatively new university in a small town where the student population is growing. That's almost a no-brainer to look for a place to buy."

Mr. Sheehan notes that even in campus locations with little or no appreciation, a house you own and can keep full still beats paying thousands each year for student housing. You also may be able to deduct the mortgage interest, property taxes and a percentage of utilities and maintenance (if you collect rents) on your income tax.

"You don't want to get into a situation that, in the long run, you're going to worry about appreciation," Mr. Sheehan says. "If that's your primary goal, then don't invest."

In retrospect, he says he should have put his daughter on the deed as a co-owner.

"That's the one mistake I did make, that I didn't buy it with her. It would have helped, although it didn't slow her down."

Mr. Sheehan's not alone in that oversight. Few parents think of buying a home with their student instead of for them. But that choice pays several benefits, according to real estate attorney Andy Sirkin of Sirkin Paul Associates in San Francisco.

"With their name on the title, it creates a credit history for them. If the student is working and generating taxable income, then some tax benefits would accrue to them that they wouldn't have if they were paying rent. And they might be able to exempt the capital gain on the resale if the student lives there for two of the past five years before they sell it," Mr. Sirkin says.

Has buying a campus home worked well for his clients?

"Yes, because of the truism that real estate tends to increase in value over a reasonable period of time," he says. "In a university town, that's probably even slightly more likely than average. I think it works out well for people compared to renting, for the most part."


Jay MacDonald writes for www.bankrate.com , a loan clearinghouse on the Web. Reach him at editors@bankrate.com .


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