Dear Dave,
My wife and I very recently sent our son off to college. We are considering investing in a house near the university he is attending. We would like to know your opinion on investing in a property near a university or college. Is it a good idea to buy a house that could be used as a rental for college students or is it a nightmare waiting to happen?
Any feedback you have would be appreciated!
Thanks - Joe and Darbi - Grand Junction, CO
I think purchasing a property is a great idea! I would suggest you check with your financial adviser or accountant, but I would bet the investment would pay off over the course of your son’s college career. I will add one qualifier, it will work out better if your son is also responsible and will responsibly help you maintain the property while living there. Let's look at a quick scenario to demonstrate how you might benefit from purchasing, rather than pouring out rent over the next 4-5 years.
Let’s say you purchase a 3 bedroom condo for $300,000 and put 5% down, which is $15,000. You then own a 3 bedroom condo with a monthly payment estimated at $1,700 which should include taxes and insurance. You only need one bedroom and surely your son has a couple of friends that he would like to have living with him. Let’s assume they would be willing to pay $750 per month, which in turn makes your monthly out of pocket shelter expenses $200, which is $500-$600 per month less than having him rent. Five years from now, assuming that your son takes a bit longer to graduate than 4 years, and let's also assume the market has improved 5% per year for your condo, it would then be valued at $383,000. Let's also assume that you have paid the principle down to $260,000, which leaves you with over $100,000 in equity when you go to sell. I know there are expenses and this is not direct profit, but at the very least you should receive a good return, rather than footing the bill with nothing but a diploma to show for it. The numbers in this scenario may not be exact, but it does illustrate the fiscal advantages to owning vs. renting for your college student.
There also is a loan specifically designed for this situation and it is referred to as the “Kiddie Condo Loan”. The requirements are designed specifically for your scenario and require that the child must live in the home and be on the loan. The financial qualifications for the loan are done off your information, but it allows your son to begin building a credit portfolio for after he graduates. There are several great things about this loan. You can qualify with only 3.5% down, the loan is assumable and with today’s low interest rates, assumable loans may be very advantageous in the future. If your son decides to stay in his college town after school, he can assume the loan from you and take over the payments or you could sell it and have them assume your interest rate. As you can see, there is a good case to be made for a college purchase, in town or out of town, for kids who are attending college.
Lastly, one of the great things about University towns, their real estate generally will not fluctuate up or down as drastically as other areas, because they have built in buyers and sellers that cycle through which generally helps ensure good demand and smooth out any other market influences. Worst case scenario would be that you have a rental in a college town that will be pretty easy to rent year after year. I say, “do it and you are likely to be glad in the long run”. Hope this helps.
Dave Kimbrough
The Kimbrough Team
