By Sarita Harbour
There’s a new trend sweeping college campuses, and it has nothing to do with academics or sports. According to a recent informal survey of Coldwell Banker sales associates, a growing number of parents are purchasing real estate for their children to live in while attending college. In fact, over the past two years more than one-third of U.S. Coldwell Banker agents reported an increase in business from parents.
Recent data from real estate website Zillow also presents a strong case for parents to buy college homes now instead of paying for dorm rooms or other rentals. According to its numbers, the rising demand for college rentals keeps pushing rent rates up, while home purchase prices are still recovering from their sharp decline during the financial crisis. This combination of high rents and still-affordable purchase prices makes buying a college home an attractive option for investor parents.
Who’s Buying College Real Estate?
In some neighborhoods, international and affluent buyers who are thinking about downsizing in the future purchase homes for their children to use while attending local universities, said Ed Feijo, sales associate with Coldwell Banker Residential Brokerage in Cambridge, Massachusetts. In some Ivy League areas, parents of kids as young as 14 are buying properties in anticipation of their children attending these schools in the future, according to Feijo.
“Their goal is to eventually move into the home once the child has graduated,” Feijo said. “We also see buyers who are thinking of the properties as long-term investments, with plans to rent out the property once their child is finished with college.”
Rental rates in Cambridge show why these buyers believe it’s more economical in the long term to buy rather than rent, he added.
“With the average rent for a one-bedroom apartment in the Cambridge area at $2,000 per month, the total cost for the college housing can quickly run up to about $100,000 over a four-year period,” Feijo noted.
Money-Saver to Money-Maker
Buying real estate for your college kids to live in may be more than a money saver—it also can be a money maker for parent investors.
“Any college parents who face paying $7,000 to $15,000 annually for their kid’s dorm room or rental over four or more years can redirect those payments into a rental property as a money saver,” said Dan Gooder Richard, author of the book Smart Essentials for College Rentals: Parent and Investor Guide to Buying College-Town Real Estate.
Here are three things to look for to ensure the money saver today is a money maker tomorrow, according to Richard:
- Pick a property with three to four extra bedrooms and rent them to other students.
- Expect and budget for repairs.
- Invest in a college town where high demand for off-campus housing drives up rents.
“That perfect trifecta will translate into higher property values when it’s time to cash out,” he said.
Maintenance and Management
But buying a college home involves more than simply watching your investment grow and collecting rent. An important issue to consider is, who will take care of the student rental property?
“This is an essential question,” Richard said. “If parents live in town, they may be able to manage the property themselves.” This could involve finding and screening additional renters as well as performing repairs, regular yard work and indoor maintenance. Yet in many cases, children choose colleges far from their hometown.
“For out-of-town parents, sometimes their offspring has the temperament and maturity to be a resident manager to collect unpaid rents or enforce rules or find mid-year housemates,” Richard said. However, this isn’t always the case—especially if the other housemates are all friends.
“Most often parents hire a local management company for maintenance and turnover fix-ups,” he noted, “and let their scholar concentrate on being a college student, rather than being their parents’ business partner.”
Property management companies can help find and deal with additional student tenants as well as arrange for property maintenance issues, but they don’t come cheap. Although property management fees are tax deductible, you should expect to pay anywhere from 5 percent to 10 percent of your rental income to cover them, according to the NOLO Law for All website.
Taxes and Insurance
Parents should also be aware of tax implications and advantages of investing in college real estate. Tax laws governing second homes can be very complicated. The IRS website has information about how and when you can deduct expenses related to a second home. But it’s best to consult a tax professional for advice about your specific situation.
When it comes to insurance, your college home may be covered under your primary residence homeowner’s insurance if you have an umbrella policy, according to the National Association of Insurance Commissioners (NAIC). If you plan to have renters, they should consider getting renters insurance as well, the NAIC suggests. In all cases, contact your insurance provider for advice for your specific situation.
In today’s economy, tuition and student housing rates are increasing, while interest rates are still relatively low. With a desirable college neighborhood, a strong current and/or future rental market and a child with years of school ahead, investing in college properties may make financial sense.
Sarita Harbour writes about personal finance, business and technology. She is a former financial adviser and holds the Personal Financial Planning designation from the Institute of Canadian Bankers.
