Duane Duggan's Real Estate Blog

Clients with College Age Children

Being from a college town, I get many clients coming to me that are considering purchasing a home for there college age child to live in while attending school. You can help your clients make this a worthwhile investment financially, as well as an excellent learning experience for the student.

In Boulder, Colorado, if a parent bought a condo in the 1980s and held on to it for 4 years, they most likely would have sold it for about what they paid for it. If a parent bought a condo in the 1990s and sold it in 4 years they most likely would have made enough profit to pay for their child’s education at the University of Colorado.

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Owning the property the student lives in while they attend college can be beneficial in several ways.

1. The student will have a greater sense of stability in that they won’t need to look for a different apartment to live in each year. In addition, you can pick the lifestyle that will help your student succeed in school by choosing the location and the quality of housing that best fits their needs.

2. In the past, apartment rents in college towns typically increase on an annual basis. By purchasing a property with a fixed rate mortgage the student’s housing expense will be fixed. In addition, they won’t have to deal with paying security deposits or going through the hassle of getting the deposit back.

3. Having a single place to live in that you own means your student will not have to worry about storing furniture over the summer break.

4. By purchasing a home for the student, you will be providing him/her with an excellent learning experience. The student will learn not only about the process of investing in real estate, but will also learn about the responsibilities that go along with property ownership.

In my own personal situation, I have two sons who attended the University of Colorado. I bought them each a condo using owner occupied FHA financing. Each lived in the unit and has a roommate paying rent to help pay the monthly mortgage. At the end of their college careers, they had built up some significant real estate equity to utilize in the next phase of their lives.

I have had some clients buy a piece of real estate in which they have had all two, three or more of their children live in while attending college. In some cases this spanned a 10 year time frame. Rather than throwing money down the “rent drain”, they have built equity in a real estate investment over this period of time.

Helping the student establish Credit

If you decide to have your child on the mortgage and deed, you can help the student establish credit prior to making a mortgage loan application by obtaining a credit card in the student’s name, preferably a year prior to your purchase. In addition, if the student has a car it is a good idea to have a small loan on the car in the student’s name which can also help their credit rating.

Method of Ownership for the “Student Property”

It is necessary to have your clients talk to your accountant and attorney to determine the ownership method that works best for them. Some parents will buy as a second home, or as an owner occupied property with the student on the deed and loan. Others will treat it 100% as a rental property for additional tax benefits. There are many ways of holding title, including creating a Family Limited Liability Company (LLC)

Rental Roommate Income

One option is to buy a 1 bedroom condo for the student to live in by themselves. However, a 2 bedroom unit will allow for a roommate and the rent from the roommate can supplement the mortgage payment. If a 3 bedroom unit or home can be found, the rental income from 2 roommates can help the monthly cash flow even more.

Be aware that there are occupancy limits imposed in some communities. In other words, check the local ordinances before deciding if it is okay to have 5 students living in one property. In Boulder, zoning rules allow 3 unrelated people in a low density zone and 4 unrelated people in a medium density zone.

Roommate Lease or Rental Agreement

Even though the potential roommates are typically close friends, it is a good idea to have a written rental agreement with roommates. The roommate rental agreement should cover all the items typically found in a residential lease such as:

Term Utility payment agreement

Rental rate and due date Maximum occupancy

Security Deposit Parking

Notice to Vacate Pets

Financing for the “Student Property”

If you are purchasing a condo, the type of financing and down payment options available can be determined by the owner occupancy ratio of the condo complex, and what particular approvals (FHA, Fannie Mae, etc). It is good to have your lender to check to see if the complex has the approvals for the type of financing you are considering.

Is it Better to Purchase a House or a Condo/Townhome?

This decision depends on whether or not the student will be up for doing homeownership items such as exterior maintenance, snow removal, lawn care, etc.

Often a condo suits the student life the best since most college students won’t be interested in mowing the lawn in their free time. Your clients will be paying a Homeowner’s Association fee at a condo or townhome in order to cover these maintenance items. This will increase the monthly cost but will insure that these maintenance items are done.

Advantages of a condo for a student

No lawn care, snow shoveling, or exterior maintenance

Easier to “just leave” for the summer

Disadvantages of a condo for a student

Owner occupancy ratio of the complex could affect the ability to purchase, sell, or refinance.

Homeowner’s Association fee may be high and out of your control

Loud stereos might bother nearby neighbors

Advantages of the single family home

No concern over occupancy ratios

A single family home might be easier to resell than a condo since you tend to have more competing properties when selling a condo or townhome.

Typically there is no Homeowner Association fee

Disadvantages of the single family home

The student needs to mow & water the lawn & shovel snow

Neighborhood may be less friendly to a group of students living there.

Disposing of your Rental Property When the Student is ready to Move On.

When the student is ready to move on, and has hopefully graduated, the owners can keep the property as an investment rental, the former student may keep it as their first home, or you can exchange it for a piece of investment real estate somewhere else.

As an example, I have one family I worked with, who purchased a property for their first child who attended and graduated from CU, they then sold the property in Boulder, and bought a new property in a different college town where their next child was going to attend school.

Purchase Worksheet (to help you determine the monthly cash flow)

Purchase Price………………………………___________

Down Payment………………………....……___________

Loan amount……………………………….. ____________

Monthly Principal and Interest Payment……____________

Mortgage Insurance (if any)……………… ____________

Taxes……………………………………… ____________

Homeowner’s fee (if any)………………….._____________

Insurance……………………………………_____________

Total Monthly Payment…………………. ____________

Roommate rental income…………………..+___________

Net Monthly expense before utilities………___________

Tax benefit (if any)………………………… _____________

Potential financial benefits include:

Possible appreciation in value

Possible tax benefits

Debt reduction on an amortized loan which increases equity build up