There’s no denying that the cost of sending your child to college has skyrocketed in the past decade. In the most recent annual survey of the cost of secondary education, the College Board reports that tuition for a “moderate” in-state public college averaged about $24,061 for 2015-16. And a private university? That could cause acute sticker shock for many families since the average tuition hovers around $47,831.
With those prices, it’s critical that you treat sending your child off to college like a business decision, doing everything possible to minimize the financial blow while maximizing return.
One way to do that is to negate the huge additional cost of room and board, or housing for four (or more) years, by purchasing a property where your child will live during his or her college studies.
The average cost of room and board in 2015–2016 was $10,138 at four-year public schools, or $11,516 at private institutions. In California, costs are even higher (as we well know!). In fact, the average cost of living on-campus for California schools is $14,838 per year in 2016-17, and in many parts of California, rental prices can reach $2,000 or even $3,000 a month!
In the greater Sacramento area, this usually makes even more sense. The list of colleges in the region that provide on-campus or student housing includes California State University Sacramento, The Art Institute of California Sacramento, the University of California Davis, Shasta College, and William Jessup University.
But remember that buying a property isn’t just a smart move when your eager student is attending a school that offers on-campus housing like dorms. Renting a property off-campus can be just as expensive, or even more so. In the Sacramento area, parents with children attending Carrington College, Los Rios Community College District, Sacramento City College, University of the Pacific Sacramento Campus, the UC Davis School Of Medicine, MTI College, American River College, Cosumnes River College and Carrington College may consider buying, as well.
When done correctly, buying a house, townhouse or condo in the town where your child is attending school can cut out a huge expense or, with the best case scenario, even make you a whole lot of money as a sound investment in the process. There are many other non-financial benefits to your young adult living in your/their property instead of living in a dorm or off-campus rental.
We’ll outline the strategy of buying a property in your child’s college town, but remember that like with any investment, there is risk and reward and it takes a lot of careful planning and work to make it a glowing success.
In this blog we’ll outline the first 4 tips, and cover the next 11 in parts 2 and 3 of this blog. Contact me if you have any questions about the process of buying a property in Sacramento or any college town!
1. Think LONG term to be safe
Your child may be in school for four years, maybe five, or possibly even six or longer if they decide to pursue a graduate or masters degree or PHD. However, just like any real estate investment, you should plan on holding the property much longer if you want to recoup your money and make a profit. Real estate cycles tend to ebb and flow in 5-7 year increments, and it’s not safe to bank on buying and selling for a profit in 4 years or even within one cycle. Therefore, plan on holding onto the property long after your child graduates school, most likely renting it out to college kids (just not your college kid.) If the numbers still make sense and you don’t mind being a landlord for an additional decade or so, then you know it’s a no-brainer.
Interestingly enough, some parents don’t even need a property to appreciate in value or make them money – or sometimes even break even – upon sale.
Think about the average college dorm or rental housing if you paid $1,200 a month. Over four years (48 months) that equals out to $57,600! Once the college years are over, you’ll have nothing to show for that $57k investment – no equity, not principal pay down, no tax breaks, etc. So if you bought a home instead and it went up in value a little, you paid down the mortgage a smidge, and you got some solid tax breaks, all by the time you sold, it should still be considered a financial success.
2. Rent out rooms to other students to maximize your investment
Unless you’re buying a one-bedroom condo (and maybe even then!) you’ll have extra bedrooms in the property that can be rented out to other students. Your son or daughter will probably love having roommates anyways to get the real college experience, and this is where your investment really starts penciling out.
Plan on buying a two-bedroom condo/townhouse/house at least, and a three bedroom/two bath is ideal. Where you might be able to get $1,200 rent/month for the property as a whole (hypothetically) you can instead rent out each room for $600, so you’ll have your entire mortgage paid for every month, essentially paying nothing (EXCEPT taxes, insurance, maintenance, etc.) for your child’s share of the property.
Even if you buy a two-bedroom unit, you at least cut your expenses in half by renting out the other room. Likewise, when your child graduates and the house is strictly a rental property, you’ll suddenly have an additional room to rent out to maximize your profit. This is standard practice when it comes to college rental housing, although it will require a little bit more work/management as a landlord.
3. Be aware the differences with buying and getting a loan on an investment property
If you’ve only bought or sold your personal residence but never purchased a rental property before, you’ll want to sit down with a mortgage broker first to prepare you for the differences in the lending process. Getting a loan on an investment property is a slightly different animal, with different requirements for down payments, credit scores, income and debt ratios, and other lending parameters. They can walk you trough the whole process and map out the numbers with you to make sure it makes sense and you’re prequalified before we go look at actual properties in Sacramento or nearby college towns. There are some slight – but very important – differences on the real estate side of the transaction, too, when purchasing an investment property instead of a personal residence that I’ll help you through.
4. But possible FHA loan
When it comes to taking out a mortgage loan on your college investment property, the great news is that there are specific loans designed for exactly that purpose! FHA “Kiddie Condo” loans allow your child to be on the property’s title but still put less than the traditional 30% down for a rental property. Essentially, the FHA “Kiddie Condo” loan program helps students co-borrow with a blood relative with terms/interest rates much more favorable than traditional investment home loans. There are stipulations to qualify, so please contact a qualified mortgage broker to review your lending options.
Look for part 2 and 3 of this blog coming up soon, and contact me if you have any questions about buying or selling a home!