In my last article, Part 1 of “Coronavirus and Buying a College Condo” I discussed how buying a condo or house for your child to live in when going to college can be a worthwhile investment and can also have financial as well as other benefits for your college student.
As you evaluate this decision, here’s a guide to help you:
Helping your college student establish credit
If you decide to have your college student on the mortgage and deed, you can help your student establish credit prior to making a mortgage loan application by obtaining a credit card in his or her name, preferably a year prior to your house or condo 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 your student’s credit rating. It is also good idea to meet with a mortgage professional to discuss strategies well in advance of a possible purchase.
Method of ownership for the “student property”
It’s necessary to talk to your accountant and attorney to determine the ownership method that works best for you. Some parents will buy the property as a second home or as an owner-occupied property with the student on the deed and loan. Others will treat it 100 percent as a rental property for additional tax benefits. There are many ways of holding the title including creating a family limited liability company (or FLLC).
Rental roommate income
One option is to buy a one-bedroom condo for your student to live in alone. However, a two-bedroom unit will allow for a roommate, and the rent from the roommate can supplement the mortgage payment. If a three-bedroom unit or home can be found, the rental income from two 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 five students living in one property. In Boulder, zoning rules allow three unrelated people in a low-density zone and four unrelated people in a medium or high-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 for roommates. The roommate rental agreement should cover all of the terms typically found in a residential lease such as:
- Lease term
- Rental rate and due date
- Security deposit
- Notice to vacate
- Utility payment agreement
- Maximum occupancy
Financing for the “student property”
If a condo is being purchased, 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.) are available. It is good to have the lender 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 able to maintain a house and be responsible for exterior maintenance, snow removal, lawn care, etc. Often a condo suits student life best since most college students are not interested in mowing the lawn in their free time. Typically, an owner will be paying a Homeowner’s Association (HOA) fee at a condo or townhome in order to cover these maintenance items. This will increase the monthly cost but will ensure that the upkeep and maintenance tasks are completed.
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 music or parties 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
- Often there is no Homeowner Association fee
Disadvantages of the single-family home
- The student needs to mow and water the lawn, shovel snow, and maintain the home
- Neighborhood may be less friendly to a group of students living there
- What to do with the rental property when the student is ready to move on
When the student is ready to move on and has hopefully graduated, there are a few options to consider. 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 real estate investment somewhere else.
As an example, one family I worked with purchased a property for their first child who attended and graduated from CU-Boulder, then sold the property in Boulder and bought a new property in a different college town where their next child was planning to attend school.
Potential financial benefits include:
- Possible appreciation in value
- Possible tax benefits
- Debt reduction on an amortized loan which increases equity build up
- Keep as an investment after college for cash flow
Purchasing a college home is a significant decision. Consulting the appropriate professionals can help create a plan for a housing situation that could provide many short- and long-term benefits for your student and your family
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.