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Parents Are Buying Homes in College Towns to Avoid Pricey Dorms (and Earn Rental Income)

The average cost of private college has nearly doubled over the past thirty years, and public college is up by about 150%.

Families have little power over what they pay for tuition. But they can control living expenses — a budget line that averages between $12,000 and $13,600 a year for on-campus room and board.

To save (and sometimes make) money, some families choose to skip the dorm and dining hall and instead buy a home for their college-aged child to study and sleep.

The benefits are pretty straightforward: Your student can live with friends, who pay rent. That covers your child’s expenses, and it ideally covers the property’s expenses. At graduation, your kid leaves with a diploma and you’re left with equity in a home that, with luck, has appreciated during your child’s college career.

Why do parents consider purchasing a home for their college students?

Buying a home can mean saving money on college expenses while also making a good investment, says Robert Persichitte, an Arvada, Colorado, financial planner. He points to a client who bought an older townhome within biking distance to the University of Colorado’s Boulder campus.

“The daughter lived with three roommates,” he says. “The rent from the roommates covered the mortgage and left them with zero housing costs, aside from utilities and incidentals.”

When the student graduated, the parent sold the place at a profit.

That parent wasn’t a singular case: A second client of Persichitte’s also bought a Boulder home for her daughter to live in while she studied at the University of Colorado. She plans to keep the property indefinitely and rent it out.

“The rent is much higher than the mortgage payment, and the owner also gets a tax benefit,” Persichitte says. Treating the property as an ongoing income source makes more sense than selling it because the property has appreciated quite a bit and the owner would owe substantial capital gains tax if she sold. Instead, he says, she plans to let her daughter inherit it, a move that can eliminate capital gains tax if the daughter decides to sell.

The benefits can go beyond finances

In addition to offering a financial benefit, a college home can help a family solve other problems. One of my clients bought a one-bedroom condominium to save money on educational expenses, but it also helped to even out the sums the family spent on each of their sons.

One son attended a more expensive college. The other chose a cheaper institution. This client bought the condo for the son with the less expensive school, with the understanding that he will buy the property from them by making monthly payments.

“We credited him with a nice down payment, and we aren’t charging him interest,”

The downsides of buying a property for your college student

Owning college property can bring a lot of potential benefits. It can also deliver substantial risks and hassles.

Parents who buy a college home invest significant time, energy, and money in the project as they shop for a place, buy it, choose renters, maintain the home and ultimately sell the property or keep it as a long-term rental.

No matter how great your kid and her roommates are, every property has problems: things that break or wear out inadvertent damage, and neighbors who might not be thrilled to live next door to college students. You’ll know less about your prospective renters after your child graduates because you’ll no longer have an inside information source. You might need to hire a manager if the home isn’t nearby.

Rental income will complicate your tax situation, too, especially if the property is in another state. You’ll owe ordinary income tax on the rents you collect, minus your expenses. Sell the property at a profit and you may owe capital gains tax on your earnings.

You’re also putting a lot of capital at risk since the home you purchase could lose value. Even if it gains value, it’s not liquid until you sell it.

“If you need the cash quickly, real estate is not for you" Tenants could also inflict damage that’s well beyond the value of any security deposit.

And if you have a substantial amount saved in a 529 plan, keep in mind that you can use that money to pay for college for your child’s room and board, but you probably can’t spend 529 funds on mortgage payments.

There’s also the potential for purchase to cause emotional complications within a family. Buy a place for your college student to live and you become your child’s landlord — right at a time when many young people are becoming more independent from their parents.

Thinking about buying a home in a college town? What to know first:

While the thought of earning rental income for a home your son or daughter can live in may sound appealing, it’s not a move you should enter into lightly. Here’s how to do your due diligence:

Don’t disrupt your finances (or your lifestyle)

Whether buying a second home for the college years makes sense for your family depends on the price your college is charging for on-campus room and board, the cost of real estate in your college town, your family circumstances, and your appetite for risking capital and becoming a short- or longer-term landlord.

Crunch your numbers

Get a sense of how much you might pay for a home and what your monthly payments would be if you finance the purchase — remembering that mortgage rates have risen a lot in the past two years. Add estimated costs for utilities, food, and home maintenance. How does that number compare with the per-bedroom rent you might charge your child’s roommates or stack up against what the college charges for room and board?

Forecast your earnings

You’ll also want to look at how similar area homes have appreciated over the past five or so years. Is it likely that you could buy a property now and sell it for a similar or increased sum in four or five years? You’ll want to recoup closing costs as well as a down payment and monthly mortgage installments.

You shouldn’t pursue this strategy if the investment’s outcome would drastically affect your financial situation, especially not if it would change your retirement plans.

Give me a call if you don't know if renting to college students is the best strategy for you.

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