Your son or daughter is accepted to college, and they fully plan to stay four years, maybe longer. That’s great! But you are on the hook for housing costs, and that’s a bundle of money. On average, that’s about $10,000 per year or $40,000 over the 4 year period. Is there another way to do this?
Here to explore an alternative is Real Estate Expert John Adams:
Question: John, lots of parents pay tons of money for their kids to live on or off campus, usually for four consecutive years. Is this the smart way to house your kids?
Adams: For about 8 out of ten students, this is the norm. They either rent on-campus in a dorm or off-campus in a shared house or apartment. But there is a smart alternative you need to consider.
It’s called buying a rental house for your kid to rent out to other students. It may not be right for everyone, but the numbers can be compelling, and the experience will teach great lessons to your child.
Q: Let’s start with WHO IS THIS NOT FOR?
A: OK, this idea is not for kids going to school in an extremely expensive area like San Francisco or Manhattan. At over a million dollars for a small apartment, the numbers just don’t work. In those situations, the school typically offers subsidized housing for students, making attendance possible.
Q: I get it. But let's talk about closer to home. What about a student planning on attending UGA or Georgia Southern or maybe Georgia Tech?
A: The average cost of housing in those Georgia communities is quite reasonable in some neighborhoods, and the numbers work quite nicely.
Q: Can we see an example?
Let’s say your son is accepted to UGA for next fall, and he has shown an entrepreneurial streak already - he mowed lawns in the summer and delivered papers in the winter.
The simplest scenario is one in which YOU buy a house for your son to rent. He gets to live there for half price if he acts as property manager, and he signs a four-year management contract with you in exchange for an option to buy you out at the end of the contract for what you put in it.
YOU buy the house. YOU get the 80% loan. YOU pay the 20% down payment. YOU are legally responsible for taxes, insurance, and all maintenance. YOUR NAME is on the deed at the courthouse.
Q: WHAT does the house cost you?
A: You can buy a 4 BR 2 BA 1960’s brick ranch in Athens for about $125,000 all day long, but you find one for $100,000. If seller pays closing costs, you put down $20,000, and get a 15-year loan for $80,000 at 5%.
Your monthly payments are $633, plus $100 for taxes and insurance, for a total of $733. Your son rents out three bedrooms to other students at half the dorm rate ($500 per month) plus $75 for utilities.
Q: How does that work out?
A: $575x3.5 = $2012/month income. You pay $300/mo utilities, pay $733 PITI, and pocket almost $1,000 every month, or about $12,000/year.
Q: Why will students want to rent off-campus?
A: Is this a trick question? The rent is half the dorm rate, and that’s just the beginning. No trouble staying full.
Q: How can you make sure that the renters pay on time and that there are no wild parties?
A: Since we are talking about a location IN-STATE, you drop into town for a visit at least twice a quarter. Unannounced inspections are written into the lease docs.
Furthermore, ALL leases are co-signed by the parents, so they are fully and legally responsible not only for the rent, but also for any damages or lost rent due to early move-out.
Q: How far is this house from campus? Is it a dump? Is it a bad neighborhood? Did you just make this up?
A: No, I found it on Zillow, and I’m thinking about buying it as an investment. It’s 1437 sq feet, brick front, built in 1968, about 5 miles from Sanford Stadium, This house is listed with a REALTOR, it’s in good shape, clean, decent, working-class neighborhood. It is not new or perfect.
Q: What about repairs?
A: Your son and his buddies are responsible for all the small stuff like light bulbs and sticking doors. You take the hit on major repairs, and set aside 15% or net income as a repair fund. That will cover all major systems on a regular rotation.
And you can buy a home warranty if it makes you feel better.
Q: WHo is this plan NOT right for?
A: Anyone who has no faith in their son or daughter’s ability to grow up and make decisions on their own. (that may be half of all parents).
It’s also not good for a student who plans to transfer to an out of state school after a year or two. Also not recommended for a child who is totally irresponsible.
Q: What are the benefits?
A: After putting down 20% cash, your kid lives essentially rent-free for four years, and you pocket extra cash for 48 months in a row.
Q: What happens after four years?
A: Assuming appreciate of 4% annually, the home will be worth about $132,000. The loan balance will be about $64,000.
With lots of equity ($58,000) and good positive cash flow, you can keep the property. Or sell it to your new graduate. Or sell it to the public. Or trade the equity into another property using a tax-free exchange.
Q: John, who don’t more people do this?
A: It’s not right for everyone, and it’s not the EASY thing to do. But if you will LEARN about the process, and PROTECT yourself along the way, it can be a GREAT experience.
Best of all, your son or daughter learns valuable LIFE LESSONS about leadership, management, and real estate investing.