While many parents are content to have their children live in the dorms when they head off to college, others see an investment opportunity. Instead of forking over even more cash to the university, some enterprising college parents prefer to buy nearby property—perhaps a condominium unit—for their children to live in during their university years. But Keith Gumbinger of HSH Associates says anyone considering such a move should proceed with caution, as the housing rules of the university, the whims of the local market, and the relatively short investment horizon could work to undercut its returns. Here are seven things to consider before buying property to house your college student:
1. University housing rules: Before parents even think about buying property, it's essential to check out the university's rules on off-campus housing, Gumbinger says. Some colleges require that students spend at least a portion of their collegiate years in the dorms. Longer on-campus housing requirements, of course, make off-campus property investments less attractive for parents.
2. Rental opportunities: Next, parents should explore the rental opportunities in the area. Certain university communities may have off-campus housing that is both nicer and less expensive than the school's offerings. Parents may want to consider these rental options rather than taking on the expenses of buying property, Gumbinger says.
3. Understand the local market: Parents bent on buying property should research the local economy and housing market trends in depth. Towns with other job-producing industries in addition to the university are more likely to be able to bolster real estate values over the long term, Gumbinger says. "Just like you wouldn't want to have [the market] beholden to one industry, you must make sure that you've got a diverse [economic] base that is going to help to support real estate values," he says. "That is kind of your first consideration as you are investigating this option."
4. Betting on the university: Gumbinger adds that property values in university towns are often influenced a great deal by developments at the college itself. "Highly accredited schools while you are there might not always be highly accredited schools," Gumbinger says. "They might lose programs that are attractive and soften up that real estate market as a result."
5. Additional ownership costs: Even buyers who get a great deal on a property in a university town need to be mindful of the additional costs associated with home ownership. "You've got your taxes and insurance that must be paid on the property, [plus] maintenance, if any, or common-area fees if you have a condo type arrangement," Gumbinger says. "The cost of those alone might outstrip the cost of very adequate, suitable rental."
6. Investment window: Students can take between three and five years to graduate from college. From a real estate investing perspective, that's not an ideal window of time. As we have learned in recent years, property values can decline. And a longer investment horizon provides additional time for prices to recover and appreciate. "You might buy [a condo], and property prices might be stagnant for years," Gumbinger cautions. Property owners must also be mindful of their exit strategy. "You will have to sell [the property], and—oh, by the way—pay a 6 percent sales commission on going out the door."
7. Landlord headaches: Parents, of course, can always hang on to the property after their children have graduated and rent it out to other students. But such an arrangement can come with all sorts of headaches, especially if you don't live in that community yourself. If you don't live nearby, "you are going to talk about having to hire a local active manager, getting someone to take care of the rental and the people who are renting the property from you, [and] assess damages as people come and go," Gumbinger says. "Being a landlord is a big headache."