Campus Cribs: Buying Real Estate Property for Your College Student
Talk to your accountant and attorney to determine the ownership method that works best for you. Some parents will buy as owner occupied property; others will treat it 100 percent as a rental property for additional tax benefits. There are many ways of holding title, including creating a Family Limited Liability Company (LLC).
Several options are available for financing your student property.
- FHA "Kiddie Condo" loans. If you want your student to be in title to the property and you want to pay the minimum amount down, using FHA financing is the easiest way to purchase a property. The FHA “Kiddie Condo” loan program helps students qualify for loans by allowing them to co-borrow with a blood relative. Down payments for this type of loan can be as little as 3 percent of the total purchase price, and interest rates are lower than those on investment properties. Maximum FHA loan limits vary by location so check to see what they are for your county.
- Non-owner occupied loans. Some parents will choose to own the property as investment property by putting 20 percent down and using non-owner occupied conventional financing. The Chase Family Opportunity Mortgage allows parents to classify the property as a second or vacation home, therefore allowing them to pay less in points than on a rental property mortgage.
- Interest-only loans. An interest-only loan, rather than a fully amortized loan, is another option. The advantage of using an interest-only loan is that it reduces the monthly payment.
If you're buying a condo, check the owner-occupancy ratio of the complex. This may affect the type of financing you can secure.
Help Your Child Establish Credit
If you decide to have your child on the mortgage and deed, help your child establish credit before you apply for a mortgage. Obtain a credit card in the student’s name, preferably a year prior to your purchase. Also, if the student has a car, it's a good idea to have a small loan on the car in the student’s name which can also help their credit rating.
You can buy a one-bedroom condo for your student to live in by themselves. However, a two-bedroom unit will allow for a roommate and the rent from the roommate can supplement the mortgage payment. If you find a three-bedroom unit or home, the rental income from two roommates can help the monthly cash flow even more.
Check the local ordinances for occupancy limits in the community where you want to buy. You may find that five students cannot live in one property. In Boulder, zoning rules allow three unrelated people in an LRE zone and four unrelated people in an MRE zone.
Roommate Lease or Rental Agreement
Even though the potential roommates are typically close friends, have each roommate sign a written rental agreement. Consult with an attorney for specific format and wording. The agreement should cover all the items found in a residential lease such as:
- Rental Rate and Due Date
- Security Deposit
- Notice to Vacate
- Utility Payment Agreement
- Maximum Occupancy
It depends on whether or not you think your student will be able to handle homeownership responsibilities like exterior maintenance, snow removal, lawn care, etc.
Often a condo suits the student life better since most college students won’t be interested in mowing the lawn in their free time. You'll have to pay a homeowners association (HOA) fee for a condo or townhome, which covers these maintenance items. This increases your cost but ensures that maintenance is taken care of. Read more about HOAs.
- No lawn care, snow shoveling or exterior maintenance
- Easier to just leave for the summer
- Owner occupancy ratio of the complex could affect ability to purchase, sell or refinance
- Homeowners association fee may be high and out of your control
- Loud stereos might bother nearby neighbors
SINGLE FAMILY HOMES
- 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
- No homeowners association fee (unless you buy a house in a planned unit development)
- Student needs to mow and water the lawn and shovel snow
- Neighborhood may be less friendly to a group of students living there
When your child has moved on (hopefully graduated), he or she can continue to live in the property, you can keep it as an investment rental or for your next child, or you can exchange it for a piece of investment real estate somewhere else.
For example, one family I worked with purchased a property for their first child who attended and graduated college. They did a 1031 exchange for a property in a different college town where their next child was going to attend school.