The arrangement was a win all around. "Bottom line, between my daughter's scholarships, the cost of the house we bought and her (thankfully) frugal living, her private college costs were actually lower than the full cost of a state university," says Tilp, founder and president of Trillium Valley Financial Planning in Sherwood, Ore.
Tilp advises his clients to consider similar moves - and he isn't alone. "I've seen people save on their kids' costs as well as ending up with equity in a rental property," says David Blain, president and chief investment officer of RIA firm D.L. Blain & Co. in New Bern, N.C. "If you get the right property and get a couple of kids in there, then 60% to 70% of the time you can work it so the kid's housing is free."
EXPLORING A PURCHASE
The decision to buy isn't a no-brainer. It depends on the college's location, the cost of housing, the student's abilities and desires, and the parents' feelings about what they can manage, both financially and logistically.
Tilp's daughter had already researched the cost of sharing the rent on an apartment or house, and found that the room cost itself was similar to that of living on campus. "However, the difference in cost between the university meal plan and her cooking on her own was considerable," Tilp says. "The other advantage was she was able to eat a much healthier and varied diet."
"When we penciled out the cash flow of having roommates to pay the mortgage, it became very apparent that this was a way to significantly reduce her shelter costs while in college," he adds. "My parents helped with the down payment funding."
CRUNCHING THE NUMBERS
As long as a family saves money on the overall room-and-board package, buying a place can be a good strategy, advisors say. "If you can pay what you would pay for campus housing toward buying a home, that's a pretty big win," says Rick Kahler, president of Kahler Financial Group in Rapid City, S.D. "You build some equity in the investment, and if they're going to be at that school for four to eight years, that could go a long way toward building investment equity."
Tilp's daughter attended Pacific University in Forest Grove, Ore., a 45-minute drive from home. After scholarships, the family paid about $30,000 a year in educational expenses the first year. Around $20,000 of that was for tuition; the rest covered a dorm room and a dining plan.
The family bought a three-bedroom house in Forest Grove for $180,000, using a $20,000 down payment. They rented space to their daughter's college friends, some of whom also joined her in the house during the summer, when she worked for the college. The tenants paid for the utilities, including water and sewer; Tilp and his wife paid property taxes.
The Tilps also paid $100 a month for their daughter's grocery bill. Her roommates' rent covered the mortgage payment entirely. Property taxes are about $2,500 a year, maintenance cost about $500 (the family does the work themselves, and the property was in good shape), and insurance costs were perhaps $300 a year, Tilp says. Added together, the family saved more than half - about $5,800 a year - of the cost of living on campus.
That savings was before any appreciation or equity. But because of the risky nature of the real estate market, planners say it's crucial to make sure the numbers work even if the property doesn't appreciate.
The Tilps didn't have any unexpected vacancies, but they would probably have saved money even if they had lost a tenant. "You need to plan and have some reserves for vacancies," Kahler says.
CONSIDER LOAN RATES
Financing was at investment property rates. The Tilps might have saved more if they could have arranged owner-occupied financing, which typically involves a lower down payment and smaller mortgage interest rate. But that wasn't possible, Tilp says, because as a student his daughter had very little income.
Because investment properties don't qualify for the lowest mortgage rates, it might have been even cheaper to use a fixed-rate home equity loan on the Tilp's primary residence to buy the college house, Kahler points out.