College Housing for Clients' Kids?

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When planner Andy Tilp's daughter was in college, she wanted to live off campus after her freshman year. After considering the options, Tilp and his wife ended up buying a three-bedroom home about a half-block from campus. Their daughter lived there with roommates during her last three years of college.

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."



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."



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.



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.

In addition, he says, a college student could potentially use money in a 529 plan to pay his or her parents a market-rate rent. "You can at least use what you would have paid for the dorm," he says.



Once a family determines that a housing purchase could work for their student and their finances, there are other key issues to consider. "Think about whether the college is going to outcompete you" by offering housing that is cheaper or closer than anything a parent could provide, Blain says.

Parents should also investigate the college's housing policy, which could require that students live on campus or in college-owned properties for some or all of their college careers. "When I was at Notre Dame, you had to live on campus for the first two years," Blain says.

Investigate zoning regulations, too. Will the town let you rent out a particular property? Some towns limit the number of rentals on a block or in a neighborhood.



Before shopping for a property, parents should also consider the pluses and minuses of a house versus a condominium.

"A house is a lot more maintenance and expense," Blain points out. Condo associations typically take care of exterior maintenance as part of the common fee, and that can make a property look much better than it would if college students were in charge of mowing the lawn and cleaning the gutters.

On the other hand, a condo association may have rules about whether properties can be rented. The association may restrict the number of roommates in a residence and in general may make decisions that a family might prefer to make for themselves.

The size of a residence is also a consideration. Multiple rooms mean more roommates and more rents, increasing the chance that a property will pay for itself.

The Tilps managed the property where their daughter lived. A hired manager may cost more, but may also make ownership easier, particularly if parents live far away. A student might not feel comfortable ensuring that his friends pay their share of the rent on time.

In addition to collecting rent, a good management company can replace furnace filters, put new batteries in the smoke detector and watch for maintenance problems. In hiring a manager, parents may be able to negotiate a better-than-usual deal in exchange for finding tenants from among a student's group of friends.

Once the numbers work, the key to success is simple: "It's the tenants," Blain says. "There is no other answer." If possible, parents should try to find tenants who they already know.

"Say to other parents, 'We're going to buy this place. Would your daughter like to live with my daughter?' " Blain says.

"That really, really works out well," he points out. "You know the tenant and you have the property prerented."



When it comes to maintaining the value of your new investment, make your expectations clear up front, before you buy a place, Blain says.

"Take a clear look at your child and his friends. If your kid showed a lack of self-control around other young people in high school, this might not be a good idea."

Several of Blain's clients have bought places for their college students to live, but "I haven't seen any Animal House situations," he says.

If one happens, "that's the end," Blain says. "You move them on campus. At the end of the day, this is an investment. If you're having to spend thousands of dollars to fix things or replace carpet that's soaked with beer, this isn't going to work."

The Tilps had "very strict" rules about smoking in the house (not allowed), the number and condition of permissible cars, general cleanliness and taking care of the yard. Illegal activity was grounds for immediate eviction.

Tilp and his wife also got to know the neighbors and gave them the parents' contact information.



After a student graduates, parents can sell the property, rent it out or hope that a younger child will choose to attend the same or a nearby school. Since their daughter graduated in the spring of 2012, the Tilps have continued renting out their house, with their daughter's help in selecting tenants. Even so, they are considering selling it either this spring or next, Tilp says.

Ideally, he says, they'll sell to another set of parents. "Another family would probably see the same opportunity," Tilp says.

The Tilps aren't underwater, but the property might still be a rental win if they were. That's the situation for Jamie Milne, whose daughter bought a condominium near the University of Illinois, with her grandmother as a backer.

Although the property has lost $20,000 in value from its initial $120,000 purchase price, the current rental income covers most of the mortgage each month.

"I think she's maybe $50 to $100 a month short," says Milne, who is the principal at Milne Financial Planning with offices in St. Johnsbury, Burlington and Barre, Vt.

A college property could also be the seed of a 1031 exchange for an investment property closer to home. Or it could help a child on the way to home ownership - either as a gift, if the family were able to handle both the gift tax and the challenge of providing equally for other children, or with the child purchasing the property from the parent.

Lazetta Rainey Braxton, founder and CEO of Financial Fountains in Baltimore, has a client who bought a property for a child to live in while attending graduate school. The parents plan ultimately to sell the home to the child. That plan can work well, but only if the child is able to take over ownership after graduating.

Despite the additional work, Tilp says he'd readily repeat his purchase. In addition to saving money, "we discovered many intangible advantages to her living in the house. It allowed my wife and me to get to know her friends and roommates socially, not as landlords," he says.

"My daughter and her friends speak warmly of having a place they could call their own home and are taking fond memories with them into their lives."



Ingrid Case is a Financial Planning contributing writer in Minneapolis.

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