August 12th, 2016
Do you have a child going off to college soon? Now would be a good time to look into investing in rental property where they’re going to go to college. You don’t have to know where they’re going yet, but you can start planning on what you want to invest and how you manage the rental property.
According to a recent informal survey at Coldwell Banker, a growing number of parents are purchasing real estate for their children to live in while attending college. In fact, over the past two years more than one-third of U.S. Coldwell Banker agents reported an increase in business from parents.
Zillow also felt it was a good idea for parents to buy college homes now instead of paying for dorm rooms or other rentals. According to its numbers, the rising demand for college rentals keeps pushing rent rates up, while home purchase prices are still recovering from their sharp decline during the financial crisis. Additionally, interest rates are still in an affordable range. This combination makes buying a college home an attractive option for investor parents.
"Any college parents who face paying $7,000 to $15,000 annually for their kid's dorm room or rental over four or more years can redirect those payments into a rental property as a money saver," said Dan Gooder Richard, author of the book Smart Essentials for College Rentals: Parent and Investor Guide to Buying College-Town Real Estate.
Contact a reputable mortgage loan officer to find out how much you can invest. It’s different for rental properties than it is for your primary residence.
But buying a college home involves more than simply watching your investment grow and collecting rent. An important issue to consider is, who will take care of the student rental property?
If parents live in town, they may be able to manage the property themselves if they have the time and skills for it. This could involve finding and screening additional renters as well as performing repairs, regular yard work and indoor maintenance. Additionally, you’ll want to collect the rent.
Chances are, the property will be out of town. If you have a more mature student, it’s possible they could handle being the resident manager collecting rent and enforcing rules. However, this is rarely the case especially if the other housemates are all friends.
Most often parents hire a local management company for maintenance and let the kid focus on their studies.
Property management companies can help find and deal with additional student tenants as well as arrange for property maintenance issues, but they don't come cheap. Although property management fees are tax deductible, you should expect to pay anywhere from 5 percent to 10 percent of your rental income to cover them, according to the NOLO Law for All website.
Parents should also be aware of tax implications and advantages of investing in college real estate. Tax laws governing second homes can be very complicated. The IRS website has information about how and when you can deduct expenses related to a second home. As always, it’s best to consult a tax professional for advice about your specific situation.
Additionally, talk with your insurance agent to find out what you will pay to insure a rental property. And encourage your renters to get renter’s insurance to protect their personal items.