March 11, 2012

Buying a Home for Your Child During College

Once in a while I'll hear about someone who bought a house for their kid to live in while they are attending college.   Its an interesting idea.   The logic is that rather than pay exorbitant dorm room rents you simply buy a house and rent out rooms to some other students and make money in the deal.   But I wonder how easy it is to come out ahead buying a house for a 4 year period and if this makes more sense than simply paying rent for dorm room or an apartment.

Just one example

I'm going to run through a theoretical example of buying a home for your college age son or daughter to live in.   This is just one example.

Lets say you plan to send your kid off to University of Minnesota for four years.   You look at the room and board charges and it runs close to $8,000 per year.   Multiplied by 4 years and thats $32,000 you'd be spending on room and board.    Housing isn't too expensive in that area so you think you might just buy a house for them and they could share it and charge rent to a couple other students.  

I'm going to set the cost of food aside and only consider the cost of housing. 

Dorm Room cost
The rent for a room in the dorms for U. M. costs $2,197 per semester for a shared double occupancy room.   Thats $4,394 room rent costs for one school year.   

Buying a House costs
I found a 3 bedroom home about 2.5 miles from U.M. for sale for $125,000.   The home in question is currently in rough shape, so it might take a little work to fix it up or you could just move the kid in as is and not worry about them ruining the carpet.

Assuming you finance that purchase you're going to have closing costs of around $2300 for a loan with 20% down.   Your monthly bills will be :


mortgage $477
taxes $118
insurance $65
utilities $200
total $860

Annually that gives you costs of $10,320.    But you can make some good money renting a couple rooms.   If you charged $3000 a year each for the 2 extra  rooms that would be $6,000 of income to offset your expenses.   Your costs would then be $4,320 per year.  

After 4 years you would be left with a house.  Lets assume you sell that house.   If it went up 3% a year over 4 years then it would appreciate from $125,000 to about $140,000.   If you sell it you will have to pay a realtor about 6% commission so thats a $8400 bill.    The loan would have been paid down from $100,000 initial mortgage principal to about $92,500.    Altogether that gives you a net profit of about $12,500 for the 4 year period on the investment.   BUT ... of course that analysis makes the assumption hat the value of the property will go up 3% annually.   That is probably not a safe assumption in todays real estate markets.       If the house had stayed flat in value and you sell it at $125,000 then you'd end up losing $2500 over the 4 year period.   Also keep in mind that you've had $25,000 tied up in the home via your initial 20% down payment.    A $2500 return on that $25000 equity is around what you'd net if you put the money in a CD for 4 years.  

Annual costs are a wash
The cost of living in a dorm is $4,394 per school year for room rent.    The cost of the house you buy would be around $4,320 per  year after you pay the $10,320 annual expenses and collect $6000 in rent.  So we're looking at $4394 a year for a dorm versus $4320 a year for the house

Its just Speculating on Housing Market

Since the annual costs are a wash the difference is going to be in how much profit you could make after selling the house.    Four years is not a long time for a house to appreciate.   You have to pay closing costs and realtor fees so you need a minimum appreciation just to cover your purchase costs.   We could hope for 3% annual appreciation, but even then the profit is not substantial given the risks.   If the house goes up in value then you'll profit some but if it goes down in value then you'll lose money.    This amounts to simply speculating on real estate values.

Every situation is Different

I only ran one example here.   Of course every situation is going to be different.  I think for many university areas the cost of housing would be prohibitive to purchase a home and pay less than rent.   In some other areas housing is going to fairly cheap compared to on campus costs.   One of the colleges I went to you could buy a house for around $70,000 nearby campus and dorms cost $4000 a year.   That would be a lot easier to come out ahead when buying a home for your college age child.    On the other hand the other college I attended charges about $5000 a year for the dorms but houses near campus run closer to $225,000 and up.   It would be a lot harder to come out ahead with a house that expensive versus spending $5000 a year on a dorm room.   If housing is especially cheap near the college then it might be a decent idea to buy a house, but quite often you'll lose money or simply be gambling on housing market.

Food costs could matter
I've only been looking at the cost of housing thus far.  But food costs quite a bit as well.   In the dorms for U.M. the cost of food is $1,769 for their top meal plan.  Thats $3,538 per year.  Thats nearly $400 a month for a 9 month long school year.   It shouldn't be very hard for a single student to feed themselves for something closer to $200 per month if they buy groceries and make meals at home and eat out sparingly.  

Meals in dorms = $3538
Meals at home = $1800
Potential annual savings = $1738

You could see pretty substantial savings annually just due to lower food costs.   Of course this would depend on your child being able to properly feed themselves.  They would need to know how to cook well enough and take the time to do so.    Making their own food would require making trips to the grocery store and the time for preparing meals.   Cooking for yourself isn't a big deal or anything but its not a trivial time investment. 

Other Factors

There are a lot of other questions to ask yourself if you're thinking about buying a home for your college age child to live in.    How mature is your child?     Can you trust them to run a home and manage all the bills as well as collect rent from roommates?    I think most college age children are mature and capable enough to pay some utility bills and collect rent checks from a couple other students.    You should know if your own child is capable of the task and trust worth enough not to blow the rent money on video games.   Would living in a single residence home far from campus be a distraction from studying or would it be conducive to studying?   This could go either way.    When I lived off campus during college it was actually less distracting than when I lived in the dorms.    But it is just as likely that a house shared by a few college kids could turn into 'party house central'.

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4 comments:

  1. Why not be the one that rents the room for $3000 per year from someone else who bought the house? That seems like the best of both worlds. The food issue is key (they charge a lot for those meal plans) though only if it's comparing meal plan to cooking at home. If they end up eating take-out pizza, it would probably be more expensive.

    Also, typically dorm rooms are shared but apartment rooms are one person per room. So the math above isn't quite apples to apples.

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  2. SteveD, Yes finding a cheap room to rent off campus could be the best solution. My comparison is not apples to apples. There are other pros and cons to a dorm or buying a house that I don't discuss. As you point out the dorm room is a small room shared by two people and in your own home you have a lot more space. On the other hand buying a house requires you to handle maintenance, paying bills, acting as landlord etc.

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  3. My parents bought a foreclosure in SC for my sister to live in while she was a student. Their total investment was $40k, and she got in state tuition as well. Saved them a ton of $$. They still own the home and it brings in $750/ month. She graduated in '01. Really paid off!

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  4. Danielle alludes to a key part of such a scheme. You have to (plan to) keep the home longer than the four years that a stereotypical student is in college. If you only plan to own a house four years, the overhead of the transaction costs would be too much friction to overcome.

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