Next time you write a check to your student's college for a cramped dorm room, you may wonder if there's a better -- and more cost-effective -- option to house your bookish son or daughter. Some parents bypass university housing or off-campus renting altogether: They buy a condominium for their student to live in, with the aim of recouping those room-and-board dollars after graduation.
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The average cost for college housing for the 2012-2013 school year was $5,433, according to the most recent figures from the National Center for Education Statistics. That adds up to $21,732 after four years and $32,598 over six years for housing costs alone.
You gotta do it right
But buying a condo isn't an easy A. Just like any real estate investment, it comes with possible pitfalls, such as losing money, if you don't do your homework.
"You need to look at it from the perspective that you will be a seller a few years down the road. Be very aware of market conditions before you make a purchase," says Regina Santore, a real estate agent with Coldwell Banker Wallace and Wallace Realtors in Knoxville, Tennessee, home to the University of Tennessee. "It's not just about if you can get your kid's friends to pay rent and make a little money."
Does the math work?
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There are three factors to consider before buying a property for your college student, says Raylene Lewis, a real estate agent with Century 21 Beal in College Station, Texas, where Texas AandM University is located:
- How long do you think your son or daughter is going to be there?
- What will it cost to sell the property?
- What are current rental rates in the neighborhood?
Most students don't finish in 4 years
While you may have high hopes for your honors student to finish college within four years, only 39 percent do, according to the National Center for Education Statistics. In general, 59 percent of students graduate within six years. So, you need to think in a four- to six-year timeline and then consider the costs of selling.
"When you sell your house in the market here, it costs about 7 percent of the sales price plus $2,000," says Lewis. "Also, you need to consider how responsible your child is. I've seen condos that have a lot of damage done to the property, which affects the resale value."
You also need to weigh the rental rates -- on and off campus -- versus the financing costs of buying a condo. And you have to take into account the option of having other students defray the cost of the condo by renting rooms, or the possibility of appreciation or depreciation of the condo's value.
Condo vs. dorm
The financial impact of owning a condo can be softened by renting out one or more rooms, as well as the buildup of equity if the unit's value doesn't fall. Mortgage for condo is based on median condo price of $211,100, minus 20 percent down payment.
|Owning a condo*||Living in a dorm??|
|Annual principal and interest payments / rent||$10,268||$5,433|
|Total after four years||$41,073||$21,732|
|Total interest payments over four years||$29,401||-|
|Principal payments over four years||$11,672||-|
* 30-year mortgage of $168,880 at 4.5 percent ?? Median dorm cost of $5,433 a year
Choose your leverage
If you're buying for the short term, such as four years, you may want to contribute a smaller down payment in case the condo loses value by the time you sell, says Dan Barnabic, author of "The Condo Bible for Americans." But if you plan to hold the condo longer, a higher down payment will help to buffer against any spikes in interest rates and will keep the mortgage payment lower, he says.
Condo Buying 101
Once you decide to buy a condo, there is a lot of studying that goes into it, Barnabic says. He recommends asking residents how well the condo association is run, how responsive the property management company is, if they know of any complaints from unit owners or renters and if there are any working orders against the property.
"This is precious information. Don't take a real estate agent's word for it," Barnabic says. "Even though a condo can be financially a good investment, it could change for lack of governance or management."
Be upfront about renters
When using a real estate agent, make sure to mention if you plan to rent out the other rooms in the condo, says Lewis. Some municipalities may not allow renting to more than two or four unrelated parties, which would change your renting-versus-buying comparisons.
Other factors to consider
Another key factor is how saturated the market is with student housing, Santore says. If there are too many rentals, then maybe it's best to skip buying. Otherwise, look for communities with student-oriented amenities that will appeal to future parent buyers, such as shuttle buses to campus, common work areas with copy machines and Wi-Fi, pet-friendly units and facilities such as pools, tennis courts or movie theater rooms.
However, avoid being the first person to buy in a new condo development, Santore warns, because the sticker price offered by the developer will likely fall as time wears on.
"The first buyers will be the first ones to take a loss," she says. "That's who you should buy from."
One couple's story
Joshua Bradley, an attorney in Knoxville, Tennessee, and his wife, a doctor, own two condos in the city, both left over from their college years when they attended the University of Tennessee. They live in one but are trying to rent out the second, which was bought by Bradley's wife's parents about eight years ago.
The three-bedroom unit was a new, exclusively student complex located right across the river from the college. Bradley's wife lived in it for three years. It was empty for one year and then her brother lived there for three years. It's now vacant.
A tale of 2 condos
Bradley, 27, is stuck renting it because the condo has lost around 30 percent to 40 percent in value, Bradley estimates, after a glut of condos hit the market in 2006 and 2007 right as the housing bubble burst. The rental market has also fallen, but not as much. However, Bradley has taken on finding renters himself through Craigslist because the condo's management company is "in over their heads," he says.
By contrast, the condo they live in is located five minutes west of campus in an affluent neighborhood. Its resale and rental values have held up because of its location and because it's not student-focused. It attracts young professionals along with middle-aged couples and some students.
"It's really hard to come into a new city you don't know and buy a property that you need just for three or four years in the right market," he says. "Many out-of-town parents have taken a bad bath on these condos."
Copyright 2014, Bankrate Inc.