This College Housing Alternative Could Be a Money-Maker

College life changed in 2020. The COVID pandemic forced students into remote learning scenarios all over the United States. As such, a polarity of circumstances ensued. Students were either required to sequester in their dorms or they were altogether banished from campus life. Those who had to leave campus typically went home to live with mom and dad until the pandemic loosened its grip on society. Greek life was also affected as many sororities and fraternities were forced to close for the school year.

The sudden upheaval has many students and their parents reconsidering their approach to college housing, and for good reason! Conventional knowledge dictates that owning is a better financial choice than renting. (See “Is It Cheaper To Own or Rent A House” for more on this.) With mortgage rates at historic lows and housing still affordable in many college towns, some families are taking a buy versus rent approach. When families purchase a home for their child or children to inhabit during the college years, the financial rewards are both immediate and long-term. Instead of renting an overpriced and overpopulated dorm space, parents purchase a home and either rent it to their child or gift them the space for the duration of their college years.

Start With Mortgage Pre-Approval

Unless you’re paying cash for the property, it makes sense to get pre-approved before you start looking at housing. Most buyers will obtain an investment loan, also called an investor loan, especially if they plan to continue renting the property to others after their child graduates. If the property will truly be used as a second/vacation home, inform your loan officer. To qualify as a second home, the property may only be rented for profit for a limited number of days each year. The maximum rental period lasts anywhere from 14 to 180 days depending on the loan product.

Parents who plan to use a property management service would not qualify for a second home. Also, know up-front that second home loans, as well as investor loans, have more stringent underwriting requirements than mortgages on primary residences. However, with today’s low rates they are more affordable than ever.

What Are the Upfront Costs?

Every loan is different, so discuss costs and options with your loan officer. Upfront costs on an investor loan usually include title search and insurance, and may also include necessary fees for origination, processing, and underwriting. Recording fees apply and vary by county. Prepaid taxes and insurance may also be collected if the loan includes an escrow account. The minimum down payment for an investor loan is usually around 20%. Loans for second homes typically require a smaller down payment of at least 10%. Of course, a buyer could choose to put more down to reduce their monthly mortgage payment and sometimes to obtain a lower interest rate.

How Much Can the Landlord Charge Each Month?

Whether and how much you charge your child and their friends/roommates to occupy the property is negotiable. Rents vary based on the location, square footage, and availability of off-campus housing. Generally, homes closer to campus command a higher monthly rent. Off-street and garage parking also increase the marketability of college housing. If you’d like an idea of monthly rent near your student’s school, the United States Department of Housing and Urban Development (HUD) publishes fair market rent values by county.

What About the Summer Months?

Nine-month leases are common in college towns. If you’re purchasing the property as an investment, consider signing an additional tenant or group of tenants into a three-month lease to cover the summer months. You will need to begin marketing the property ahead of time. (Maybe your kid can help with this as they may know people who plan to stay near campus for the summer.) Weekly rental is also an option, one that is becoming more common thanks to marketing sites like Airbnb and VRBO.

If the property is your second home, you’ll need to occupy it for part of the year. Summer may be the opportune time to enjoy your real estate. Summer break is also a good time to make repairs and updates. Any time a lease ends, make sure to reassign the utilities if needed.              

Should I Sell the Property After My Student Graduates?

Not necessarily. If you purchased the home as an investment and the monthly net is profitable, then why sell? You could hire a property management company and continue renting. College towns need good rental stock and the academic demographic will provide plenty of prospective tenants for your rental business. Short-term weekly rentals are also a great investment opportunity since college towns get visitors year-round. On the other hand, if the local real estate market is hot and your property has appreciated, selling could be warranted. If you purchased the property as a second home, you may want to hold onto it for the enjoyment value.

One last thing: If you’ve never owned rental property or a second home, doing so will change the way you file your taxes. Discuss your real estate plans with your tax professional or CPA as soon as you plan to make a change. Good documentation will save time (and maybe money) when you file with rental income.