As college students prepare for fall classes, some of their parents or grandparents will be studying up on the real estate markets near campus.
Investing in student housing may not only help to reduce the room-and-board portion of the tuition bill, but also provide a revenue source, and in some cases a tax deduction.
Valerie Adelman, a wealth manager and a principal of the Financial Asset Management Corporation in Manhattan, says many of her clients have invested in property near colleges for family members to use for a few years, reclaiming it for themselves afterward.
She says that the key to a successful purchase is to concentrate on making “a good investment choice — the bonus is that their child can live there at the same time.”
Families must decide whether they’re buying the property as their second home or solely as an investment, in which case it would be run as a business, with costs and depreciation deducted from rental income. This would require more record-keeping, but can provide tax benefits, experts say.
As long as you are buying a one- to four-family home, you will probably qualify for a residential mortgage. The lender will expect the buyers to show that they have sufficient steady income and a good credit score (740 or higher is ideal).
Lenders often call these properties “kiddie condos,” and they typically put the student on the mortgage along with the parents so it can be considered owner-occupied housing, said Jeff Lipes, a vice president of Rockville Bank, which is based in South Windsor, Conn., and the president of the Connecticut Mortgage Bankers Association.
“Most people who are going to college are not making anything near what is needed to buy a home,” Mr. Lipes noted. Yet being on the mortgage will help them build their credit and take some responsibility for the property.
“As long as they’re of age, absolutely” the students go on it, said Jody Tobia, a senior vice president for mortgage lending of Somerset Hills Bank in Madison, N.J. That way, the parents’ and student’s incomes (if the student has any) are used to qualify for the home loan, he said, even though the student is unlikely ever to make a payment.
Owner-occupied properties typically qualify for lower mortgage rates and down payments, Mr. Tobia said; his bank usually expects at least a 20 percent down payment.
If your child is attending college in a distant city, you may need to find a lender there. Some parents may refinance their primary residence or take out a home-equity loan to finance the purchase of the second home, Mr. Tobia said.
One advantage of using the property as a second home is that the parents get to deduct the mortgage interest and property taxes. But keep in mind: you can only claim two residences.
Interest in student housing has been steadily rising as enrollment in colleges and universities has increased. According to the most recent data from the National Center for Education Statistics, enrollment rose 33 percent from 2000 to 2009.
Lawrence Yun, the chief economist for the National Association of Realtors, suggested in a post this spring on the Realtors’ blog that because of increases in college enrollment, “buying a rental property in college towns or college areas of a large city may prove a good return on investment for those who are patient.”
Parents looking to buy property near colleges, however, may face some competition for student housing. A quarter of colleges have plans to build on-campus housing, of which 39 percent expect to do so within five years, according to a survey of 209 university housing administrators published in June by College Planning and Management.