A year in off-campus housing can cost a student $10,000 per year or more in many of the nation’s priciest university rental markets—like those surrounding Columbia University in New York, University of California, Berkeley, or University of Southern California in Los Angeles.
These staggering numbers have the parents of many incoming freshmen considering other options, like buying real estate within their child’s university town.
For many families, it may be a savvy strategy, but there are several variables to consider. Before you start hitting the investment property circuit, here’s what you need to know:
The potential for market appreciation
Depending on market conditions, a four-year real estate investor could break even, lose money or, as was the case for many 1990s real estate investors, make a tidy profit. Short-term real estate markets are notoriously unpredictable, which makes it almost impossible to forecast a loss or a gain over an undergraduate ownership horizon.
Still, depending on the conditions in your child’s university town, a real estate purchase could be the superior option. Because real estate purchase and rental rates vary dramatically by city, town or even neighborhood, an in-depth rent-versus-buy analysis is a necessary first step.
Long-term property options
Still, some campus real estate investors choose to defray any possible losses by holding on to the property long after their child graduates. They may collect rental income indefinitely, or just until the real estate market reaches an attractive sales inflection point.
Others sweeten the pot upfront by purchasing a place with an extra bedroom. This not only defrays the costs of lodging when visiting, but also locks in accommodations during graduation or other peak visitation weekends, when supply and demand renders lodging especially costly.
Then there are those with a long-term generational legacy at a particular university, who purchase a property with an eye toward retirement. For some families, their child’s college accommodations can make for a perfect, down-sized weekend or long-term retreat during their golden years.
Enhanced year-to-year stability
Despite the financial considerations, for many the decision to purchase college town real estate is far from fiscal. Not all rentals are created equal, and availability can vary significantly from year-to-year and from campus-to-campus. One couple was astounded when the best rental they could procure for their incoming U.C. Berkeley freshman would entail their son sharing flat space with 10 other roommates—far from an ideal student living situation. The parents decided that the cramped, noisy environment would have a significant negative impact on their student’s learning environment. So as an alternative, they decided to purchase an off campus condominium instead.
A teachable moment
Some campus real estate owners elect to put their college student in charge of managing the day-to-day. The experience can create opportunities for the student to learn important life lessons, like how to vet roommates, monitor rents and care for a property. The management of a rental property can be akin to running a mini-business, which can be invaluable for a budding entrepreneur or future senior manager. By placing some of the accountability on your child’s shoulders, he or she can learn to appreciate the responsibilities—as well as the benefits—that can accompany real estate ownership.
Other costs to consider
Those who don’t already own an investment property may be surprised by the conditions required, which are substantially more stringent than those for an owner-occupied property. Among the requirements are more up-front cash—typically 25 to 30 percent—and a cash reserve of between six and 12 months’ worth of expenses.
Then there are the fees associated with ownership. Locations with sky-high real estate taxes and neighborhoods with pricey home owner association fees can add to the overall expenditure. There are also maintenance costs and other inconveniences associated with maintaining college-aged tenants, even if one is your own child.
Even so, for those with the proclivity for managing young tenants, a real estate investment near your child’s college can make sense. It can be particularly smart for parents who want to help provide life lessons while offering up a quiet, secure home base where academic interests can thrive.
The views of the author of this article do not necessarily reflect the views of First Republic Bank.
© First Republic Bank 2016