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While Real Estate is Struggling, Now's a
Good Time to Consider That Kiddie Condo
For parents with investment dollars to spare in deflated
college-area real estate markets, there's never been a better
time to invest in condos or single-family homes to house a
student during their undergraduate or graduate years while
providing tax breaks and potential investment appreciation for
the folks.
But, it's very important to consider pros and cons because
the potential rewards of buying housing for a student carries
many risks. Over the past decade, the once-galloping real estate
market made condo and home purchases in college areas attractive
to parents looking for an actual return on the room and board
expenses they would otherwise throw away to their kids' schools.
With the double-digit home appreciation of the 1990s, parents
looked at buying property as a way to essentially house their
kids for free.
Today, in most markets, home values have fallen, which makes
for a better investment proposition. But it's critical to talk
to tax and financial experts such as a CERTIFIED FINANCIAL
PLANNER™ professional. As a starting point, parents need to
consider the following:
How responsible is your kid? If your kid thinks you're
buying them a crash pad or party palace, you're already in
trouble. He or she will have to be responsible enough to act as
an onsite landlord making sure the interior and exterior of the
property stay in livable and salable condition. That's not a job
that every child can handle, so unless you can afford
housekeeping and maintenance help, any doubts on your part
should dissuade you from such a purchase. Also, if you have ANY
suspicions that your child might drop out, take a break or
transfer from her chosen school, do you want to risk becoming a
landlord yourself or paying for an empty property?
How's your cash flow? If you are already a homeowner,
you know what owning a home costs — mortgage payments, property
taxes, insurance, homeowners or condo association dues,
maintenance costs — can you cover these things in a remote
residence (including emergencies) without batting an eye? And
keep in mind those costs are going to be considerably higher for
your kid's property in downtown Chicago than they would be in
Omaha. Also, keep in mind that it will cost considerably more to
insure this property because even though it's your kid, you'll
essentially need to be insured as a landlord based on the damage
that can occur in rental properties.
When would you have to sell? Most people think in
terms of owning a kiddie condo for four years — the term of a
standard degree. A decade ago, that was a relatively easy
commitment to make as housing prices were skyrocketing and
buyers always seemed to be circling. Today, however, owners have
to consider that it may take them considerably longer to sell
the property at a profit with necessary investments in
maintenance along the way, and a big 5 to 6 percent slice off
the top to pay a selling broker.
Location, location, location. Buying a property in the
immediate vicinity of campus might be great for your kid who
rolls out of bed late for class, but bad for you if you're
expecting your property to appreciate. In most markets,
on-campus real estate is notoriously low on appreciation (think
how you'd feel buying next door to Animal House). This is why
investors do better buying in established, off-campus
residential areas or developments that are near but not on
campus. Your child will have to miss the experience of living
with their peers, though, and that's a big consideration.
Can the property do double duty? Students are pretty
possessive about their space and privacy in college, which is
why you don't see many parents crashing in their kids' dorm
rooms for the weekend. But if you have regular business or
vacation plans in the city where your kid goes to school, see if
that might be one more incentive to invest as long as it doesn't
cramp your style or your kid's.
Might your investment become your kid's investment?
Again, this requires sensible planning and the full cooperation
of a responsible child, but if your child is planning to stay in
the city where they've graduated, parents might consider a plan
to sell the property to their kids at graduation. This could
give the grad a great start on their finances during their first
earning years.
November 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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