Last week I got a call from someone out of state. He said his son is attending William Jewel College in Liberty, Missouri, as a freshman. After looking at the cost of student housing while his son attends college over the next four years, it occurred to him that it might make sense to purchase a small starter home near the college and let his son stay there. I told him I’ve actually had a few clients that did this and it worked out very well for them. Here’s some of the things we discussed.
First, I wanted him to call my lender, Josh Chrans at Prime Lending to see what options might be available to him. Josh would likely tell him that if he doesn’t already own a second home, he may be able to count this as a “second home” for tax purposes and also still get a low interest rate. There are specific issues though; your permanent residence would need to be at least 100 miles away, and you might be required to sign an occupancy affidavit that says you intend to occupy this residence at least 14 days out of the year.
Second, I wanted him to talk to his CPA about the possibility of calling this a rental property and then “charging” his son to stay there. For some people, this may be a better option. This would also allow him to rent out the other bedrooms in the home to his son’s friends or other college students attending the university. If he bought a large enough home with multiple bedrooms, it could actually cash flow on a monthly basis. I’ve had some clients buy a piece of real estate in which they had all two or more of their children live in while attending college, in some cases, spanning a 7-year time frame. Rather than throwing money down the rent drain, they’ve built equity in a real estate investment over this period of time.
There are a few disadvantages of buying a single family home for your college kids.
- Students needs to mow and water the lawn and shovel snow
- Neighborhood may be less friendly to a group of students living there
- You may need to plan for added repairs or updates during the period in which your kids are living there
- Unpredictability. Staying put for four or five years can be difficult for a college student. He or she may decide to transfer to another school, spend a year abroad or (heaven forbid) drop out and move back home. Investing in one place for your student to spend his or her entire college career could be a bad move in these cases.
Talk to your accountant and attorney to determine the ownership method that works best for you. Some parents will buy as owner occupied property; others will treat it 100 percent as a rental property for additional tax benefits. There are many ways of holding title, including creating a Family Limited Liability Company (LLC).