Real Estate Q&A
My son is in college at Colorado State University and is currently living in a rental and my other son will be attending CSU starting in the fall of this year. I have at least three years left with one child and at least four years with the other. We are currently paying $750 per month in rent and this will double, assuming we can find another suitable rental, starting this fall. We have been told by several friends that we should purchase a house or condo near campus instead of paying rent for both of them. What are your thoughts? We do not have a lot of money and have not saved as we should have for the college expenses we are already incurring and those will soon double. If it can save us money we are open to the idea, as it sounds promising, but we have concerns. What will we do if one, or both, decide that the college route or college is not their path? We are concerned we might be stuck with a property in Fort Collins that we have no need for. Is this a good strategy or should we just continue to bite the bullet and pay their rent? Thanks.
— Jeff and Rachel, Grand Junction
Jeff and Rachel,
I think purchasing a property is a great idea! I would check with a financial advisor and accountant. If you dont have either, find them so you can see what the potential impact will be. It is my understanding that most all of the rentals are yearly, not monthly, so you will likely be paying over the summer even if they are not living there and going to school. At $1,500 per month, that is $18,000 per year. For the next three years and half that for the fourth year, you are into their housing for at least $63,000 over the next four years. Wow, that is a substantial sum. Looks like I need to start saving myself!! : ) Lets look at a quick scenario to demonstrate the benefits.
Lets say you purchase a three-bedroom condo for $300,000 and put 3.5 percent down, which is $10,500. You then own a three-bedroom condo with a monthly payment estimated at $1,600 which could include taxes and insurance. You only need two bedrooms and surely one of your sons has a friend that they would like to have living with them that would be willing to pay $750 per month, which in turn makes your monthly out-of-pocket shelter expenses $850, which is a savings of $650 per month or $7,800 per year. Five years from now, assuming that your second son takes a bit longer to graduate than four years, the market has improved 5 percent per year your condo would be valued at $383,000. Let’s also assume that you have paid the principle down to $260,000, which leaves you with more than $100,000 in equity when you go to sell. I know there are expenses and this is not direct profit, but at the very least you should receive some return, rather than footing the bill and only have two college diplomas to show for it. The numbers in this scenario may not be exact, but it does illustrate the fiscal advantages of owning versus renting for your college student(s).
There is a loan specifically designed for this situation and it is referred to as the “Kiddie Condo Loan”. The requirements are designed specifically for your scenario and require that the child must live in the home, must have a credit score and be on the loan. The financial qualifications for the loan are done off your information, but it allows the child to begin building a credit portfolio for after he graduates. There are several great things about this loan, you can qualify with only 3.5 percent down and the loan is assumable and with today’s low interest rates, assumable loans may be very advantageous in the future. If one of your sons decides to stay in Fort Collins and live there, they can assume the loan from you and take over the payments or you could sell it and have them assume your interest rate at 3.875 percent. As you can see, there is a good case to be made for a college purchase, in town or out of town, for kids who are attending college.
As for your concerns of selling it later or being stuck with it, you should talk to a qualified agent in Fort Collins to get a good understanding of that market and help you assess how much risk you would be taking on. The worse case scenario is you have to sell in a couple of years, but the great thing about university towns, is that their real estate generally will not fluctuate down as drastically as other areas, because they have built-in buyers and sellers that cycle through which generally helps ensure good demand and smooth out other market influences. My bet, the risk does not outweigh the potential benefit! I say, “do it and you are likely to be glad in the long run.” Hope this helps.
The Kimbrough Team
RE/MAX 4000, Inc