College Housing Rent vs. Buy

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Sending 2 kids to college in the Fall.  One wants to live in the dorm first year, then 3 years off-campus.  The other is older and will finish in 2 years.  Based on this plan, I will need 5 student-years of housing in the next 4 years.

Lease analysis:
Base Rent          400.00 per room shared apt    
Escalation 3%        
           
Year 1 2 3 4 Total
           
Jake 4,800.00 4,944.00      
Elwood Dorm  4,944.00 5,092.32 5,245.09  
           
Total Lease 4,800.00 9,888.00 5,092.32 5,245.09 25,025.41

Purchase analysis:
Price   100,000.00 3Br/3Ba  Condo    
Interest Rate 4%        
Tax Millage 0.019801        
HOA Fees          132.00 mo      
           
Purchase 1 2 3 4 Total
           
Interest 4,000.00 3,600.00 3,240.00 2,916.00 13,756.00
Taxes 1,980.10 1,980.10 1,980.10 1,980.10   7,920.40
Insurance 1,000.00 1,030.00 1,060.90 1,092.73   4,183.63
HOA 1,584.00 1,631.52 1,680.47 1,730.88   6,626.87
Maint/Repairs 2,500.00 2,575.00 2,652.25 2,731.82 10,459.07
Purchase/Sell 1,000.00     6,000.00   7,000.00
           
Subtotal 12,064.10 10,816.62 10,613.72 16,451.52 49,945.96

If I buy a 3/3, we have friends that will rent the vacant rooms.  I figure a minimum rate would be $300/mo per room (utilities extra).  That would provide income of:
Sublease 300  mo/room      
  1 2 3 4  
R1 3,600.00 3,708.00 3,819.24 3,933.82  
R2 3,600.00 3,708.00 3,819.24 3,933.82  
           
Subtotal 7,200.00 7,416.00 7,638.48 7,867.63 30,122.11
           
Net Ownership  4,864.10 3,400.62 2,975.24 8,583.89 19,823.85
           
Savings     (64.10) 6,487.38 2,117.08 (3,338.80)   5,201.56

Looks like I could save over $5K by purchasing a condo vs. renting.  Some key points in the analysis:

1. I included 2.5% annual for repairs and maintenance.  These kids are not partyers, I don't expect abuse or neglect.
2. I accounted for no appreciation or depreciation in sales price when I sell.
3. It's possible one may stay beyond 4 years for grad school.
4. Ownership allows significant flexibility on the move-in move-out.
5. I'm considering this a real estate investment.  After they move out, I would not be afraid to rent the unit on the market.

What does FWF think of this analysis?  Am I missing anything?  I have an excel worksheet that can adjust the variables.  This is the most conservative parameter set.

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I read that one RE investor is going to rent to their kids but pay himself out of their 529 savings

Closing costs are closer to 10% than 7% between buying and selling. You also haven't figured in vacancy rates which will be higher than normal in a college town. There is also a lot of risk of the home being damaged by a bunch of college students and you can't really collect from your kids. Renting rooms and renting in a college town is riskier than other types of rentals.

The real question is what else would you do with this money? Is there another property that has better returns? Could you make more sticking with mutual funds?

gnopgnip said:   Closing costs are closer to 10% than 7% between buying and selling. You also haven't figured in vacancy rates which will be higher than normal in a college town. There is also a lot of risk of the home being damaged by a bunch of college students and you can't really collect from your kids. Renting rooms and renting in a college town is riskier than other types of rentals.

The real question is what else would you do with this money? Is there another property that has better returns? Could you make more sticking with mutual funds?

Typically college town leases are co-signed by parents -- which doesn't help when OPs kids are the occupants.

stanolshefski said:   gnopgnip said:   Closing costs are closer to 10% than 7% between buying and selling. You also haven't figured in vacancy rates which will be higher than normal in a college town. There is also a lot of risk of the home being damaged by a bunch of college students and you can't really collect from your kids. Renting rooms and renting in a college town is riskier than other types of rentals.

The real question is what else would you do with this money? Is there another property that has better returns? Could you make more sticking with mutual funds?

Typically college town leases are co-signed by parents -- which doesn't help when OPs kids are the occupants.

Why wouldn't op handle damages the same way as when his kids were living at home?

Younger family member has the right idea.  University of Nebraska has a rule requiring dorm occupancy for the first year.

IF HOA involved - check the public notices. HOA rules - real estate restrictive covenants - any other public notices on record at the county.

There have been FWF find out the hard way that the condo or neighborhood HOA has restrictions on making a property a rental.
Example: neighbors protesting number of cars in driveway or on the street.

My county has a law cars cannot be parked in the same spot on the street over 24 hours. We have a neighbor who enforces that to the point of calling and complaining before the 24 hours have passed claiming "the car has been there for days". County Deputy comes out - posts a "car to be towed" notice some as soon as 4 hours after the deputy places the notice on the offending car. This item is my personal experience more than once.

I had an acquaintance tell the story that she parked her car in the driveway to unload her groceries. This was a legitimate one family occupancy of a home they bought the traditional way. Some bitty came up the driveway with a copy of the covenants saying she could not park her car in the driveway and she was ordered to get it in the garage immediately by the neighbor.

JW10 said:   IF HOA involved - check the public notices. HOA rules - real estate restrictive covenants - any other public notices on record at the county.

There have been FWF find out the hard way that the condo or neighborhood HOA has restrictions on making a property a rental.
Example: neighbors protesting number of cars in driveway or on the street.

My county has a law cars cannot be parked in the same spot on the street over 24 hours. 

  A lot of neighborhoods around here with HOAs restrict parking to one side of the street, the other side being for mail delivery (mailboxes are all on one side of street) and firetruck access. The nice thing is then it becomes unpractical to have additional restrictions

My parents bought a condo for me for college and real estate market was hot, they cleared 100k in 4 years. Took care of paying for college.

Luniz97 said:   My parents bought a condo for me for college and real estate market was hot, they cleared 100k in 4 years. Took care of paying for college.
  
Yeah the city it is in is most definitely a factor.  I went to college in two cities -- one was a small town in the middle of farm country and the other was a major city with a lot of things going on.  

If your kid is going to Austin or Dallas then buy.  If they are going to EBFU (East Bum$#%@ University) then I would probably rent them a cheap 2 BR and tell them to get with the books.   If you are getting a 3BR condo for 100K then I am leaning more towards us talking about EBFU than UTAustin.  If it is anything like SFA where I went then property is stagnant - only people buying are the LLs that rent to students and parents.  There isn't a lot of room for growth so you may not even get your initial investment back.  

Oh, and even though many colleges do require Freshmen to live in the dorms - the scenario here is different.  With an older sibling at the same school it is likely that they can get a waiver or exempted.  (it doesn't MATTER what the kid prefers.. if they don't like it they can pay for it)   

gnopgnip said:   Closing costs are closer to 10% than 7% between buying and selling. You also haven't figured in vacancy rates which will be higher than normal in a college town. There is also a lot of risk of the home being damaged by a bunch of college students and you can't really collect from your kids. Renting rooms and renting in a college town is riskier than other types of rentals.

The real question is what else would you do with this money? Is there another property that has better returns? Could you make more sticking with mutual funds?

  Occupancy could certainly impact the profitability, and I factored in 100%.  Thanks for pointing that out.  I'll factor in a semester or two of vacancy as the numbers firm up.  Good catch on buying/selling as well.

I'm not too concerned about damage, at least while my kids are living there.  If I can find a decent unit, my 2.5% maintenance allowance should be sufficient. I will handle most maintenance.

Regarding the opportunity costs, I could purchase with cash, but prefer to leave the funds invested.  Likely put 20% down and finance.  I used a 4% cost of funds for the analysis.

thanks for the reply.

RedWolfe01 said:   
Luniz97 said:   My parents bought a condo for me for college and real estate market was hot, they cleared 100k in 4 years. Took care of paying for college.
  
Yeah the city it is in is most definitely a factor.  I went to college in two cities -- one was a small town in the middle of farm country and the other was a major city with a lot of things going on.  

If your kid is going to Austin or Dallas then buy.  If they are going to EBFU (East Bum$#%@ University) then I would probably rent them a cheap 2 BR and tell them to get with the books.   If you are getting a 3BR condo for 100K then I am leaning more towards us talking about EBFU than UTAustin.  If it is anything like SFA where I went then property is stagnant - only people buying are the LLs that rent to students and parents.  There isn't a lot of room for growth so you may not even get your initial investment back.  

Oh, and even though many colleges do require Freshmen to live in the dorms - the scenario here is different.  With an older sibling at the same school it is likely that they can get a waiver or exempted.  (it doesn't MATTER what the kid prefers.. if they don't like it they can pay for it)   

  Luniz97:  That would never happen here, LOL.

The college is in a fairly large city.  The Area around the campus is fully built, and some areas very close to campus are being bought up and redeveloped for private dorm operators.  It would be unlikely that the units we are considering would be a Target for redevelopment.

its most likely that there will be no price appreciation or decline during the next four years.

cherry3m said:   
RedWolfe01 said:   
Luniz97 said:   My parents bought a condo for me for college and real estate market was hot, they cleared 100k in 4 years. Took care of paying for college.
  
Yeah the city it is in is most definitely a factor.  I went to college in two cities -- one was a small town in the middle of farm country and the other was a major city with a lot of things going on.  

If your kid is going to Austin or Dallas then buy.  If they are going to EBFU (East Bum$#%@ University) then I would probably rent them a cheap 2 BR and tell them to get with the books.   If you are getting a 3BR condo for 100K then I am leaning more towards us talking about EBFU than UTAustin.  If it is anything like SFA where I went then property is stagnant - only people buying are the LLs that rent to students and parents.  There isn't a lot of room for growth so you may not even get your initial investment back.  

Oh, and even though many colleges do require Freshmen to live in the dorms - the scenario here is different.  With an older sibling at the same school it is likely that they can get a waiver or exempted.  (it doesn't MATTER what the kid prefers.. if they don't like it they can pay for it)   

  Luniz97:  That would never happen here, LOL.

The college is in a fairly large city.  The Area around the campus is fully built, and some areas very close to campus are being bought up and redeveloped for private dorm operators.  It would be unlikely that the units we are considering would be a Target for redevelopment.

its most likely that there will be no price appreciation or decline during the next four years.

  
I saw that in Waco and Charlotte -- private "dorm" operators are taking over even in smaller towns.  Its almost impossible to undercut their model -- 2-4 lockable bedrooms around a central area and a roommate assignment/referral system.  Similar or cheaper than the actual dorms with lots more space and amenities.  (and a private bath)

It sounds like you are in the middle of my two extremes, so a harder case.  I would definitely tell Elwood to suck it up and live with Jake that first year even if you end up renting.  Also put locks on all the bedrooms if you plan to rent even one room out -- you said you planned to keep it as a rental.  That feature alone will make it a much easier rental.  (its a silly thing, but most people don't want to ADD something like that even if they don't fully trust the roomie -- but would LOVE to have it) 

I skimmed through your analysis, but aren't you missing the fact that Elwood would still need to pay rent in year 2? I don't think Jake and Elwood will want to live together, as they'll have their own set of friends. Even if they do decide to live together, you have to remove R2 rent for year 2, as only 1 BR will be not be occupied by one of your kids. Add those costs into the analysis and you're basically breaking even.

I'd say pay rent and save yourself jumping through hoops for ownership and responsibility of being a landlord.

Don't forget if one of your kids drops out

Luniz97 said:   Don't forget if one of your kids drops out
  Or transfer (which ~1/3 of all undergrads do)



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