Tuesday, May 17, 2005

College Housing Investing: Room And Board Is A Terrible Thing to Waste

With three teenagers in the house heading to college in a few years, and several of my friends facing the same demographic, the discussion turns to whether or not it's a good idea to purchase a house for your student instead of paying for rooming costs.

The College Board reports the average cost increase over the last five years has been about five percent per year. The 2004-05 national average cost for a four year public college or university is $14,640 per year; for a four year private college or university, it is $30,295 per year, according to Oppenheimer Funds' web site The Education Plan.

In the last 25 years, college costs have risen at twice and sometimes three times the Consumer Price Index. Over the last decade, after adjusting for inflation, the average four-year public tuition, fees and expenses rose 75 percent for both public and private colleges, according to the College Board, the organization that administers the SAT exams and other entrance programs for its 4,700 member schools.

Where the tuition used to be the primary expense, room and board are playing a significant role in higher education expenses -- many times exceeding the cost of tuition, according to the site. The College Board reports that the average monthly room and board cost is $6,222. Over a nine month school year, it would be roughly $690 per month. Can you do better than that if you own a condo, townhouse, or home in the college town?

Plenty of parents are opting for the home purchase instead of the dorm rental -- but that's not always the best way to go. Before you plop down money to purchase your kid's "dorm" unit, be sure to run the pros and cons, which are generally dictated by finances and time.

Financial

Here are some questions to answer before moving forward:


Does the transaction make sense financially at this time in your life?

Will the purchase create a positive or negative cash flow?

With that said, would the negative cash flow be less or more than the monthly expense of paying for a dorm room?

Where is the cost of housing going in the college town?

What's your rate of return on your down payment and closing costs over the next four years?

Will you be able to rent out other rooms besides your student/child to reduce your monthly cost?

How will this work out for you as far as taxes are concerned?

Do you have enough reserves to cover the breakdown of the air conditioner, furnace, hot water heater, appliances, winterizing, cleaning and maintaining of the property (In a dorm or campus housing, these expenses are covered by the college/university)?
Time

If you decide the investment would be worth the financial expense, then you also need to take a look at time:


Do you have time, or resources to take care of the property management?

Who will you call cross-state or inter-state for repairs to the property?

Who will handle eviction of other students in the house if they fail to pay rent?

Will your child/student be responsible enough to report, and repair, any breakdowns in the house/investment you've made to save money so that the property is maintained and doesn't become a money pit?
On a final landlord note: now that you're entering the investor field, you must also adhere to the Fair Housing Act. This means you cannot discriminate against any renter based on the seven protected classes: race, color, nationality, sex, familial status, religion, and handicap. This doesn't include other protected classes that might be required on a local basis, such as sexual orientation, source of income, matriculation, political affiliation or more. For more information on this area of the law, visit HUD.gov.

There are more aspects to owning a rental property in your child's college town than just having a cheaper place to house them instead of the dorm. Be sure to conduct your research, determine your financial and time limitations and act accordingly.

Published: May 6, 2005

1 comment:

Mary said...

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