By Harvey S. Jacobs August 21, 2010
With the cost of an undergraduate education at some private institutions exceeding $200,000, parents should be looking for any way possible to take the sting out of sending a child to college. In addition to tuition, one significant component of total college cost is the room portion of room and board. This is especially true for colleges and universities with notorious housing shortages.
At George Washington University in the District, for example, housing costs for the academic year run $840 a month for one-quarter to one-half of a dorm room. If that money were to be applied to the purchase of a large one-bedroom or small two-bedroom apartment within walking distance (liberally defined) of campus, a parent might be able to locate equivalent shelter while getting tax and financial benefits. By buying a place and taking out a mortgage, non-deductible dorm rents can be converted into tax-deductible mortgage interest payments.
Parents also benefit from tax deductions for real property taxes, depreciation and the costs of repairs and replacements, as well as travel expenses to locate, acquire and periodically inspect the investment property. The parents’ tax burden might also be lessened by the capitalization and amortization of capital improvements made to the residence.
A pure financial comparison would have to account for the fact that, with dorms, parents could have to find and pay for other shelter for three or four months of the year if Junior opts not to move home each summer, and perhaps during extended winter and spring breaks, when many dorms are closed. If students can keep their belongings in the investment property year-round, parents stand to save the hassle and expense of hauling all their children’s possessions between home and college twice a year.
Of course, when making a decision, parents should factor in the cost of furnishings, vacancies, repairs, wear and tear, replacements and utilities. Transactional cost of buying and eventually selling (including sales commissions, transfer and recordation taxes and lender’s fees) must also be counted in total cost of ownership.
Condo units in Foggy Bottom or Georgetown, of course, carry significant monthly maintenance fees. And parents should always confirm before buying a condo that there is no restriction on renting to students.
But condos are not the only option. Single-family homes near the University of Maryland in College Park or row houses near Catholic University of America or Howard University would probably not involve condo fees and association rules.
Parents also stand to benefit if the investment appreciates in price. Although the opposite has occurred in recent years, prices will eventually rise, and well-located properties near campus — with a never-ending source of new tenants — will benefit.
Depending on the number of bedrooms in the apartment and the entrepreneurial nature of the student, it might be possible for Junior’s roommates to pay all of the costs of principal, interest, taxes, insurance and utilities, allowing Junior to live rent-free for four or more years. During this time, the tenants are helping to pay off the mortgage. Parents might also have peace of mind knowing that their children are, hopefully, not living in squalor and that they can visit their college-age kids under the guise of inspecting their real estate investment.
However, a decision to purchase a dorm-room equivalent involves more than just dollars and cents.
If the student is responsible enough to manage the property, he or she will be learning valuable lessons about advertising, marketing, business management, psychology and, perhaps, even physics and engineering, assuming there are toilets to unclog from time to time.
But there is also the very real possibility that the student will not like his or her first school choice and leave the college — voluntarily or otherwise — leaving parents as absentee landlords with a nonliquid property investment full of someone else’s kids.
Another argument against buying a college home is that the student would miss out on part of the typical college experience: living in the dorms, eating in the dorms, studying in the dorms and partying in the dorms.
And the student might not be mature enough to become a property manager. The investment property could become “party central.” The feeling of ownership could connote an attitude of “it’s my house so anything goes” instead of “it’s my house so I had better take care of it.” Only a parent will know a child well enough to know which of these scenarios is likely.
There are financial risks, as well. In addition to the ups and downs of the overall housing market, construction of additional on-campus dorm space can cause the value of off-campus housing to plummet.
Finally, the decision on such a real estate investment might be affected by other factors. Is the home near a large sports university where a parent would like to have a place to use during homecoming or football, basketball or lacrosse seasons, even after Junior graduates? Are there other cultural or sporting events nearby that would make a college property more attractive? Say, for example, it is located near University of Nevada at Las Vegas or in Indianapolis and is available each year during the Memorial Day Indy 500 race or can be rented out for that event at a significant premium.
At the end of the day, the decision must include the matriculating student. No matter how good the financial deal is, if a student has his or her heart set on living in the most popular fraternity or sorority house on campus, a parent will not have a good real estate experience by forcing the student to live elsewhere.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, firstname.lastname@example.org or ask@the