One of the issues I occasionally hear about from students is that their parents want to buy a rental property at school for them to live in. If you're a parent, or if you have a parent who's considering doing this, you may be wondering if it's really a smart move. After all, it sounds like a good idea, right? But despite how great it sounds, buying a rental property for your out-of-town college kid probably isn’t the best choice.
First, most parents of college students are probably not already landlords, and therefore likely do not understand the issues and hassles with real estate ownership. Students are historically very hard on properties, and that translates into higher costs for the owner — and if you're a parent considering buying a rental property for your child, then that would mean higher costs for you! And the potential issue with owning property that's far from your primary residence also needs to be considered.
In addition, there is the question of whether or not the investment makes financial sense. Will it add to your net worth by owning the property, or will it reduce your net worth? Because there is high demand for student housing, the price of these units can be high compared to the rental income they generate. Parents must pencil out their deal on the particular property they target to own and see if it makes financial sense and determine if it'll give them a fair rate of return on their cash equity investment.
Student housing usually generates a pretty low investment return, and that is before taking the high risk into account. Some parents may still want to take the real estate plunge anyway because they think that owning the unit will make it a comfortable place for their child to live during school. And the fact is that it might, but the student will also have to deal with renting the other rooms out to suitable co-tenants, fixing problems when they occur like plumbing backups or electrical outages, and stressing out when damage occurs to the property. All in all, students have enough issues to deal with in college life like classes, tests, grades, social pressures, dating, etc. Why add another huge stress to their lives? They should be having a good time in college while keeping up their grades, not worrying about taking care of a property.
Then, when college is over and students move back home or to another city, who is going to handle the property then? Or will it sold? If parents choose to sell the property, they may find out that they'll lose money overall because short term ownership of real estate rarely increases one’s wealth. The transaction costs on short term real estate ownership usually are more than any appreciation in value. The end result is a few years of hassle and then losing money.
Alternatively, if parents decide to keep the property after their child leaves the area, they will own one orphan rental property that's far from their personal residence. A property management company may do a good job for the $75-$150 per month they are being paid, but if something major happens, the owner is probably going to have to get significantly involved. Again, things may work out fine, but the odds are higher that they will find it more of a hassle than it is worth.
Real estate investment can be a great long-term wealth building strategy. But for a variety of reasons, student housing is high risk and fraught with potential issues. If a parent wants to be a landlord and/or help out their student to build real estate wealth in life, it would be better to wait until they graduate, have a good job and consistent income, and are settled in a town where they will live a long time. The child can then purchase real estate, maybe with the parent or simply with the parent’s assistance, and that will give them a much higher probability of increasing their net wealth with real estate ownership.
Facebook Comments